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Payday, Vehicle Title, and Certain High-Cost Installment Loans

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Start Preamble Start Printed Page 54472

AGENCY:

Bureau of Consumer Financial Protection.

ACTION:

Final rule; official interpretations.

SUMMARY:

The Bureau of Consumer Financial Protection (Bureau or CFPB) is issuing this final rule establishing regulations creating consumer protections for certain consumer credit products and the official interpretations to the rule. First, the rule identifies it as an unfair and abusive practice for a lender to make covered short-term or longer-term balloon-payment loans, including payday and vehicle title loans, without reasonably determining that consumers have the ability to repay the loans according to their terms. The rule exempts certain loans from the underwriting criteria prescribed in the rule if they have specific consumer protections. Second, for the same set of loans along with certain other high-cost longer-term loans, the rule identifies it as an unfair and abusive practice to make attempts to withdraw payment from consumers' accounts after two consecutive payment attempts have failed, unless the consumer provides a new and specific authorization to do so. Finally, the rule prescribes notices to consumers before attempting to withdraw payments from their account, as well as processes and criteria for registration of information systems, for requirements to furnish and obtain information from them, and for compliance programs and record retention. The rule prohibits evasions and operates as a floor leaving State and local jurisdictions to adopt further regulatory measures (whether a usury limit or other protections) as appropriate to protect consumers.

DATES:

Effective Date: This regulation is effective January 16, 2018. Compliance Date: Sections 1041.2 through 1041.10, 1041.12, and 1041.13 have a compliance date of August 19, 2019.

Application Deadline: The deadline to submit an application for preliminary approval for registration pursuant to § 1041.11(c)(1) is April 16, 2018.

Start Further Info

FOR FURTHER INFORMATION CONTACT:

Sarita Frattaroli, Counsel; Mark Morelli, Michael G. Silver, Steve Wrone, Senior Counsels; Office of Regulations; Consumer Financial Protection Bureau, at 202-435-7700 or cfpb_reginquiries@cfpb.gov.

End Further Info End Preamble Start Supplemental Information

SUPPLEMENTARY INFORMATION:

I. Summary of the Final Rule

On June 2, 2016, the Bureau issued proposed consumer protections for payday loans, vehicle title loans, and certain high-cost installment loans. The proposal was published in the Federal Register on July 22, 2016.[1] Following a public comment period and review of comments received, the Bureau is now issuing this final rule with consumer protections governing the underwriting of covered short-term and longer-term balloon-payment loans, including payday and vehicle title loans. The rule also contains disclosure and payment withdrawal attempt requirements for covered short-term loans, covered longer-term balloon-payment loans, and certain high-cost covered longer-term loans.

Covered short-term loans are typically used by consumers who are living paycheck to paycheck, have little to no access to other credit products, and seek funds to meet recurring or one-time expenses. The Bureau has conducted extensive research on these products, in addition to several years of outreach and review of the available literature. The Bureau issues these regulations primarily pursuant to its authority under section 1031 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) to identify and prevent unfair, deceptive, or abusive acts or practices.[2] The Bureau is also using authorities under section 1022 of the Dodd-Frank Act to prescribe rules and make exemptions from such rules as is necessary or appropriate to carry out the purposes and objectives of the Federal consumer financial laws,[3] section 1024 of the Dodd-Frank Act to facilitate supervision of certain non-bank financial service providers,[4] and section 1032 of the Dodd-Frank Act to require disclosures to convey the costs, benefits, and risks of particular consumer financial products or services.[5]

The Bureau is not, at this time, finalizing the ability-to-repay determination requirements proposed for certain high-cost installment loans, but it is finalizing those requirements as to covered short-term and longer-term balloon-payment loans. The Bureau is also finalizing certain disclosure, notice, and payment withdrawal attempt requirements as applied to covered short-term loans, longer-term balloon-payment loans, and high-cost longer-term loans at this time.

The Bureau is concerned that lenders that make covered short-term loans have developed business models that deviate substantially from the practices in other credit markets by failing to assess consumers' ability to repay their loans according to their terms and by engaging in harmful practices in the course of seeking to withdraw payments from consumers' accounts. The Bureau has concluded that there is consumer harm in connection with these practices because many consumers struggle to repay unaffordable loans and in doing so suffer a variety of adverse consequences. In particular, many consumers who take out these loans appear to lack the ability to repay them and face one of three options when an unaffordable loan payment is due: Take out additional covered loans (“re-borrow”), default on the covered loan, or make the payment on the covered loan and fail to meet basic living expenses or other major financial obligations. As a result of these dynamics, a substantial population of consumers ends up in extended loan sequences of unaffordable loans. Longer-term balloon-payment loans, which are less common in the marketplace today, raise similar risks.

In addition, many lenders may seek to obtain repayment of covered loans directly from consumers' accounts. The Bureau is concerned that consumers may be subject to multiple fees and other harms when lenders make repeated unsuccessful attempts to withdraw funds from their accounts. In these circumstances, further attempts to withdraw funds from consumers' accounts are very unlikely to succeed, yet they clearly result in further harms to consumers.

A. Scope of the Rule

The rule applies to two types of covered loans. First, it applies to short-term loans that have terms of 45 days or less, including typical 14-day and 30-day payday loans, as well as short-term vehicle title loans that are usually made for 30-day terms, and longer-term balloon-payment loans. The underwriting portion of the rule applies to these loans. Second, certain parts of the rule apply to longer-term loans with terms of more than 45 days that have (1) a cost of credit that exceeds 36 percent per annum; and (2) a form of “leveraged Start Printed Page 54473payment mechanism” that gives the lender a right to withdraw payments from the consumer's account. The payments part of the rule applies to both categories of loans. The Bureau had proposed parallel underwriting requirements for high-cost covered longer-term loans. However, at this time, the Bureau is not finalizing the ability-to-repay portions of the rule as to covered longer-term loans other than those with balloon payments.

The rule excludes or exempts several types of consumer credit, including: (1) Loans extended solely to finance the purchase of a car or other consumer good in which the good secures the loan; (2) home mortgages and other loans secured by real property or a dwelling if recorded or perfected; (3) credit cards; (4) student loans; (5) non-recourse pawn loans; (6) overdraft services and lines of credit; (7) wage advance programs; (8) no-cost advances; (9) alternative loans (similar to loans made under the Payday Alternative Loan program administered by the National Credit Union Administration); and (10) accommodation loans.

B. Ability-to-Repay Requirements and Alternative Requirements for Covered Short-Term Loans

The rule identifies it as an unfair and abusive practice for a lender to make covered short-term or longer-term balloon-payment loans without reasonably determining that the consumers will have the ability to repay the loans according to their terms. The rule prescribes requirements to prevent this practice and thus the specific harms to consumers that the Bureau has identified as flowing from the practice, including extended loan sequences for a substantial population of consumers.

The first set of requirements addresses the underwriting of these loans. A lender, before making a covered short-term or longer-term balloon-payment loan, must make a reasonable determination that the consumer would be able to make the payments on the loan and be able to meet the consumer's basic living expenses and other major financial obligations without needing to re-borrow over the ensuing 30 days. Specifically, a lender is required to:

  • Verify the consumer's net monthly income using a reliable record of income payment, unless a reliable record is not reasonably available;
  • Verify the consumer's monthly debt obligations using a national consumer report and a consumer report from a “registered information system” as described below;
  • Verify the consumer's monthly housing costs using a national consumer report if possible, or otherwise rely on the consumer's written statement of monthly housing expenses;
  • Forecast a reasonable amount for basic living expenses, other than debt obligations and housing costs; and
  • Determine the consumer's ability to repay the loan based on the lender's projections of the consumer's residual income or debt-to-income ratio.

Furthermore, a lender is prohibited from making a covered short-term loan to a consumer who has already taken out three covered short-term or longer-term balloon-payment loans within 30 days of each other, for 30 days after the third loan is no longer outstanding.

Second, and in the alternative, a lender is allowed to make a covered short-term loan without meeting all the specific underwriting criteria set out above, as long as the loan satisfies certain prescribed terms, the lender confirms that the consumer meets specified borrowing history conditions, and the lender provides required disclosures to the consumer. Among other conditions, under this alternative approach, a lender is allowed to make up to three covered short-term loans in short succession, provided that the first loan has a principal amount no larger than $500, the second loan has a principal amount at least one-third smaller than the principal amount on the first loan, and the third loan has a principal amount at least two-thirds smaller than the principal amount on the first loan. In addition, a lender is not allowed to make a covered short-term loan under the alternative requirements if it would result in the consumer having more than six covered short-term loans during a consecutive 12-month period or being in debt for more than 90 days on covered short-term loans during a consecutive 12-month period. A lender is not permitted to take vehicle security in connection with loans that are made according to this alternative approach.

C. Payment Practices Rules

The rule identifies it as an unfair and abusive practice for a lender to make attempts to withdraw payment from consumers' accounts in connection with a short-term, longer-term balloon-payment, or high-cost longer-term loan after the lender's second consecutive attempts to withdraw payments from the accounts from which the prior attempts were made have failed due to a lack of sufficient funds, unless the lender obtains the consumers' new and specific authorization to make further withdrawals from the accounts. The Bureau found that in these circumstances, further attempted withdrawals are highly unlikely to succeed, but clearly impose harms on consumers who are affected. This prohibition on further withdrawal attempts applies whether the two failed attempts are initiated through a single payment channel or different channels, such as the automated clearinghouse system and the check network. The rule requires that lenders must provide notice to consumers when the prohibition has been triggered and follow certain procedures in obtaining new authorizations.

In addition to the requirements related to the prohibition on further payment withdrawal attempts, a lender is required to provide a written notice, depending on means of delivery, a certain number of days before its first attempt to withdraw payment for a covered loan from a consumer's checking, savings, or prepaid account or before an attempt to withdraw such payment in a different amount than the regularly scheduled payment amount, on a date other than the regularly scheduled payment date, by a different payment channel than the prior payment, or to re-initiate a returned prior transfer. The notice must contain key information about the upcoming payment attempt and, if applicable, alert the consumer to unusual payment attempts. A lender is permitted to provide electronic notices as long as the consumer consents to electronic communications.

D. Additional Requirements

The rule requires lenders to furnish to provisionally registered and registered information systems certain information concerning covered short-term and longer-term balloon-payment loans at loan consummation, during the period that the loan is an outstanding loan, and when the loan ceases to be an outstanding loan. To be eligible to become a provisionally registered or registered information system, an entity must satisfy the eligibility criteria prescribed in the rule. The rule provides for a registration process that will allow information systems to be registered, and lenders to be ready to furnish required information, at the time the furnishing obligation in the rule takes effect. Consumer reports provided by registered information systems will include a reasonably comprehensive record of a consumer's recent and current use of covered short-term and longer-term balloon-payment loans. Before making covered short-term and longer-term balloon-payment loans, a lender is required to obtain and consider a consumer report from a registered information system.Start Printed Page 54474

A lender is required to establish and follow a compliance program and retain certain records. A lender is also required to develop and follow written policies and procedures that are reasonably designed to ensure compliance with the requirements in this rule. Furthermore, a lender is required to retain the loan agreement and documentation obtained for any covered loan or an image thereof, as well as electronic records in tabular format regarding origination calculations and determinations for a short-term or longer-term balloon-payment loan, and regarding loan type and terms. The rule also includes an anti-evasion clause to address the kinds of concerns the Bureau noted in connection with the evasive actions that lenders in this market took in response to the regulations originally adopted on loans made to servicemembers under the Military Lending Act.

E. Effective and Compliance Dates/Application Deadline [6]

The final rule will become effective January 16, 2018, 60 days after publication of the final rule in the Federal Register. Compliance with §§ 1041.2 through 1041.10, 1041.12, and 1041.13 will be required beginning August 19, 2019, 21 months after publication of the final rule in the Federal Register. The deadline to submit an application for preliminary approval for registration pursuant to § 1041.11(c)(1) will be April 16, 2018, 150 days after publication of the final rule in the Federal Register. The effective and compliance dates and application deadline are structured to facilitate an orderly implementation process.

II. Background

A. Introduction

For most consumers, credit provides a means of purchasing goods or services and spreading the cost of repayment over time. This is true of the three largest consumer credit markets: The market for mortgages ($10.3 trillion in outstanding balances), for student loans ($1.4 trillion), and for auto loans ($1.1 trillion). This is also one way in which certain types of open-end credit—including home equity loans ($0.13 trillion) and lines of credit ($0.472 trillion)—and at least some credit cards and revolving credit ($1.0 trillion)—can be used.[7]

In addition to the credit markets described above, consumers living paycheck to paycheck and with little to no savings have also used credit as a means of coping with financial shortfalls. These shortfalls may be due to mismatched timing between income and expenses, misaligned cash flows, income volatility, unexpected expenses or income shocks, or expenses that simply exceed income.[8] According to a recent survey conducted by the Board of Governors of the Federal Reserve System (Federal Reserve Board), 44 percent of adults reported they would either be unable to cover an emergency expense costing $400 or would have to sell something or borrow money to cover it, and 30 percent reported that they found it “difficult to get by” or were “just getting by” financially.[9] Whatever the cause of these financial shortfalls, consumers in these situations sometimes seek what may broadly be termed a “liquidity loan.” [10] There are a variety of loans and products that consumers use for these purposes including credit cards, deposit account overdraft, pawn loans, payday loans, vehicle title loans, and installment loans.

Credit cards and deposit account overdraft services are each already subject to specific Federal consumer protection regulations and requirements. The Bureau generally considers these markets to be outside the scope of this rulemaking as discussed further below. The Bureau is also separately engaged in research and evaluation of potential rulemaking actions on deposit account overdraft.[11] Start Printed Page 54475Another liquidity option—pawn—generally involves non-recourse loans made against the value of whatever item a consumer chooses to give the lender in return for the funds.[12] The consumer has the option to either repay the loan or permit the pawnbroker to retain and sell the pawned property at the end of the loan term, relieving the borrower from any additional financial obligation. This feature distinguishes pawn loans from most other types of liquidity loans. The Bureau is excluding non-recourse possessory pawn loans, as described in proposed § 1041.3(e)(5), from the scope of this rulemaking.

This rulemaking is focused on two general categories of liquidity loan products: (1) Short-term loans and longer-term balloon-payment loans; and (2) with regard to payment practices, a broader set of liquidity loan products that also includes certain higher-cost longer-term installment loans. The largest category of short-term loans are “payday loans,” which are generally required to be repaid in a lump-sum single-payment on receipt of the borrower's next income payment, and short-term vehicle title loans, which are also almost always due in a lump-sum single-payment, typically within 30 days after the loan is made. The final rule's underwriting requirements also apply to depository advance products and other loans of 45 days or less in duration, as well as certain longer-term balloon-payment loans that generally involve a series of small, often interest-only, payments followed by a single final large lump sum payment. The final rule's payment presentment requirements apply to short-term and longer-term balloon-payment products, as well as to certain higher-cost longer-term installment loans. That latter category includes what are often referred to as “payday installment loans”—that is, loans that are repaid in multiple installments with each installment typically due on the borrower's payday or regularly scheduled income payment and with the lender having the ability to automatically collect payments from an account into which the income payment is deposited. In addition, the latter category includes certain high-cost installment loans made by more traditional finance companies.

This rulemaking includes both closed-end loans and open-end lines of credit.[13] As described in the section-by-section analysis, the Bureau has been studying these markets for liquidity loans for over five years, gaining insights from a variety of sources. During this time the Bureau has conducted supervisory examinations of a number of payday lenders and enforcement investigations of a number of different types of liquidity lenders, which have given the Bureau insights into the business models and practices of such lenders. Through these processes, and through market monitoring activities, the Bureau also has obtained extensive loan-level data that the Bureau has studied to better understand risks to consumers.[14] The Bureau has published five reports based upon these data.[15] The Bureau has also carefully reviewed the published literature with respect to small-dollar liquidity loans and a number of outside researchers have presented their research at seminars for Bureau staff. In addition, over the course of the past five years the Bureau has engaged in extensive outreach with a variety of stakeholders in both formal and informal settings, including several Bureau field hearings across the country specifically focused on the subject of small-dollar lending, meetings with the Bureau's standing advisory groups, meetings with State and Federal regulators, meetings with consumer advocates, religious groups, and industry trade associations, Tribal consultations, and through a Small Business Review Panel process as described further below. As described in Summary of the Rulemaking Process, the Bureau received and reviewed over one million comments on its proposal, mostly from lenders and borrowers within the respective markets.

This Background section provides a brief description of the major components of the markets for short-term loans and longer-term balloon-payment loans, describing the product parameters, industry size and structure, lending practices, and business models of major market segments. The Background section also provides a brief overview of the additional markets for higher-cost longer-term installment loans that are subject to the payment practices components of the final rule. This section also describes recent State and Federal regulatory activity in connection with these various product markets. Market Concerns—Underwriting below, provides a more detailed description of consumer experiences with short-term loans describing research about which consumers use the products, why they use the products, and the outcomes they experience as a result of the product structures and industry practices. The Background section also includes an Start Printed Page 54476extensive description of the methods by which lenders initiate payments from consumers' accounts. Market Concerns—Payments, below, describes consumer experiences and concerns with these payment practices. Most of the comments received on the proposal's Background section agreed in general terms with the descriptions of the markets and products described below, although there may be slight differences in individual lenders' loan products and business practices. Comments that provided significantly different information are noted below.

B. Short-Term, Hybrid, and Balloon-Payment Loans

Providing short-term loans for liquidity needs has been a long-term challenge in the consumer financial services market due to the fixed costs associated with loan origination regardless of loan size. At the beginning of the twentieth century, concern arose with respect to companies that were responding to liquidity needs by offering to “purchase” a consumer's paycheck in advance of it being paid. These companies charged fees that, if calculated as an annualized interest rate, were as high as 400 percent.[16] To address these concerns, between 1914 and 1943, 34 States enacted a form of the Uniform Small Loan Law, which was a model law developed by the Russell Sage Foundation. That law provided for lender licensing and permitted interest rates of between 2 and 4 percent per month, or 24 to 48 percent per year. Those rates were substantially higher than pre-existing usury limits (which generally capped interest rates at between 6 and 8 percent per year) but were viewed by proponents as “equitable to both borrower and lender.” [17]

New forms of short-term small-dollar lending appeared in several States in the 1990s,[18] starting with check cashing outlets that would hold a customer's personal check for a period of time for a fee before cashing it (“check holding” or “deferred presentment”). One of the larger payday lenders began making payday loans in Kansas in 1992, and that same year at least one State regulator issued an administrative interpretation holding that deferred presentment activities were consumer loans subject to that State's licensing and consumer lending laws.[19] One commenter described his role in developing and expanding the deferred presentment lending industry in Tennessee in the early 1990s prior to any regulation in that State, while noting that those same activities required lending licenses in two nearby States.

Several market factors converged around the same time that spurred the development of these new forms of short-term small-dollar lending. Consumers were using credit cards more frequently for short-term liquidity lending needs, a trend that continues today.[20] Storefront finance companies, described below in part II.C, that had provided small loans changed their focus to larger, collateralized products, including vehicle financing and real estate secured loans. At the same time there was substantial consolidation in the storefront installment lending industry. Depository institutions similarly moved away from short-term small-dollar loans.

Around the same time, a number of State legislatures amended their usury laws to allow lending by a broader group of both depository and non-depository lenders by increasing maximum allowable State interest rates or eliminating State usury laws, while other States created usury carve-outs or special rules for short-term loans.[21] The confluence of these trends has led to the development of markets offering what are commonly referred to as payday loans (also known as cash advance loans, deferred deposit, and deferred presentment loans depending on lender and State law terminology), and short-term vehicle title loans that are much shorter in duration than vehicle-secured loans that have traditionally been offered by storefront installment lenders and depository institutions. Although payday loans initially were distributed through storefront retail outlets, they are now also widely available on the Internet. Vehicle title loans are typically offered exclusively at storefront retail outlets.

These markets as they have evolved over the last two decades are not strictly segmented. There is substantial overlap between market products and the borrowers who use them. For example, in a 2015 survey, almost 14.8 percent of U.S. households that had used a payday loan in the prior year had also used a vehicle title loan.[22] There is also an established trend away from “monoline” or single-product lending companies. Thus, for example, a number of large payday lenders also offer vehicle title and installment loans.[23] The following discussion nonetheless provides a description of major product types.

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 Start Printed Page 54477benefits).[24] For most borrowers, the loan is due in a single payment on their payday, although State laws with minimum loan terms—seven days for example—or lender practices may affect the loan duration in individual cases. The Bureau refers to these short-term payday loans available at retail locations as “storefront payday loans,” but the requirements for borrowers taking online payday loans are generally similar, as described below. There are now 35 States that either have created a carve-out from their general usury cap for payday loans or have no usury caps on consumer loans.[25] The remaining 15 States and the District of Columbia either ban payday loans or have fee or interest rate caps that payday lenders apparently find too low to sustain their business models. As discussed further below, several of these States previously had authorized payday lending but subsequently changed their laws.

Product definition and regulatory environment. As noted above, payday loans are typically repayable in a single payment on the borrower's next payday. In order to help ensure repayment, in the storefront environment the lender generally holds the borrower's personal check made out to the lender—usually post-dated to the loan due date in the amount of the loan's principal and fees—or the borrower's authorization to electronically debit the funds from her checking account, commonly known as an automated clearing house (ACH) transaction.[26] Payment methods are described in more detail below in part II.D.

Payday loan sizes vary depending on State law limits, individual lender credit models, and borrower demand. Many States set a limit on payday loan size; $500 is a common loan limit although the limits range from $300 to $1,000.[27] In 2013, the Bureau reported that the median loan amount for storefront payday loans was $350, based on supervisory data.[28] This finding is broadly consistent with other studies using data from one or more lenders as well as with self-reported information in surveys of payday borrowers [29] and State regulatory reports.[30]

The fee for a payday loan is generally structured as a percentage or dollar amount per $100 borrowed, rather than a periodic interest rate based on the amount of time the loan is outstanding. Many State laws set a maximum amount for these fees, with 15 percent ($15 per $100 borrowed) being the most common limit.[31] The median storefront payday loan fee is $15 per $100; thus for a $350 loan, the borrower must repay $52.50 in finance charges together with the $350 borrowed for a total repayment amount of $402.50.[32] The annual percentage rate (APR) on a 14-day loan with these terms is 391 percent.[33] For payday borrowers Start Printed Page 54478who receive monthly income and thus receive a 30-day or monthly payday loan—many of whom are Social Security recipients [34] —a $15 per $100 charge on a $350 loan for a term of 30 days equates to an APR of about 180 percent. The Bureau has found the median loan term for a storefront payday loan to be 14 days, with an average term of 18.3 days. The longer average loan duration is due to State laws that require minimum loan terms that may extend beyond the borrower's next pay date.[35] Fees and loan amounts are higher for online loans, described in more detail below.

On the loan's due date, the terms of the loan obligate the borrower to repay the loan in full. Although the States that created exceptions to their usury limits for payday lending generally did so on the theory these were short-term loans to which the usual usury rules did not easily apply, in 18 of the States that authorize payday lending the lender is permitted to roll over the loan when it comes due. A rollover occurs when, instead of repaying the loan in full at maturity, the consumer pays only the fees due and the lender agrees to extend the due date.[36] By rolling over, the loan repayment of the principal is extended for another period of time, usually equivalent to the original loan term, in return for the consumer's agreement to pay a new set of fees calculated in the same manner as the initial fees (e.g., 15 percent of the loan principal). The rollover fee is not applied to reduce the loan principal or amortize the loan. As an example, if the consumer borrows $300 with a fee of $45 (calculated as $15 per $100 borrowed), the consumer will owe $345 on the due date, typically 14 days later. On the due date, if the consumer cannot afford to repay the entire $345 due or is otherwise offered the option to roll over the loan, she will pay the lender $45 for another 14 days. On the 28th day, the consumer will owe the original $345 and if she pays the loan in full then, will have paid a total of $90 for the loan.

In some States in which rollovers are permitted they are subject to certain limitations such as a cap on the number of rollovers or requirements that the borrower amortize—repay part of the original loan amount—on the rollover. Other States have no restrictions on rollovers. Specially, 17 of the States that authorize single-payment payday lending prohibit lenders from rolling over loans and 11 more States impose some rollover limitations.[37] However, in most States where rollovers are prohibited or limited, there is no restriction on the lender immediately making a new loan to the consumer (with new fees) after the consumer has repaid the prior loan. New loans made the same day, or “back-to-back” loans, effectively replicate a rollover because the borrower remains in debt to the lender on the borrower's next payday.[38] Ten States have implemented a cooling-off period before a lender may make a new loan. The most common cooling-off period is one day, although some States have longer periods following a specified number of rollovers or back-to-back loans.[39]

At least 17 States have adopted laws that require payday lenders to offer borrowers the option of taking an extended repayment plan when they encounter difficulty in repaying payday loans.[40] Details about the extended repayment plans vary including: Borrower eligibility (in some States only prior to the lender instituting collections or litigation); how borrowers may elect to participate in repayment plans; the number and timing of payments; the length of plans; permitted fees for plans; requirements for credit counseling; requirements to report plan payments to a statewide database; cooling-off or “lock-out” periods for new loans after completion of plans; and the consequences of plan defaults. Start Printed Page 54479Two States more generally allow lenders the discretion to offer borrowers an extension of time to repay or enter into workout agreements with borrowers having repayment difficulties.[41] The effects of these various restrictions are discussed further below in Market Concerns—Underwriting.

Industry size and structure. There are various estimates as to the number of consumers who use payday loans on an annual basis. One survey found that 2.5 million households (2 percent of U.S. households) used payday loans in 2015.[42] In another survey, 3.4 percent of households reported taking out a payday loan in the past year.[43] These surveys referred to payday loans generally, and did not specify whether they were referring to loans made online or at storefront locations. One report estimated the number of individual borrowers, rather than households, was higher at approximately 12 million annually and included both storefront and online loans.[44] See Market Concerns—Underwriting for additional information on borrower characteristics.

There are several ways to gauge the size of the storefront payday loan industry. Typically, the industry has been measured by counting the total dollar value of each loan made during the course of a year, counting each rollover, back-to-back loan or other re-borrowing as a new loan that is added to the total. By this metric, one industry analyst estimated that from 2009 to 2014, storefront payday lending generated approximately $30 billion in new loans per year and that by 2015 the volume had declined to $23.6 billion,[45] although these numbers may include products other than single-payment loans. The analyst's estimate for combined storefront and online payday loan volume was $45.3 billion in 2014 and $39.5 billion in 2015, down from a peak of about $50 billion in 2007.[46]

Alternatively, the industry can be measured by calculating the dollar amount of loan balances outstanding. Given the amount of payday loan re-borrowing, which results in the same funds of the lender being used to finance multiple loan originations to the same borrower, the dollar amount of loan balances outstanding may provide a more nuanced sense of the industry's scale. Using this metric, the Bureau estimates that in 2012, storefront payday lenders held approximately $2 billion in outstanding single-payment loans.[47] In 2015, industry revenue (fees paid on storefront payday loans) was an estimated $3.6 billion, representing 15 percent of loan originations. Combined storefront and online payday revenue was estimated at $8.7 billion in 2014 and $6.7 billion in 2015, down from a peak of over $9 billion in 2012.[48]

In the last several years, it has become increasingly difficult to identify the largest payday lenders due to firm mergers, diversification by many lenders into a range of products including installment loans and retraction by others into pawn loans, and the lack of available data because most firms are privately held. However, there are at least 10 lenders with approximately 200 or more storefront locations.[49] Only a few of these firms are publicly traded companies.[50] Most large payday lenders are privately held,[51] and the remaining payday loan stores are owned by smaller regional or local entities. The Bureau estimates there are about 2,400 storefront payday lenders that are small entities as defined by the Small Business Administration (SBA).[52] Several industry commenters, an industry trade association commenter, and a number of payday Start Printed Page 54480lenders noted that they offer non-credit products and services at their locations including check cashing, money transmission and bill payments, sale of prepaid cards, and other services, some of which require them to comply with other laws as “money service businesses.”

According to one industry analyst, there were an estimated 16,480 payday loan stores in 2015 in the United States, a decline from 19,000 stores in 2011 and down from the industry's 2007 peak of 24,043 storefronts.[53]

The average number of payday loan stores in a county with a payday loan store is 6.32.[54] The Bureau has analyzed payday loan store locations in States which maintain lists of licensed lenders and found that half of all stores are less than one-third of a mile from another store, and three-quarters are less than a mile from the nearest store.[55] Even the 95th percentile of distances between neighboring stores is only 4.3 miles. Stores tend to be closer together in counties within metropolitan statistical areas (MSA).[56] In non-MSA counties the 75th percentile of distance to the nearest store is still less than one mile, but the 95th percentile is 22.9 miles.

Research and the Bureau's own market outreach indicate that payday loan stores tend to be relatively small with, on average, three full-time equivalent employees.[57] An analysis of loan data from 29 States found that the average store made 3,541 advances in a year.[58] Given rollover and re-borrowing rates, a report estimated that the average store served fewer than 500 customers per year.[59]

Marketing, underwriting, and collections practices. Payday loans tend to be marketed as a short-term bridge to cover emergency expenses. For example, one lender suggests that, for consumers who have insufficient funds on hand to meet such an expense or to avoid a penalty fee, late fee, or utility shut-off, a payday loan can “come in handy” and “help tide you over until your next payday.” [60] Some lenders offer new borrowers their initial loans at no fee (“first loan free”) to encourage consumers to try a payday loan.[61] Stores are typically located in high-traffic commuting corridors and near shopping areas where consumers obtain groceries and other staples.[62]

The evidence of price competition among payday lenders is mixed. In their financial reports, publicly traded payday lenders have reported their key competitive factors to be non-price related. For instance, they cite location, customer service, and convenience as some of the primary factors on which payday lenders compete with one another, as well as with other financial service providers.[63] Academic studies have found that, in States with rate caps, loans are almost always made at the maximum rate permitted.[64] Another study likewise found that in States with rate caps, firms lent at the maximum permitted rate, and that lenders operating in multiple States with varying rate caps raise their fees to those caps rather than charging consistent fees company-wide. The study found, however, that in States with no rate caps, different lenders operating in those States charged different rates. The study reviewed four lenders that operate in Texas [65] and observed differences in the cost to borrow $300 per two-week pay period: two lenders charged $61 in fees, one charged $67, and another charged $91, indicating some level of price variation between lenders (ranging from about $20 to $32 per $100 borrowed).[66] One industry commenter cited the difference in average loan pricing between storefront (generally lower) and online loans (generally higher), as evidence of price competition but that is more likely due to the fact that state-licensed lenders are generally constrained in the amount they can charge rather than competitive strategies adopted by those lenders. That commenter also notes as evidence of price competition that it sometimes discounts its own loans from its advertised prices; the comment did not address whether such discounts were offered to meet competition.

The application process for a payday loan is relatively simple. For a storefront payday loan, a borrower must generally provide some verification of income (typically a pay stub) and evidence of a personal deposit account.[67] Although a few States impose limited requirements that lenders consider a borrower's ability to repay,[68] storefront payday Start Printed Page 54481lenders generally do not consider a borrower's other financial obligations or require collateral (other than the check or electronic debit authorization) for the loan. Most storefront payday lenders do not consider traditional credit reports or credit scores when determining loan eligibility, nor do they report any information about payday loan borrowing history to the nationwide consumer reporting agencies, TransUnion, Equifax, and Experian.[69] From market outreach activities and confidential information gathered in the course of statutory functions, the Bureau is aware that a number of storefront payday lenders obtain data from one or more specialty consumer reporting agencies during the loan application process to check for previous payday loan defaults, identify recent inquiries that suggest an intention to not repay the loan, and perform other due diligence such as identity and deposit account verification. Some storefront payday lenders use analytical models and scoring that attempt to predict likelihood of default.[70] Through market outreach and confidential information gathered in the course of statutory functions, the Bureau is aware that many storefront payday lenders only conduct their limited underwriting for first-time borrowers or those returning after an absence.

From market outreach, the Bureau is aware that the specialty consumer reporting agencies contractually require any lender that obtains data to also report data to them, although compliance may vary. Reporting usually occurs on a real-time or same-day basis. Separately, 14 States require lenders to check statewide databases before making each loan in order to ensure that their loans comply with various State restrictions.[71] These States likewise require lenders to report certain lending activity to the database, generally on a real-time or same-day basis. As discussed in more detail above, these State restrictions may include prohibitions on consumers having more than one payday loan at a time, cooling-off periods, or restrictions on the number of loans consumers may take out per year.

Although a consumer is generally required when obtaining a loan to provide a post-dated check or authorization for an electronic debit of the consumer's account which could be presented to the consumer's bank,[72] consumers in practice generally return to the store when the loan is due to “redeem” the check either by repaying the loan or by paying the finance charges and rolling over the loan.[73] For example, a major payday lender with a predominantly storefront loan portfolio reported that in 2014, over 90 percent of its payday loan volume was repaid in cash at its branches by consumers either paying in full or by paying the “original loan fee” (finance charges) and rolling over the loan (signing a new promissory note and leaving a new check or payment authorization).[74]

An industry commenter stated that repayment in cash reflects customers' preferences. However, borrowers are strongly encouraged and in some cases required by lenders to return to the store when payment is due. Some lenders give borrowers appointment cards with a date and time to encourage them to return with cash. For example, one major storefront payday lender explained that after loan origination “the customer then makes an appointment to return on a specified due date, typically his or her next payday, to repay the cash advance . . . . Payment is usually made in person, in cash at the center where the cash advance was initiated . . . .” [75]

The Bureau is aware, from confidential information gathered in the course of statutory functions and from market outreach, that lenders routinely make reminder calls to borrowers a few days before loan due dates to encourage borrowers to return to the store. One large lender reported this practice in a public filing.[76] Another storefront payday lender requires its borrowers to return to the store to repay. Its Web site states: “All payday loans must be repaid with either cash or money order. Upon payment, we will return your original check to you.” [77]

The Bureau is also aware, from confidential information gathered in the course of statutory functions, that one or more storefront payday lenders have operating policies that specifically state that cash is preferred because only half of their customers' checks would clear if deposited on the loan due dates. Encouraging or requiring borrowers to return to the store on the due date provides lenders an opportunity to offer borrowers the option to roll over the loan or, where rollovers are prohibited by State law, to re-borrow following repayment or after the expiration of any cooling-off period. Most storefront lenders examined by the Bureau employ monetary incentives that reward employees and store managers for loan volumes, although one industry commenter described the industry's incentives to employees as rewards for increases in net revenue. Since as discussed below, a majority of loans result from rollovers of existing loans or re-borrowing contemporaneously with or shortly after loans have been repaid, rollovers and re-borrowing contribute substantially to employees' Start Printed Page 54482compensation. From confidential information gathered in the course of statutory functions, the Bureau is aware that rollover and re-borrowing offers are made when consumers log into their accounts online, during “courtesy calls” made to remind borrowers of upcoming due dates, and when borrowers repay in person at storefront locations. In addition, some lenders train their employees to offer rollovers during courtesy calls when borrowers notified lenders that they had lost their jobs or suffered pay reductions.

Store personnel often encourage borrowers to roll over their loans or to re-borrow, even when consumers have demonstrated an inability to repay their existing loans. In an enforcement action, the Bureau found that one lender maintained training materials that actively directed employees to encourage re-borrowing by struggling borrowers. It further found that if a borrower did not repay or pay to roll over the loan on time, store personnel would initiate collections. Store personnel or collectors would then offer the option to take out a new loan to pay off an existing loan, or refinance or extend the loan as a source of relief from the potentially negative outcomes (e.g., lawsuits, continued collections). This “cycle of debt” was depicted graphically as part of “The Loan Process” in the company's new hire training manual.[78] In Mississippi, another lender employed a companywide practice in which store personnel encouraged borrowers with monthly income or benefits payments to use the proceeds of one loan to pay off another loan, although State law prohibited these renewals or rollovers.[79]

In addition, though some States require lenders to offer borrowers the option of extended repayment plans and some trade associations have designated provision of such plans as a best practice, individual lenders may often be reluctant to offer them. In Colorado, for instance, some payday lenders reported, prior to a regulatory change in 2010, that they had implemented practices to restrict borrowers from obtaining the number of loans needed to be eligible for the State-mandated extended payment plan option and that some lenders had banned borrowers who had exercised their rights to elect payment plans from taking new loans.[80] The Bureau is also aware, from confidential information gathered in the course of statutory functions, that one or more lenders used training manuals that instructed employees not to mention these plans until after employees first offered rollovers, and then only if borrowers specifically asked about the plans. Indeed, details on implementation of the repayment plans that have been designated by two national trade associations for storefront payday lenders as best practices are unclear, and in some cases place a number of limitations on exactly how and when a borrower must request assistance to qualify for these “off-ramps.” For instance, one trade association representing more than half of all payday loan stores states that as a condition of membership, members must offer an “extended payment plan” but that borrowers must request the plan at least one day prior to the date on which the loan is due, generally in person at the store where the loan was made or otherwise by the same method used to originate the loan.[81] Another trade association with over 1,300 members, including both payday lenders and firms that offer non-credit products such as check cashing and money transmission, states that members will provide the option of extended payment plans in the absence of State-mandated plans to customers unable to repay, but details of the plans are not publicly available on its Web site.[82]

From confidential information gathered in the course of statutory functions and market outreach, the Bureau is aware that if a borrower fails to return to the store when a loan is due, the lender may attempt to contact the consumer and urge the consumer to make a cash payment before eventually depositing the post-dated check that the consumer had provided at origination or electronically debiting the account. The Bureau is also aware of some situations in which lenders have obtained electronic payments from borrowers' bank accounts and also accepted cash payments from borrowers at storefronts.[83] The Bureau is aware, from confidential information gathered in the course of its statutory functions and from market outreach, that lenders may use various methods to try to ensure that a payment will clear before presenting a check or ACH. These efforts may range from storefront lenders calling the borrower's bank to ask if a check of a particular size would clear the account to the use of software offered by a number of vendors that attempts to model likelihood of repayment (“predictive ACH”).[84] If Start Printed Page 54483these attempts are unsuccessful, store personnel at either the storefront level or at a centralized location will then generally engage in collection activity.

Collection activity may involve further in-house attempts to collect from the borrower's bank account.[85] If the first attempt fails, the lender may make subsequent attempts at presentment by splitting payments into smaller amounts in hopes of increasing the likelihood of obtaining at least some funds, a practice for which the Bureau recently took enforcement action against a small-dollar lender.[86] Or, the lender may attempt to present the payment multiple times, a practice that the Bureau has noted in supervisory examinations.[87] A more detailed discussion of payments practices is provided in part D and Markets Concerns—Payments.

Eventually, the lender may attempt other means of collection. The Bureau is aware of in-house debt collections activities, by both storefront employees and employees at centralized collections divisions, including calls, letters, and visits to consumers and their workplaces,[88] as well as the sale of debt to third-party collectors.[89] The Bureau recently conducted a survey of consumer debt collection experiences; 11 percent of consumers contacted about a debt in collection reported the collection activity was related to payday loan debt.[90] Further, the Bureau observed in its consumer complaint data that from November 2013 through December 2016, more than 31,000 debt collection complaints had “payday loan” as the underlying debt. In more than 11 percent of the complaints the Bureau handled about debt collection, consumers selected “payday loans” as the underlying debt.[91]

In addition, in 2016, the Bureau handled approximately 4,400 complaints in which consumers reported “payday loan” as the complaint product and about 26,600 complaints about credit cards.[92] As noted above, there are about 12 million payday loan borrowers annually, and approximately 156 million consumers have one or more credit cards.[93] Therefore, by way of comparison, for every 10,000 payday loan borrowers, the Bureau handled about 3.7 complaints, while for every 10,000 credit card holders, the Bureau handled about 1.7 complaints.

Some payday lenders sue borrowers who fail to repay their loans. A study of small claims court cases filed in Utah from 2005 to 2010 found that 38 percent of cases were attributable to payday loans.[94] A recent news report found that the majority of non-traffic civil cases filed in 14 Utah justice courts are payday loan collection lawsuits, and in one justice court, the percentage was as high as 98.8 percent.[95] In 2013, the Bureau entered into a Consent Order with a large national payday and installment lender based, in part, on the filing of flawed court documents in about 14,000 debt collection lawsuits.[96] However, an industry trade association commenter states that many payday lenders do not file lawsuits on defaulted debt.

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 Start Printed Page 54484percent of the amount loaned. In this example, the lender would still have received substantial revenue, as the lender would have collected fees for each rollover prior to default. The Bureau estimates that during the 2011-2012 time frame, charge-offs (i.e., uncollectible loans defaulted on and never repaid) equaled nearly one-half of the average amount of outstanding loans during the year. In other words, for every $1.00 loaned, only $.50 in principal was eventually repaid.[97] One academic study found loss rates to be even higher.[98]

To sustain these significant costs, the payday lending business model is dependent upon a large volume of re-borrowing—that is, rollovers, back-to-back loans, and re-borrowing within a short period of paying off a previous loan—by those borrowers who do not default on their first loan. The Bureau's research found that over the course of a year, 90 percent of all loan fees comes from consumers who borrowed seven or more times and 75 percent comes from consumers who borrowed 10 or more times.[99] Similarly, when the Bureau identified a cohort of borrowers and tracked them over 10 months, the Bureau found that more than two-thirds of all loans were in sequences of at least seven loans, and that over half of all loans were in sequences of 10 or more loans.[100] The Bureau defines a sequence as an initial loan plus one or more subsequent loans renewed within 30 days after repayment of the prior loan; a sequence thus captures not only rollovers and back-to-back loans but also re-borrowing that occurs within a short period of time after repayment of a prior loan either at the point at which a State-mandated cooling-off period ends or at the point at which the consumer, having repaid the prior loan, runs out of money.[101] A more detailed discussion of sequence length is provided in the section-by-section discussion of §§ 1041.2(a)(14) and 1041.5 and in Market Concerns—Underwriting.

Other studies are broadly consistent. For example, a 2013 report based on lender data from Florida, Kentucky, Oklahoma, and South Carolina found that 85 percent of loans were made to borrowers with seven or more loans per year, and 62 percent of loans were made to borrowers with 12 or more loans per year. These four States have restrictions on payday loans such as cooling-off periods and limits on rollovers that are enforced by State-regulated databases, as well as voluntary extended repayment plans.[102] An updated report on Florida payday loan usage derived from the State database noted this trend has continued, with 83 percent of payday loans in 2015 made to borrowers with seven or more loans and 57 percent of payday loans that same year made to borrowers with 12 or more loans.[103] In Alabama's first year of tracking payday loans with a single database, it reported that almost 50 percent of borrowers had seven or more payday loans and almost 37 percent of borrowers had 10 or more payday loans.[104] Other reports have found that over 80 percent of total payday loans and loan volume is due to repeat borrowing within 30 days of a prior loan.[105] One trade association has acknowledged that “[i]n any large, mature payday loan portfolio, loans to repeat borrowers generally constitute between 70 and 90 percent of the portfolio, and for some lenders, even more.” [106] A recent report by a specialty consumer reporting agency confirms that the industry's business model relies on repeat customers, noting that over half of all loans are made to returning customers and stating “[t]his finding suggests that even though new customers are critical, existing customers are the most productive.” [107] Market Concerns—Underwriting below discusses the impact of these outcomes for consumers who are unable to repay and either default or re-borrow.

Recent regulatory and related industry developments. A number of Federal and State regulatory developments have occurred over the last 15 years as concerns about the effects of payday lending have spread. Regulators have found that the industry has tended to shift to new models and products in response.

Since 2000, it has been clear from commentary added to Regulation Z, that payday loans constitute “credit” under the Truth in Lending Act (TILA) and that cost of credit disclosures are required to be provided in payday loan transactions, regardless of how State law characterizes payday loan fees.[108]

In 2006, Congress enacted the Military Lending Act (MLA) to address concerns that servicemembers and their families were becoming over-indebted in high-cost forms of credit.[109] The MLA, as Start Printed Page 54485implemented by the Department of Defense's regulation, imposes two broad classes of requirements applicable to a creditor. First, the creditor may not impose a military annual percentage rate (MAPR) [110] greater than 36 percent in connection with an extension of consumer credit to a covered borrower. Second, when extending consumer credit, the creditor must satisfy certain other terms and conditions, such as providing certain information, both orally and in a form the borrower can keep, before or at the time the borrower becomes obligated on the transaction or establishes the account; refraining from requiring the borrower to submit to arbitration in the case of a dispute involving the consumer credit; and refraining from charging a penalty fee if the borrower prepays all or part of the consumer credit. In 2007, the Department of Defense issued its initial regulation under the MLA, limiting the Act's application to closed-end loans with a term of 91 days or less in which the amount financed did not exceed $2,000; closed-end vehicle title loans with a term of 181 days or less; and closed-end tax refund anticipation loans.[111] However, the Department found that evasions developed in the market as “the extremely narrow definition of `consumer credit' in the [then-existing rule] permits a creditor to structure its credit products in order to reduce or avoid altogether the obligations of the MLA.” [112]

As a result, effective October 2015 the Department of Defense expanded its definition of covered credit to include open-end credit and longer-term loans so that the MLA protections generally apply to all credit subject to the requirements of Regulation Z of the Truth in Lending Act, other than certain products excluded by statute.[113] In general, creditors must comply with the new regulations for extensions of credit after October 3, 2016; for credit card accounts, creditors are required to comply with the new rule starting October 3, 2017.[114]

At the State level, the last States to enact legislation authorizing payday lending—Alaska and Michigan—did so in 2005.[115] At least 11 States and jurisdictions that previously had authorized payday loans have taken steps to restrict or eliminate payday lending. In 2001, North Carolina became the first State that had previously permitted payday loans to adopt an effective ban by allowing the authorizing statute to expire. In 2004, Georgia also enacted a law banning payday lending.

In 2008, the Ohio legislature adopted the Short Term Lender Act with a 28 percent APR cap, including all fees and charges, for short-term loans and repealed the existing Check-Cashing Lender Law that authorized higher rates and fees.[116] In a referendum later that year, Ohioans voted against reinstating the Check-Cashing Lender Law, leaving the 28 percent APR cap and the Short Term Lending Act in effect.[117] After the vote, some payday lenders began offering vehicle title loans. Other lenders continued to offer payday loans utilizing Ohio's Credit Service Organization Act [118] and the Mortgage Loan Act; [119] the latter practice was upheld by the State Supreme Court in 2014.[120] Also in 2008, the District of Columbia banned payday lending which had been a permissible activity under the District's check cashing law, making the loans subject to the District's 24 percent per annum maximum interest rate cap.[121]

In 2010, Colorado's legislature banned short-term single-payment balloon loans in favor of longer-term, six-month loans. Colorado's regulatory framework is described in more detail in the discussion of payday installment lending below.

As of July 1, 2010, Arizona effectively prohibited payday lending after the authorizing statute expired and a statewide referendum that would have continued to permit payday lending failed to pass.[122] However, small-dollar lending activity continues in the State. The State financial regulator issued an alert in 2013, in response to complaints about online unlicensed lending, advising consumers and lenders that payday and consumer loans of $1,000 or less are generally subject to a rate of 36 percent per annum and loans in violation of those rates are void.[123] In addition, vehicle title loans continue to be made in Arizona as secondary motor vehicle finance transactions.[124] The number of licensed vehicle title lenders has increased by about 300 percent since the payday lending law expired and now exceeds the number of payday lenders that were licensed prior to the ban.[125]

In 2009, Virginia amended its payday lending law. It extended the minimum loan term to the length of two income periods, added a 45-day cooling-off period after substantial time in debt (the fifth loan in a 180-day period) and a 90-day cooling-off period after completing an extended payment plan, and implemented a database to enforce limits on loan amounts and frequency. The payday law applies to closed-end loans. Virginia has no interest rate regulations or licensure requirements for open-end credit.[126] After the amendments, a number of lenders that were previously licensed as payday lenders in Virginia, and that offer closed-end payday loans in other States, switched to offering open-end credit in Virginia without State licenses.[127]

Washington and Delaware have restricted repeat borrowing by imposing limits on the number of payday loans consumers may obtain. In 2009, Start Printed Page 54486Washington made several changes to its payday lending law. These changes, effective January 1, 2010, include a cap of eight loans per borrower from all lenders in a rolling 12-month period where there had been no previous limit on the number of total loans, an extended repayment plan for any loan, and a database to which lenders are required to report all payday loans.[128] In 2013, Delaware, a State with no fee restrictions for payday loans, implemented a cap of five payday loans, including rollovers, in any 12-month period.[129] Delaware defines payday loans as loans due within 60 days for amounts up to $1,000. Some Delaware lenders have shifted from payday loans to longer-term installment loans with interest-only payments followed by a final balloon payment of the principal and an interest fee payment—sometimes called a “flexpay” loan.[130]

In 2016, South Dakota voters approved a ballot measure instituting a 36 percent APR limit for all consumer loans made by licensed lenders.[131] The measure passed with approximately 75 percent of voters supporting it.[132] Subsequently, a number of lenders previously licensed to do business in the State either declined to renew their licenses or indicated that they would not originate new loans that would be subject to the cap.[133]

New Mexico enacted legislation in 2017 that will effectively prohibit single payment payday loans. It requires small-dollar loans to have minimum loan terms of 120 days and be repaid in four or more installments.[134] The legislation will take effect on January 1, 2018.[135] The legislation also sets a usury limit of 175 percent APR and will apply to short-term vehicle title loans.

In 2017, several other States also passed legislation related to payday lending. Arkansas passed a law clarifying that fees charged by credit service organizations are interest under the State's constitutional usury limit of 17 percent per annum.[136] Utah amended its existing law that prohibits rollovers of payday loans for more than 10 weeks by prohibiting lenders from originating new loans for borrowers to repay prior ones.[137]

At least 41 Texas municipalities have adopted local ordinances setting business regulations on payday lending (and vehicle title lending).[138] Some of the ordinances, such as those in Dallas, El Paso, Houston, and San Antonio, include requirements such as limits on loan amounts (no more than 20 percent of the borrower's gross annual income for payday loans), limits on the number of rollovers, required amortization of the principal loan amount on repeat loans—usually in 25 percent increments, record retention for at least three years, and a registration requirement.[139] On a statewide basis, there are no Texas laws specifically governing payday lenders or payday loan terms; credit access businesses that act as loan arrangers or broker payday loans (and vehicle title loans) are regulated and subject to licensing, reporting, and requirements to provide consumers with disclosures about repayment and re-borrowing rates.[140]

Online Payday Lending

With the growth of the Internet, a significant online payday lending industry has developed. Some storefront lenders use the Internet as an additional method of originating payday loans in the States in which they are licensed to do business. In addition, there are now a number of lenders offering what are referred to as “hybrid” payday loans, through the Internet. Hybrid payday loans are structured so that rollovers occur automatically unless the consumer takes affirmative action to pay off the loan, thus effectively creating a series of interest-only payments followed by a final balloon payment of the principal amount and an additional fee.[141] Hybrid loans structured as single payment loans with automatic rollovers [142] and longer-term loans with a final balloon payment [143] are covered by the final rule's Ability-to-Repay Start Printed Page 54487requirements as discussed more fully below.

Industry size, structure, and products. The size of the online payday market is difficult to measure for a number of reasons. First, many online lenders offer a variety of products beyond single-payment loans (what the Bureau refers to as payday loans) and hybrid loans (which the Bureau views as a form of payday lending and falls within the final rule's definition of short-term loans), including longer-term installment loans; this poses challenges in sizing the portion of these firms' business that is attributable to payday and hybrid loans. Second, most online payday lenders are not publicly traded, which means that minimal financial information is available about this market segment. Third, many online payday lenders claim exemption from State lending laws and licensing requirements on the basis that they are located and operated from other jurisdictions. Consequently, these lenders report less information publicly, whether individually or in aggregate compilations, than lenders holding traditional State licenses. Finally, storefront payday lenders who are also using the online channel generally do not separately report their online originations. Bureau staff's reviews of the largest storefront lenders' Web sites indicate an increased focus in recent years on online loan origination.

With these caveats, a frequently cited industry analyst has estimated that by 2012, online payday loans had grown to generate nearly an equivalent amount of fee revenue as storefront payday loans on roughly 62 percent of the origination volume, about $19 billion, but originations had then declined somewhat to roughly $15.9 billion by 2015.[144] This trend appears consistent with storefront payday loans, as discussed above, and is likely related at least in part to increasing lender migration from short-term into longer-term products. Online payday loan fee revenue has been estimated at $3.1 billion for 2015, or 19 percent of origination volume.[145] However, these estimates may be both over- and under-inclusive; they may not differentiate precisely between online lenders' short-term and longer-term loans, and they may not account for the online lending activities by storefront payday lenders.

Whatever the precise size, the online industry can broadly be divided into two segments: online lenders licensed in the State in which the borrower resides and lenders that are not licensed in the borrower's State of residence.

The first segment consists largely of storefront lenders with an online channel to complement their storefronts as a means of originating loans, as well as a few online-only payday lenders who lend to borrowers in States where they have obtained State lending licenses. Because this segment of online lenders is State-licensed, State administrative payday lending reports include these data but generally do not differentiate loans originated online from those originated in storefronts. Accordingly, this portion of the market is included in the market estimates summarized above, and the lenders consider themselves to be subject to, or generally follow, the relevant State laws discussed above.

The second segment consists of lenders that claim exemption from State lending laws. Some of these lenders claim exemption because their loans are made from physical locations outside of the borrower's State of residence, including from off-shore locations outside of the United States.[146] Other lenders claim exemption because they are lending from Tribal lands, with such lenders claiming that they are regulated by the sovereign laws of “federally recognized Indian tribes.” [147] These lenders claim immunity from suit to enforce State or Federal consumer protection laws on the basis of their sovereign status.[148] A Federal appellate court recently rejected claims of immunity from the Bureau's civil investigative demands by several Tribal-related lenders, finding that “Congress did not expressly exclude tribes from the Bureau's enforcement authority.” [149]

A frequently cited source of data on this segment of the market is a series of reports using data from a specialty consumer reporting agency serving certain online lenders, most of whom are unlicensed.[150] These data are not representative of the entire online industry, but nonetheless cover a large enough sample (2.5 million borrowers over a period of four years) to be significant. These reports indicate the following concerning this market segment:

  • Although the mean and median loan size among the payday borrowers in this dataset are only slightly higher than the information reported above for storefront payday loans,[151] the online payday lenders charge higher rates than storefront lenders. As noted above, most of the online lenders reporting this data claim exemption from State laws and do not comply with State rate caps. The median loan fee in this dataset is $23.53 per $100 borrowed, compared to $15 per $100 borrowed for storefront payday loans. The mean fee amount is even higher at $26.60 per $100 borrowed.[152] Another study based on a similar dataset from three online payday lenders is generally consistent, putting the Start Printed Page 54488range of online payday loan fees at between $18 and $25 per $100 borrowed.[153]
  • More than half of the payday loans made by these online lenders are hybrid payday loans. As described above, a hybrid loan involves automatic rollovers with payment of the loan fee until a final balloon payment of the principal and fee.[154] For the hybrid payday loans, the most frequently reported payment amount is 30 percent of principal, implying a finance charge during each pay period of $30 for each $100 borrowed.[155]
  • Unlike storefront payday loan borrowers who generally return to the same store to re-borrow, the credit reporting data may suggest that online borrowers tend to move from lender to lender. As discussed further below, however, it is difficult to evaluate whether some of this apparent effect is due to online lenders simply not consistently reporting lending activity.[156]

Marketing, underwriting, and collection practices. As with most online lenders in other markets, online payday lenders have utilized direct marketing, lead generators, and other forms of advertising for customer acquisition. Lead generators, via Web sites advertising payday loans usually in the form of banner advertisements or paid search results (the advertisements that appear at the top of an Internet search on Google, Bing, or other search engines) operated by “publishers,” collect consumers' personal and financial information and electronically offer it to lenders that have expressed interest in consumers meeting certain criteria.[157] In July 2016, Google banned ads for loans with APRs over 36 percent or with repayment due in 60 days or less.[158] From the Bureau's market outreach activities it is aware that the payday lending industry's use of lead generators has decreased but that payday lenders may be using other forms of advertising for customer acquisition and retention.

Online lenders view fraud (i.e., consumers who mispresent their identity) as a significant risk and also express concerns about “bad faith” borrowing (i.e., consumers with verified identities who borrow without the intent to repay).[159] Consequently, online payday and hybrid payday lenders attempt to verify the borrower's identity and the existence of a bank account in good standing. Several specialty consumer reporting agencies have evolved primarily to serve the online payday lending market. The Bureau is aware from market outreach that online lenders also generally report loan closure information on a real-time or daily basis to the specialty consumer reporting agencies. In addition, some online lenders report to the Bureau that they use nationwide credit report information to evaluate both credit and potential fraud risk associated with first-time borrowers, including recent bankruptcy filings. However, there is evidence that online lenders do not consistently utilize credit report data for every loan, and instead typically check and report data only for new borrowers or those returning after an extended absence from the lender's records.[160]

Typically, proceeds from online payday loans are disbursed electronically into the consumer's bank account and the consumer authorizes the lender to electronically debit her account to repay the loan as payments are due. The Bureau is aware from market monitoring that lenders employ various practices to encourage consumers to agree to authorize electronic debits for repayment. Some lenders generally will not disburse electronically if consumers do not agree to ACH repayment, but instead will require the consumer to wait for a paper loan proceeds check to arrive in the mail.[161] Some online payday lenders charge higher interest rates or fees to consumers who do not commit to electronic debits.[162] In addition, some online payday lenders have adopted policies that may delay the crediting of non-ACH payments.[163]

As noted above, online lenders typically collect payday loans via electronic debits. For a hybrid payday loan the lender seeks to collect the finance charges a pre-set number of times and then eventually collect the principal; for a true payday loan the lender will seek to collect the principal and finance charges when the loan is due. Online payday lenders, like their Start Printed Page 54489storefront counterparts, use various models and software, described above, to predict when an electronic debit is most likely to succeed in withdrawing funds from a borrower's bank account. As discussed further below, the Bureau has observed lenders seeking to collect multiple payments on the same day. This pattern may be driven by a practice of dividing the payment amount in half and presenting two debits at once, presumably to reduce the risk of a larger payment being returned for nonsufficient funds. Indeed, the Bureau found that about one-third of presentments by online payday lenders occur on the same day as another request by the same lender from the same account. The Bureau also found that split presentments almost always result in either payment of all presentments or return of all presentments (in which event the consumer will likely incur multiple nonsufficient funds (NSF) fees from the bank). The Bureau's study indicates that when an online payday lender's first attempt to obtain a payment from the consumer's account is unsuccessful, it will make a second attempt 75 percent of the time and if that attempt fails the lender will make a third attempt 66 percent of the time.[164] As discussed further at part II.D, the success rate on these subsequent attempts is relatively low, and the cost to consumers may be correspondingly high.[165]

There is limited information on the extent to which online payday lenders that are unable to collect payments through electronic debits resort to other collection tactics.[166] The available evidence indicates, however, that online lenders sustain higher credit losses and risk of fraud than storefront lenders. One lender with publicly available financial information that originated both storefront and online single-payment loans reported in 2014, a 49 percent and 71 percent charge-off rate, respectively, for these loans.[167] Online lenders generally classify as “fraud” both consumers who misrepresented their identity in order to obtain a loan and consumers whose identity is verified but default on the first payment due, which is viewed as reflecting the intent not to repay.

Business model. While online lenders tend to have fewer costs relating to operation of physical facilities than do storefront lenders, as discussed above, they face higher costs relating to lead acquisition and marketing, loan origination screening to verify applicant identity, and potentially larger losses due to what they classify as “fraud” than their storefront competitors.

Accordingly, it is not surprising that online lenders—like their storefront counterparts—are dependent upon repeated re-borrowing. Indeed, even at a cost of $25 or $30 per $100 borrowed, a typical single online payday loan would generate fee revenue of under $100, which is not sufficient to cover the typical origination costs. Consequently, as discussed above, hybrid loans that roll over automatically in the absence of affirmative action by the consumer account for a substantial percentage of online payday business. These products, while nominally structured as single-payment products, effectively build a number of rollovers into the loan. For example, the Bureau has observed online payday lenders whose loan documents suggest that they are offering a single-payment loan but whose business model is to collect only the finance charges due, roll over the principal, and require consumers to take affirmative steps to notify the lender if consumers want to repay their loans in full rather than allowing them to roll over. The Bureau recently initiated an action against an online lender alleging that it engaged in deceptive practices in connection with such products.[168] In a recent survey conducted of online payday borrowers, 31 percent reported that they had experienced loans with automatic renewals.[169]

As discussed above, a number of online payday lenders claim exemption from State laws and the regulations and limitations established under those laws. As reported by a specialty consumer reporting agency with data from that market, more than half of the payday loans for which information is furnished to it are hybrid payday loans with the most common fee being $30 per $100 borrowed, twice the median amount for storefront payday loans.[170]

Similar to associations representing storefront lenders as discussed above, a national trade association representing online lenders includes loan repayment plans as one of its best practices, but does not provide many details in its public material.[171] A trade association that represents Tribal online lenders has adopted a set of best practices, but the list does not address repayment plans.[172]

Vehicle Title Loans, Including Short-Term Loans and Balloon-Payment Products

Vehicle title loans—also known as “automobile equity loans”—are another form of liquidity lending permitted in certain States. In a title loan transaction, the borrower must provide identification and usually the title to the vehicle as evidence that the borrower owns the vehicle “free and clear.” [173] Start Printed Page 54490Unlike payday loans, there is generally no requirement that the borrowers have a bank account, and some lenders do not require a copy of a pay stub or other evidence of income.[174] Rather than holding a check or ACH authorization for repayment as with a payday loan, the lender generally retains the vehicle title or some other form of security interest that provides it with the right to repossess the vehicle, which may then be sold with the proceeds used for repayment.[175]

The lender retains the vehicle title or some other form of security interest during the duration of the loan, while the borrower retains physical possession of the vehicle. In some States either the lender files a lien with State officials to record and perfect its interest in the vehicle or charges a fee for non-filing insurance. In a few States, a clear vehicle title is not required, and vehicle title loans may be made as secondary liens against the title or against the borrower's automobile registration.[176] In some States, such as Georgia, vehicle title loans are made under pawnbroker statutes that specifically permit borrowers to pawn vehicle certificates of title.[177] Almost all vehicle title lending is conducted at storefront locations, although some title lending does occur online.[178]

Product definition and regulatory environment. There are three types of vehicle title loans: Single-payment loans, installment loans, and in at least one State, balloon payment loans.[179] Of the 24 States that permit some form of vehicle title lending, six States permit only single-payment title loans, 13 States allow the loans to be structured as single-payment or installment loans, and five permit only title installment loans.[180] (The payment practices of installment title loans are discussed briefly below.) All but three of the States that permit some form of title lending (Arizona, Georgia, and New Hampshire) also permit payday lending.

Single-payment vehicle title loans are typically due in 30 days and operate much like payday loans: The consumer is charged a fixed price per $100 borrowed, and when the loan is due the consumer is obligated to repay the full amount of the loan plus the fee but is typically given the opportunity to roll over or re-borrow.[181] The Bureau recently studied anonymized data from vehicle title lenders consisting of nearly 3.5 million loans made to over 400,000 borrowers in 20 States. For single-payment vehicle title loans with a typical duration of 30 days, the median loan amount was $694 with a median APR of 317 percent; the average loan amount was $959 and the average APR was 291 percent.[182] Two other studies contain similar findings.[183] Vehicle title loans are therefore for substantially larger amounts than typical payday loans, but carry similar APRs for similar terms. Some States that authorize vehicle title loans limit the rates lenders may charge to a percentage or dollar amount per $100 borrowed, similar to some State payday lending pricing structures. A common fee limit is 25 percent of the loan amount per month, but roughly half of the authorizing States have no restrictions on rates or fees.[184] Some, but not all, States limit the maximum amount that may be borrowed to a fixed dollar amount, a percentage of the borrower's monthly income (50 percent of the borrower's gross monthly income in Illinois), or a Start Printed Page 54491percentage of the vehicle's value.[185] Some States limit the initial loan term to one month but several States authorize rollovers (including, in Idaho and Tennessee, automatic rollovers arranged at the time of the original loan, resembling the hybrid payday structure described above), with a few States requiring mandatory amortization in amounts ranging from five to 20 percent on rollovers.[186] Unlike payday loan regulation, few States require cooling-off periods between loans or optional extended repayment plans for borrowers who cannot repay vehicle title loans.[187]

State vehicle title regulations also sometimes address default, repossession and related fees; any cure periods prior to and after repossession; whether the lender must refund any surplus after the repossession and sale or disposition of the vehicle; and whether the borrower is liable for any deficiency remaining after sale or disposition.[188] Of the States that expressly authorize vehicle title lending, nine are “non-recourse” meaning that a lender's remedy upon the borrower's default is limited to repossession of the vehicle unless the borrower has impaired the vehicle by concealment, damage, or fraud.[189] Other vehicle title lending statutes are silent and do not directly specify whether a lender has recourse against a borrower for any deficiency balance remaining after repossessing the vehicle. An industry trade association commenter stated that title lenders do not sue borrowers or garnish their wages for deficiency balances.

Some States have enacted general requirements that vehicle title lenders consider a borrower's ability to repay before making a title loan. For example, both South Carolina and Utah require lenders to consider borrower ability to repay, but this may be accomplished through a borrower affirmation that she has provided accurate financial information and has the ability to repay.[190] Until July 1, 2017, Nevada required title lenders to generally consider a borrower's ability to repay and obtain an affirmation of this fact. Effective July 1st, an amendment to Nevada law requires vehicle title lenders (and payday lenders, as noted above) to assess borrowers' reasonable ability to repay by considering, to the extent available, their current or expected income; current employment status based on a pay stub, bank deposit, or other evidence; credit history; original loan amount due, or for installment loans or potential repayment plans, the monthly payment amount; and other evidence relevant to ability to repay including bank statements and borrowers' written representations.[191] Missouri requires that lenders consider a borrower's financial ability to reasonably repay the loan under the loan's contract, but does not specify how lenders may satisfy this requirement.[192]

Industry size and structure. Information about the vehicle title market is more limited than the storefront payday industry because there are currently no publicly traded monoline vehicle title loan companies, most payday lending companies that offer vehicle title loans are not publicly traded, and less information is generally available from State regulators and other sources.[193] One national survey conducted in June 2015 found that 1.7 million households reported obtaining a vehicle title loan over the preceding 12 months.[194] Another study extrapolating from State regulatory reports estimated that about two million Americans used vehicle title loans annually.[195] In 2014, new vehicle title loan originations were estimated at roughly $2 billion with revenue estimates of $3 to $5.6 billion.[196] These estimates may not include the full extent of rollovers, as well as vehicle title loan expansion by payday lenders.

There are approximately 8,000 title loan storefront locations in the United States, about half of which also offer payday loans.[197] Of those locations that Start Printed Page 54492predominately offer vehicle title loans, three privately held firms dominate the market and together account for about 3,000 stores in about 20 States.[198] These lenders are concentrated in the southeastern and southwestern regions of the country.[199] In addition to the large title lenders, smaller vehicle title lenders are estimated to have about 800 storefront locations,[200] and as noted above several companies offer both title loans and payday loans.[201] The Bureau understands that for some firms whose core business had been payday loans, the volume of vehicle title loan originations now exceeds payday loan originations.

State loan data also show an overall trend of vehicle title loan growth. The number of borrowers in Illinois taking vehicle title loans increased 77 percent from 2009 to 2013, and then declined 14 percent from 2013 to 2015.[202] The number of title loans taken out in California increased 183 percent between 2011 and 2016.[203] In Virginia, from 2011 to 2013, the number of motor vehicle title loans made increased by 38 percent from 128,446 to a peak of 177,775, and the number of individual consumers taking title loans increased by 44 percent, from 105,542 to a peak of 152,002. By 2016, the number of title loans in Virginia decreased to 155,996 and the number of individual consumers taking title loans decreased to 114,042. The average number of loans per borrower remained constant at 1.2 from 2011 to 2015; in 2016 the number of loans per borrower increased to 1.4.[204] In addition to loans made under Virginia's vehicle title law, a series of reports noted that some Virginia title lenders offered “consumer finance” installment loans without the corresponding consumer protections of the vehicle title lending law and, accounted for about “a quarter of the money loaned in Virginia using automobile titles as collateral.” [205] In Tennessee, the number of licensed vehicle title (title pledge) locations at year-end has been measured yearly since 2006. The number of Tennessee locations peaked in 2014 at 1,071, 52 percent higher than the 2006 levels. In 2015, the number of locations declined to 965. However, in each year from 2013 to 2016, the State regulator has reported more licensed locations than existed prior to the State's title lending regulation, the Tennessee Title Pledge Act.[206]

Vehicle title loan storefront locations serve a relatively small number of customers. One study estimated that the average vehicle title loan store made 218 loans per year, not including rollovers.[207] Another study using data from four States and public filings from the largest vehicle title lender estimated that the average vehicle title loan store serves about 300 unique borrowers per year—or slightly more than one unique borrower per business day.[208] The same report estimated that the largest vehicle title lender had 4.2 employees per store.[209] But, as mentioned, a number of large payday firms offer both products from the same storefront and may use the same employees to do so. In addition, small vehicle title lenders are likely to have fewer employees per location than do larger title lenders.

Marketing, underwriting, and collections practices. Vehicle title loans are marketed to appeal to borrowers with impaired credit who seek immediate funds. The largest vehicle title lender described title loans as a “way for consumers to meet their liquidity needs” and described their customers as those who “often . . . have a sudden and unexpected need for cash due to common financial challenges.” [210] Advertisements for vehicle title loans suggest that title loans can be used “to cover unforeseen costs this month . . . [if] utilities are a little higher than you expected,” if consumers are “in a bind,” for a “short term cash Start Printed Page 54493flow” problem, or for “fast cash to deal with an unexpected expense.” [211] Vehicle title lenders advertise quick loan approval “in as little as 15 minutes.” [212] Some lenders offer promotional discounts for the initial loan and bonuses for referrals,[213] for example, a $100 prepaid card for referring friends for vehicle title loans.[214]

The underwriting policies and practices that vehicle title lenders use vary and may depend on such factors as State law requirements and individual lender practices. As noted above, some vehicle title lenders do not require borrowers to provide information about their income and instead rely on the vehicle title and the underlying collateral that may be repossessed and sold in the event the borrower defaults—a practice known as asset-based lending.[215] The largest vehicle title lender stated in 2011 that its underwriting decisions were based entirely on the wholesale value of the vehicle.[216] Other title lenders' Web sites state that proof of income is required,[217] although it is unclear whether employment information is verified or used for underwriting, whether it is used for collections and communication purposes upon default, or for both purposes. The Bureau is aware, from confidential information gathered in the course of its statutory functions, that one or more vehicle title lenders regularly exceed their maximum loan amount guidelines and instruct employees to consider a vehicle's sentimental or use value to the borrower when assessing the amount of funds they will lend.

As in the market for payday loans, there have been some studies about the extent of price competition in the vehicle title lending market. Vehicle title lending is almost exclusively a storefront market, as discussed above. The evidence of price competition is mixed. One large title lender stated that it competes on factors such as location, customer service, and convenience, and also highlights its pricing as a competitive factor.[218] An academic study found evidence of price competition in the vehicle title market, citing the abundance of price-related advertising and evidence that in States with rate caps, such as Tennessee, approximately half of the lenders charged the maximum rate allowed by law, while the other half charged lower rates.[219] However, another report found that like payday lenders, title lenders compete primarily on location, speed, and customer service, gaining customers by increasing the number of locations rather than underpricing their competition.[220]

Loan amounts are typically for less than half the wholesale value of the consumer's vehicle. Low loan-to-value ratios reduce a lender's risk. A survey of title lenders in New Mexico found that the lenders typically lend between 25 and 40 percent of a vehicle's wholesale value.[221] At one large title lender, the weighted average loan-to-value ratio was found to be 26 percent of Black Book retail value.[222] The same lender has two principal operating divisions; one division requires that vehicles have a minimum appraised value greater than $500, but the lender will lend against vehicles with a lower appraised value through another brand.[223]

When a borrower defaults on a vehicle title loan, the lender may repossess the vehicle. The Bureau believes, based on market outreach, that the decision whether to repossess a vehicle will depend on factors such as the amount due, the age and resale value of the vehicle, the costs to locate and repossess the vehicle, and State law requirements to refund any surplus amount remaining after the sale proceeds have been applied to the remaining loan balance.[224] Available information indicates that lenders are unlikely to repossess vehicles they do not expect to sell. The largest vehicle title lender sold 83 percent of the vehicles it repossessed but did not report overall repossession rates.[225] In 2012, its firm-wide gross charge-offs equaled 30 percent of its average outstanding title loan balances.[226] The Bureau is aware of vehicle title lenders engaging in illegal debt collection activities in order to collect amounts claimed to be due under title loan agreements. These practices include altering caller ID information on outgoing calls to borrowers to make it appear that calls were from other businesses, falsely threatening to refer borrowers for criminal investigation or prosecution, and unlawfully disclosing debt information to borrowers' employers, friends, and family.[227] In Start Printed Page 54494addition, approximately 16 percent of consumer complaints handled by the Bureau about vehicle title loans involved consumers reporting concerns about repossession issues.[228]

Some vehicle title lenders have installed electronic devices on the vehicles, known as starter interrupt devices, automated collection technology, or more colloquially as “kill switches,” that can be programmed to transmit audible sounds in the vehicle before or at the payment due date. The devices may also be programmed to prevent the vehicle from starting when the borrower is in default on the loan, although they may allow a one-time re-start upon the borrower's call to obtain a code.[229] One of the starter interrupt providers states that “[a]ssuming proper installation, the device will not shut off the vehicle while driving.” [230] Due to concerns about consumer harm, a State Attorney General issued a consumer alert about the use of starter interrupt devices specific to vehicle title loans.[231] The alert also noted that some title lenders require consumers to provide an extra key to their vehicles. In an attempt to avoid illegal repossessions, Wisconsin's vehicle title law prohibits lenders from requiring borrowers to provide the lender with an extra key to the vehicle.[232] The Bureau has received several complaints about starter interrupt devices.

Business model. As noted above, short-term vehicle title lenders appear to have overhead costs relatively similar to those of storefront payday lenders. Default rates on vehicle title loans and lender reliance on re-borrowing activity appear to be even greater than that of storefront payday lenders.

Based on data analyzed by the Bureau, the default rate on single-payment vehicle title loans is six percent and the sequence-level default rate is 33 percent, compared with a 20 percent sequence-level default rate for storefront payday loans. One-in-five single-payment vehicle title loan borrowers have their vehicle repossessed by the lender.[233] One industry trade association commenter stated that 15 to 25 percent of repossessed vehicles are subsequently redeemed by borrowers after paying off the deficiency balance owed (along with repossession costs).

Similarly, the rate of vehicle title re-borrowing appears high. In the Bureau's data analysis, more than half—56 percent—of single-payment vehicle title loan sequences stretched for at least four loans; over a third—36 percent—were seven or more loans; and 23 percent of loan sequences consisted of 10 or more loans. While other sources on vehicle title lending are more limited than for payday lending, the Tennessee Department of Financial Institutions publishes a biennial report on vehicle title lending. Like the single-payment vehicle title loans the Bureau has analyzed, the vehicle title loans in Tennessee are 30-day single-payment loans. The most recent report shows similar patterns to those the Bureau found in its research, with a substantial number of consumers rolling over their loans multiple times. According to the report, of the total number of loan agreements made in 2014, about 15 percent were paid in full after 30 days without rolling over. Of those loans that are rolled over, about 65 percent were at least in their fourth rollover, about 44 percent were at least in their seventh rollover, and about 29 percent were at least in their tenth, up to a maximum of 22 rollovers.[234]

The impact of these outcomes for consumers who are unable to repay and either default or re-borrow is discussed in Market Concerns—Underwriting.

Short-Term Lending by Depository Institutions

As noted above, within the banking system, consumers with liquidity needs rely primarily on credit cards and overdraft services. Some depository institutions, particularly community banks and credit unions, provide occasional small loans on an accommodation basis to their customers.[235] The Bureau's market monitoring indicates that a number of the banks and credit unions offering these accommodation loans are located in small towns and rural areas and that it is not uncommon for borrowers to be in non-traditional employment or have seasonal or variable income. In addition, some depository institutions have experimented with short-term payday-like products or partnered with payday lenders, but such experiments have had mixed results and in several cases have prompted prudential regulators to take action discouraging certain types of activity. For a period of time, a handful of banks also offered a deposit advance product as discussed below; that product also prompted prudential regulators to issue guidance that effectively discouraged the offering of the product.

National banks, most State-chartered banks, and State credit unions are permitted under existing Federal laws to charge interest on loans at the highest rate allowed by the laws of the State in which the lender is located (lender's home State).[236] The bank or State-chartered credit union may then charge the interest rate of its home State on loans it makes to borrowers in other States without needing to comply with the usury limits of the States in which it makes the loans (borrower's home State). Federal credit unions generally must not charge more than an 18 percent interest rate. However, the National Credit Union Administration Start Printed Page 54495(NCUA) has taken some steps to encourage federally chartered credit unions to offer “payday alternative loans,” which generally have a longer term than traditional payday products. Federal credit unions are authorized to make these small-dollar loans at rates up to 28 percent interest plus an application fee. This program is discussed in more detail below.

Agreements between depository institutions and payday lenders. In 2000, the Office of the Comptroller of the Currency (OCC) issued an advisory letter alerting national banks that the OCC had significant safety and soundness, compliance, and consumer protection concerns with banks entering into contractual arrangements with vendors seeking to avoid certain State lending and consumer protection laws. The OCC noted it had learned of nonbank vendors approaching federally chartered banks urging them to enter into agreements to fund payday and title loans. The OCC also expressed concern about unlimited renewals (what the Bureau refers to as rollovers or re-borrowing), and multiple renewals without principal reduction.[237] The agency subsequently took enforcement actions against two national banks for activities relating to payday lending partnerships.[238]

The Federal Deposit Insurance Corporation (FDIC) has also expressed concerns with similar agreements between payday lenders and the depositories under its purview. In 2003, the FDIC issued Guidelines for Payday Lending applicable to State-chartered FDIC-insured banks and savings associations; the guidelines were revised in 2005 and most recently in 2015. The guidelines focus on third-party relationships between the chartered institutions and other parties, and specifically address rollover limitations. They also indicate that banks should ensure borrowers exhibit both a willingness and ability to repay when rolling over a loan. Among other things, the guidelines indicate that institutions should: (1) Ensure that payday loans are not provided to customers who had payday loans outstanding at any lender for a total of three months during the previous 12 months; (2) establish appropriate cooling-off periods between loans; and (3) provide that no more than one payday loan is outstanding with the bank at a time to any one borrower.[239] In 2007, the FDIC issued guidelines encouraging banks to offer affordable small-dollar loan alternatives with APRs of 36 percent or less, reasonable and limited fees, amortizing payments, underwriting focused on a borrower's ability to repay but allowing flexible documentation, and to avoid excessive renewals.[240]

Deposit advance product lending. As the payday lending industry grew, a handful of banks decided to offer their deposit customers a similar product termed a deposit advance product (DAP). While one bank started offering deposit advances in the mid-1990s, the product began to spread more rapidly in the late 2000s and early 2010s. DAP could be structured a number of ways but generally involved a line of credit offered by depository institutions as a feature of an existing consumer deposit account with repayment automatically deducted from the consumer's next qualifying deposit. Deposit advance products were available to consumers who received recurring electronic deposits if they had an account in good standing and, for some banks, several months of account tenure, such as six months. When an advance was requested, funds were deposited into the consumer's account. Advances were automatically repaid when the next qualifying electronic deposit, whether recurring or one-time, was made to the consumer's account rather than on a fixed repayment date. If an outstanding advance was not fully repaid by an incoming electronic deposit within about 35 days, the consumer's account was debited for the amount due and could result in a negative balance on the account.

The Bureau estimates that at the product's peak from mid-2013 to mid-2014, banks originated roughly $6.5 billion of advances, which represents about 22 percent of the volume of storefront payday loans issued in 2013. The Bureau estimates that at least 1.5 million unique borrowers took out one or more DAP loans during that same period.[241]

DAP fees, like payday loan fees, did not vary with the amount of time that the advance was outstanding but rather were set as dollars per amount advanced. A typical fee was $2 per $20 borrowed, the equivalent of $10 per $100. Research undertaken by the Bureau using a supervisory dataset found that the median duration of an episode of DAP usage was 12 days, yielding an effective APR of 304 percent.[242]

The Bureau further found that while the median draw on a DAP was $180, users typically took more than one draw before the advance was repaid. The multiple draws resulted in a median average daily DAP balance of $343, which is similar to the size of a typical payday loan. With the typical DAP fee of $2 per $20 advanced, the fees for $343 in advances equate to about $34.30. The median DAP user was indebted for 112 days over the course of a year and took advances in seven months. Fourteen percent of borrowers took advances totaling over $9,000 over the course of the year; these borrowers had a median number of days in debt of 254.[243]

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 Start Printed Page 54496practices and violated the OTS' Advertising Regulation.[244] Consequently, in 2011, pursuant to a cease and desist order, the bank agreed to remunerate its DAP consumers nearly $5 million and pay a civil monetary penalty of $400,000.[245]

In November 2013, the FDIC and OCC issued final supervisory guidance on DAP.[246] This guidance stated that banks offering DAP should adjust their programs in a number of ways, including applying more scrutiny in underwriting DAP loans and discouraging repetitive borrowing. Specifically, the OCC and FDIC stated that banks should ensure that the customer relationship is of sufficient duration to provide the bank with adequate information regarding the customer's recurring deposits and expenses, and that the agencies would consider sufficient duration to be no less than six months. In addition, the guidance said that banks should conduct a more stringent financial capacity assessment of a consumer's ability to repay the DAP advance according to its terms without repeated re-borrowing, while meeting typical recurring and other necessary expenses, as well as outstanding debt obligations. In particular, the guidance stated that banks should analyze a consumer's account for recurring inflows and outflows at the end, at least, of each of the preceding six months before determining the appropriateness of a DAP advance. Additionally, the guidance noted that in order to avoid re-borrowing, a cooling-off period of at least one monthly statement cycle after the repayment of a DAP advance should be completed before another advance could be extended. Finally, the guidance stated that banks should not increase DAP limits automatically and without a fully underwritten reassessment of a consumer's ability to repay, and banks should reevaluate a consumer's eligibility and capacity for DAP at least every six months.[247]

Following the issuance of the FDIC and OCC guidance, banks supervised by the FDIC and OCC ceased offering DAP. Of two DAP-issuing banks supervised by the Federal Reserve Board and therefore not subject to either the FDIC or OCC guidance, one eliminated its DAP program while another continues to offer a modified version of DAP to its existing DAP borrowers.[248] Today, with the exception of some short-term lending within the NCUA's Payday Alternative Loan (PAL) program, described in detail below, relatively few banks or credit unions offer large-scale formal loan programs of this type.

Federal credit union payday alternative loans. As noted above, Federal credit unions may not charge more than 18 percent interest. However, in 2010, the NCUA adopted an exception to the interest rate limit under the Federal Credit Union Act that permitted Federal credit unions to make PALs at an interest rate of up to 28 percent plus an application fee, “that reflects the actual costs associated with processing the application” up to $20.[249] PALs may be made in amounts of $200 to $1,000 to borrowers who have been members of the credit union for at least one month. PAL terms range from one to six months, PALs may not be rolled over, and borrowers are limited to one PAL at a time and no more than three PALs from the same credit union in a rolling six-month period. PALs must fully amortize and the credit union must establish underwriting guidelines such as verifying borrowers' employment from at least two recent pay stubs.[250]

In 2016, about 650 Federal credit unions (nearly 20 percent of all Federal credit unions) offered PALs, with originations at $134.7 million, representing a 9.7 percent increase from 2015.[251] In 2015, the average PAL amount was about $700 and carried a median interest rate of 25 percent; in 2016, the average PAL loan amount increased to about $720 with a similar median interest rate of 25 percent.[252]

C. Longer-Term, High-Cost Loans

In addition to short-term loans, certain longer-term, high-cost loans will be covered by the payments protections provisions of this rule. These are longer-term, high-cost loans with a leveraged payment mechanism, as described in more detail in part II.D and Markets Concerns—Payments. The category of longer-term high-cost loans most directly impacted by the payments protections in this rule are payday installment loans.

Payday Installment Loans

Product definition and regulatory environment. The term “payday installment loan” refers to a high-cost loan repaid in multiple installments, with each installment typically due at the consumer's payday and with the lender generally having the ability to collect the payment from the consumer's bank account as money is deposited or directly from the consumer's paycheck.[253]

Two States, Colorado and Illinois, have authorized payday installment loans.[254] Through 2010 amendments to its payday loan law, Colorado no longer permits short-term single-payment payday loans. Instead, in order to charge fees in excess of the 36 percent APR cap for most other consumer loans, the minimum loan term must be six months and lenders are permitted to take a series of post-dated checks or payment authorizations to cover each payment under the loan, providing lenders with the same access to borrower's accounts as a single-payment payday loan.[255] In Illinois, lenders have been permitted to make payday installment loans since 2011. These loans must be fully-amortizing for terms of 112 to 180 days and the loan amounts are limited to the Start Printed Page 54497lesser of $1,000 or 22.5 percent of gross monthly income.[256]

A number of other States have adopted usury laws that some payday lenders use to offer payday installment loans in lieu of, or in addition to, more traditional payday loans. Since July 2016, Mississippi lenders can make “credit availability loans”—closed-end fully-amortizing installment loans with loan terms of four to 12 months, whether secured by personal property or unsecured.[257] The maximum loan amount on a credit availability loan is limited to $2,500, and lenders may charge a monthly handling fee of up to 25 percent of the outstanding principal balance plus an origination fee of the greater of 1 percent of the amount disbursed or $5.[258]

As of 2015, Tennessee lenders may offer “flex loans”—open-end lines of credit that need not have a fixed maturity date and that may be secured by personal property or unsecured.[259] The maximum outstanding balance on a flex loan may not exceed $4,000, with an interest rate of up to 24 percent per annum and “customary fees” for underwriting and other purposes not to exceed a daily rate of 0.7 percent of the average daily principal balance.[260] At least one lender offering flex loans states that loan payments are “aligned with your payday.” [261] Similar legislation has been unsuccessful in other States. For example, in May 2017 the Governor of Oklahoma vetoed legislation that would have authorized high-cost installment loans with interest rates of up to 17 percent per month, or 204 percent APR.[262]

None of these laws authorizing payday installment loans, credit access loans, or flex loans appear to limit the use of electronic repayment or ACH options for repayment.

In addition to States that authorize a specific form of payday installment loan, credit access loan, or flex loan, several other States provide room within their usury laws for high-cost installment products. A recent report found that seven States have no rate or fee limits for closed-end loans of $500 and that 10 States have no rate or fee limits for closed-end loans of $2,000.[263] The same report noted that for open-end credit, 13 States do not limit rates for a $500 advance and 15 States do not limit them for a $2,000 advance.[264] Another recent study of the Web sites of five payday lenders that operate both online and at storefront locations found that these five lenders offered payday installment loans in at least 17 States.[265]

In addition, as discussed above, a substantial segment of the online payday industry operates outside of the constraints of State law, and this segment, too, has migrated towards payday installment loans. For example, a study commissioned by a trade association for online lenders surveyed seven lenders and concluded that, while single-payment loans are still a significant portion of these lenders' volume, they are on the decline while installment loans are growing. Several of the lenders represented in the report had either eliminated single-payment products or were migrating to installment products while still offering single-payment loans.[266] For the practical reasons associated with having no retail locations, online lenders prefer repayment by electronic methods and use various approaches to secure consumers' authorization for payments electronically through ACH debits.

As with payday loans, and as noted above, as authorized or permitted by some State laws, payday installment lenders often hold borrowers' checks or obtain their authorization for ACH repayment. Some borrowers may prefer ACH repayment methods for convenience. The Bureau is aware of certain practices used by payday installment lenders to secure repayment through consumers' accounts including longer waits for distribution of loan proceeds and higher fees for non-electronic payment methods, described above in the Online Payday Loans section, and discussed in more detail in part II.D and Markets Concerns—Payments. To the extent that longer-term payday installment loans meet the cost of credit threshold and include leveraged payment mechanisms, they are subject to this rule's payments protections.[267]

Finance Company Installment Loans

Product definition and regulatory environment. Before the advent of single-payment payday loans or online lending, and before widespread availability of credit cards, “personal loans” or “personal installment loans” were offered by storefront nonbank installment lenders, often referred to as “finance companies.” Personal loans are typically unsecured loans used for any variety of purposes and distinguished from loans where the lender generally requires the funds be used for a specific intended purpose, such as automobile purchase loans, student loans, and mortgage loans. As discussed below, these finance companies (and their newer online counterparts) have a different business model than payday installment lenders. Some of these finance companies limit the APRs on their loans to 36 percent or less, Start Printed Page 54498whether required by State law or as a matter of company policy. However, there are other finance companies and installment lenders that offer loans that fall within the rule's definition of “covered longer-term loan,” as they carry a cost of credit that exceeds 36 percent APR and include repayment through a leveraged payment mechanism—access to the borrower's account.

According to a report from a consulting firm using data derived from a nationwide consumer reporting agency, in 2016 finance companies originated 8.6 million personal loans (unsecured installment loans) totaling $41.7 billion in originations; approximately 6.9 million of these loans worth $25.8 billion, with an average loan size of about $3,727, were made to nonprime consumers (categorized as near prime, subprime, and deep subprime, with VantageScores of 660 and below).[268]

APRs at storefront locations in States that do not cap rates on installment loans can be 50 to 90 percent for subprime and deep subprime borrowers; APRs in States with rate caps are 24 to 36 percent APR for near prime and subprime borrowers.[269] A survey of finance companies conducted in conjunction with a national trade association reported that 80 percent of loans were for $2,000 or less and 85 percent of loans had durations of 24 months or less (60 percent of loans had durations of one year or less).[270] The survey did not report an average loan amount. Almost half of the loans had APRs between 49 and 99 percent; 9 percent of loans of $501 or less had APRs between 100 and 199 percent, but there was substantial rate variation among States.[271] Except for loans subject to the Military Loan Act described above, APR calculations under Regulation Z include origination fees, but lenders generally are not required to include within the APR costs such as application fees and add-on services such as optional credit insurance and guaranteed automobile protection.[272] A wider range and number of such up-front fees and add-on products and services appear to be charged by the storefront lenders than by their newer online counterparts.

Finance companies typically engage in underwriting that includes a monthly net income and expense budget, a review of the consumer's credit report, and an assessment of monthly cash flow.[273] One trade association representing traditional finance companies has described the underwriting process as evaluating the borrower's “stability, ability, and willingness” to repay the loan.[274] Many finance companies report loan payment history to one or more of the nationwide consumer reporting agencies,[275] and the Bureau believes from market outreach that these lenders generally furnish payment information on a monthly basis.

With regard to newer online counterparts, the Bureau is aware from its market monitoring activities that some online installment lenders in this market offer products that resemble the types of loans made by finance companies. Many of these online installment lenders engage in highly-automated underwriting that involves substantial use of analytics and technology. The APRs on the loans are over 36 percent and can reach the triple digits.[276]

Finance companies and online installment lenders offer various methods for consumers to repay their loans. Particularly for online loans, repayment through ACH is common.[277] Some online installment lenders also allow other repayment methods, such as check, debit or credit card, MoneyGram, or Western Union, but may require advance notice for some of these payment methods.[278] From its market monitoring functions, the Bureau is aware that finance companies with storefront locations tend to offer a wider array of repayment options. Some finance companies will accept ACH payments in person, set up either during the loan closing process or at a later date, or by phone.[279] Finance companies also traditionally take payments in-store, generally by cash or check, or by mail. Some finance companies charge consumers a fee to use certain payment methods.[280]

Start Printed Page 54499

D. Initiating Payment From Consumers' Accounts

As discussed above, payday and payday installment lenders nearly universally obtain at origination one or more authorizations to initiate withdrawal of payment from the consumer's account. There are a variety of payment options or channels that they use to accomplish this goal, and lenders frequently obtain authorizations for multiple types. Different payment channels are subject to different laws and, in some cases, private network rules, leaving lenders with broad control over the parameters of how a particular payment will be pulled from a consumer's account, including the date, amount, and payment method.

Obtaining Payment Authorization

A variety of payment methods enable lenders to use a previously-obtained authorization to initiate a withdrawal from a consumer's account without further action from the consumer. These methods include paper signature checks, remotely created checks (RCCs) and remotely created payment orders (RCPOs),[281] and electronic payments like ACH [282] and debit and prepaid card transactions. Payday and payday installment lenders—both online and in storefronts—typically obtain a post-dated check or electronic payment authorization from consumers for repayments of loans.[283] For storefront payday loans, lenders typically obtain a post-dated check (or, where payday installment products are authorized, a series of postdated checks) that they can use to initiate a check or ACH transaction from a consumer's account. For an online loan, a consumer often provides bank account information to receive the loan funds, and the lender often uses that bank account information to obtain payment from the consumer.[284] This account information can be used to initiate an ACH payment from a consumer's account. Typically, online lenders require consumers to authorize payments from their account as part of their agreement to receive the loan proceeds electronically.[285] Some traditional installment lenders also obtain an electronic payment authorization from their customers.

Payday and payday installment lenders often take authorization for multiple payment methods, such as taking a post-dated check along with the consumer's debit card information.[286] Consumers usually provide the payment authorization as part of the loan origination process.[287]

For storefront payday loans, providing a post-dated check is typically a requirement to obtain a loan. Under the Electronic Fund Transfer Act (EFTA) lenders cannot condition credit on obtaining an authorization from the consumer for “preauthorized” (recurring) electronic fund transfers,[288] but in practice online payday and payday installment lenders are able to obtain such authorizations from consumers for almost all loans. The EFTA provision concerning compulsory use does not apply to paper checks and one-time electronic fund transfers. Moreover, even for loans subject to the EFTA compulsory use provision, lenders use various methods to obtain electronic authorizations. For example, although some payday and payday installment lenders provide consumers with alternative methods to repay loans, these options may be burdensome and may significantly change the terms of the loan. For example, one lender increases its APR by an additional 61 percent or 260 percent, depending on the length of the loan, if a consumer elects a cash-only payment option for its installment loan product, resulting in a total APR of 462 percent (210 day loan) to 780 percent (140 day loan).[289] Other lenders change the origination process if consumers do not immediately provide account access. For example, some online payday lenders require prospective customers to contact them by phone if they do not want to provide a payment authorization and wish to Start Printed Page 54500pay by money order or check at a later time. Other lenders delay the disbursement of the loan proceeds if the consumer does not immediately provide a payment authorization.[290]

Banks and credit unions have additional payment channel options when they lend to consumers who have a deposit account at the same institution. As a condition of certain types of loans, many financial institutions require consumers to have a deposit account at that same institution.[291] The loan contract often authorizes the financial institution to pull payment directly from the consumer's account. Since these payments can be processed through an internal transfer within the bank or credit union, these institutions do not typically use external payment channels to complete an internal payment transfer.

Exercising Payment Authorizations

For different types of loans that will be covered under the rule, lenders use their authorizations to collect payment differently. As discussed above, most storefront lenders encourage or require consumers to return to their stores to pay in cash, roll over, or otherwise renew their loans. The lender often will deposit a post-dated check or initiate an electronic fund transfer only where the lender considers the consumer to be in “default” under the contract or where the consumer has not responded to the lender's communications.[292] Bureau examiners have cited one or more payday lenders for threatening to initiate payments from consumer accounts that were contrary to the agreement, and that the lenders did not intend to initiate.[293]

In contrast, online lenders typically use the authorization to collect all payments, not just those initiated after there has been some indication of distress from the consumer. Moreover, as discussed above, online lenders offering “hybrid” payday loan products structure them so that the lender is authorized to collect a series of interest-only payments—the functional equivalent of paying finance charges to roll over the loan—before full payment or amortizing payments are due.[294] The Bureau also is aware that some online lenders, although structuring their product as nominally a two-week loan, automatically roll over the loan every two weeks unless the consumer takes affirmative action to make full payment.[295] The payments processed in such cases are for the cost of the rollover rather than the full balance due.

As a result of these distinctions, storefront and online lenders have different success rates in exercising such payment authorizations. Some large storefront lenders report that they initiate payment attempts in less than 10 percent of cases, and that 60 to 80 percent of those attempts are returned for non-sufficient funds.[296] Bureau analysis of ACH payments by online payday and payday installment lenders, which typically collect all payments by initiating a transfer from consumers' accounts, indicates that for any given payment only about 6 percent fail on the first try. However, over an eighteen-month observation period, 50% of online borrowers were found to experience at least one payment attempt that failed or caused an overdraft and one-third of the borrowers experienced more than one such incident.

Lenders typically charge fees for these returned payments, sometimes charging both a returned payment fee and a late fee.[297] These fees are in addition to fees, such as NSF fees, that may be charged by the financial institution that holds the consumer's account.

The Bureau found that if an electronic payment attempt failed, online lenders try again three-quarters of the time. However, after an initial failure the lender's likelihood of failure jumps to 70 percent for the second attempt and 73 percent for the third. Of those that succeed, roughly one-third result in an overdraft.

Both storefront and online lenders also frequently change the ways in which they attempt to exercise authorizations after one attempt has failed. For example, many typically make additional attempts to collect initial payment due.[298] Some lenders attempt to collect the entire payment Start Printed Page 54501amount once or twice within a few weeks of the initial failure. The Bureau, however, is aware of online and storefront lenders that use more aggressive and unpredictable payment collection practices, including breaking payments into multiple smaller payments and attempting to collect payment multiple times in one day or over a short period of time.[299] The cost to lenders to repeatedly attempt payment depends on their contracts with payment processors and commercial banks, but is generally nominal; the Bureau estimates the cost is in a range of 5 to 15 cents for an ACH transaction.[300] These practices are discussed in more detail in Market Concerns—Payments.

As noted above, banks and credit unions that lend to their account holders can use their internal system to transfer funds from the consumer accounts and do not need to utilize the payment networks. Deposit advance products and their payment structures are discussed further in part II.B. The Bureau believes that many small-dollar loans with depository institutions are paid through internal transfers.

Due to the fact that lenders obtain authorizations to use multiple payment channels and benefit from flexibility in the underlying payment systems, lenders generally enjoy broad discretion over the parameters of how a particular payment will be pulled from a consumer's account, including the date, amount, and payment method. For example, although a check specifies a date, lenders may not present the check on that date. Under UCC section 4-401, merchants can present checks for payment even if the check specifies a later date.[301] Lenders sometimes attempt to collect payment on a different date from the one stated on a check or original authorization. They may shift the attempt date in order to maximize the likelihood that funds will be in the account; some use their own models to determine when to collect, while others use predictive payment products provided by third parties that estimate when funds are most likely to be in the account.[302]

Moreover, the checks provided by consumers during origination often are not processed as checks. Rather than sending these payments through the check clearing network, lenders often process these payments through the ACH network. They are able to use the consumer account number and routing number on a check to initiate an ACH transaction. When lenders use the ACH network in a first attempt to collect payment, the lender has used the check as a source document and the payment is considered an electronic fund transfer under EFTA and Regulation E,[303] which generally provide additional consumer protections—such as error resolution rights—beyond those applicable to checks. However, if a transaction is initially processed through the check system and then processed through the ACH network because the first attempt failed for insufficient funds, the subsequent ACH attempt is not considered an electronic fund transfer under current Regulation E.[304] Similarly, consumers may provide their account and routing number to lenders for the purposes of an ACH payment, but the lender may use that information to initiate a remotely created check that is processed through the check system and thus may not receive Regulation E protections.[305]

Payment System Regulation and Private Network Requirements

Different payment mechanisms are subject to different laws and, in some cases, private network rules that affect how lenders can exercise their rights to initiate withdrawals from consumers' accounts and how consumers may attempt to limit or stop certain withdrawal activity after granting an initial authorization. Because ACH payments and post-dated checks are the most common authorization mechanisms used by payday and payday installment lenders, this section briefly outlines applicable Federal laws and National Automated Clearinghouse Association (NACHA) rules concerning stop-payment rights, prohibitions on unauthorized payments, notices where payment amounts vary, and rules governing failed withdrawal attempts.

NACHA recently adopted several changes to the ACH network rules in response to complaints about problematic behavior by payday and payday installment lenders, including a rule that allows it to more closely scrutinize originators who have a high rate of returned payments.[306] Issues around monitoring and enforcing those rules and their application to problems in the market for covered loans are discussed in more detail in Market Concerns—Payments. But it should be noted here at the outset that the NACHA rules only apply to payment attempts through ACH and are not enforceable by the Bureau.

Stop-payment rights. For preauthorized (recurring) electronic fund transfers,[307] EFTA grants consumers a right to stop paym ent by issuing a stop-payment order through their depository institution.[308] The Start Printed Page 54502NACHA private rules adopt this EFTA provision along with additional stop-payment rights. In contrast to EFTA, NACHA provides consumers with a stop-payment right for both one-time and preauthorized transfers.[309] Specifically, for recurring transfers, NACHA Rules require financial institutions to honor a stop-payment order as long as the consumer notifies the bank at least 3 banking days before the scheduled debit.[310] For one-time transfers, NACHA Rules require financial institutions to honor the stop-payment order as long as the notification provides them with a “reasonable opportunity to act upon the order.” [311] Consumers may notify the bank or credit union verbally or in writing, but if the consumer does not provide written confirmation the oral stop-payment order may not be binding beyond 14 days. If a consumer wishes to stop all future payments from an originator, NACHA Rules allow a bank or credit union to require the consumer to confirm in writing that she has revoked authorization from the originator.

Checks are also subject to a stop-payment right under the Uniform Commercial Code (UCC).[312] Consumers have a right to stop payment on any check by providing the bank with oral (valid for 14 days) or written (valid for 6 months) notice. To be effective, the stop-payment notice must describe the check “with reasonable certainty” and give the bank enough information to find the check under the technology then existing.[313] The stop-payment notice also must be given at a time that affords the bank a reasonable opportunity to act on it before the bank becomes liable for the check under U.C.C. 4-303.

Although EFTA, the UCC, and NACHA Rules provide consumers with stop-payment rights, financial institutions typically charge a fee of approximately $32 for consumers to exercise those rights.[314] Further, both lenders and financial institutions often impose a variety of requirements that make the process for stopping payments confusing and burdensome for consumers. See the discussion of these requirements in Market Concerns—Payments.

Protection from unauthorized payments. Regulation E and NACHA Rules both provide protections with respect to payments by a consumer's financial institution if the electronic transfer is unauthorized.[315] Payments originally authorized by the consumer can become unauthorized under EFTA if the consumer notifies his or her financial institution that the originator's authorization has been revoked.[316] NACHA has a specific threshold for unauthorized returns, which involve transactions that originally collected funds from a consumer's account but that the consumer is disputing as unauthorized. Under NACHA Rules, originators are required to operate with an unauthorized return rate below 0.5 percent or they risk fines and loss of access to the ACH network.[317]

Notice of variable amounts. Regulation E and the NACHA Rules both provide that if the debit amount for a preauthorized transfer changes from the previous transfer or from the preauthorized amount, consumers must receive a notice 10 calendar days prior to the debit.[318] However, both of these rules have an exception from this requirement if consumers have agreed to a range of debit amounts and the payment does not fall outside that range.[319]

Based on outreach and market research, the Bureau does not believe that most payday and payday installment lenders making loans that will be covered under the rule are providing a notice of transfers varying in amount. However, the Bureau is aware that many of these lenders take authorizations for a range of amounts. As a result, lenders use these broad authorizations rather than fall under the Regulation E requirement to send a notice of transfers varying in amount even when collecting for an irregular amount (for example, by adding fees or a past due amount to a regularly scheduled payment). Some of these contracts provide that the consumer is authorizing the lender to initiate payment for any amount up to the full amount due on the loan.[320]

Reinitiation Cap. After a payment attempt has failed, NACHA Rules allow an originator—in this case, the lender that is trying to collect payment—to attempt to collect that same payment no more than two additional times through the ACH network.[321] NACHA Rules also require the ACH files [322] for the two additional attempts to be labeled as “reinitiated” transactions. Because the rule applies on a per-payment basis, for lenders with recurring payment Start Printed Page 54503authorizations, the count resets to zero when the next scheduled payment comes due.

III. Summary of the Rulemaking Process

As described in more detail below, the Bureau has conducted broad outreach with a multitude of stakeholders on a consistent basis over more than five years to learn more about the market for small-dollar loans of various kinds. This outreach has comprised many public events, including field hearings, and hundreds of meetings with both consumer and industry stakeholders on the issues raised by small-dollar lending. In addition to meeting with lenders and other market participants, trade associations, consumer groups, community groups, and others, the Bureau has engaged with individual faith leaders and coalitions of faith leaders from around the country to gain their perspective on how these loans affect their communities and the people they serve. And the Bureau has met frequently with Federal, State, and Tribal officials to consult and share information about these kinds of loans and their consequences for consumers.

The Bureau's understanding of these loans, and how they affect consumers, has also been furthered by its ongoing supervisory activity, which involves exercising its legally mandated authority to conduct formal examinations of companies who make such loans and of debt collectors who collect on such loans. These examinations have canvassed the operations, marketing, underwriting, collections, and compliance management systems at such lenders and continue to do so on an ongoing basis. In addition, the Bureau has investigated and taken enforcement actions against a number of small-dollar lenders, which has provided further insight into various aspects of their operations and the practical effects of their business models on consumers.

The Bureau has also undertaken extensive research and analysis over several years to develop the factual foundation for issuance of this final rule. That research and analysis has included multiple white papers and data points on millions of such loans,[323] as well as careful review of studies and reports prepared by others and the relevant academic literature.[324] The Bureau has analyzed its own data on consumer complaints about the issues raised by small-dollar loans and the collections efforts made by lenders and debt collectors on such loans. And the Bureau has consistently engaged in market monitoring activities to gain insights into developing trends in the market for small-dollar loans.

All of the input and feedback the Bureau has received from its outreach over the years, its extensive experience of examining and investigating small-dollar lenders, and its research and analysis of the marketplace, have assisted the Bureau in developing and issuing this final rule. The material presented in this section summarizes the Bureau's work relating to the rule in three categories:

  • The Bureau's background and processes in developing the rule;
  • the key elements of the notice of proposed rulemaking; and
  • the receipt and consideration of feedback prior to finalizing the rule.

A. Bureau Outreach to Stakeholders

Birmingham Field Hearing. The Bureau's formal outreach efforts on this subject began in January 2012, when it held its first public field hearing in Birmingham, Alabama, focused on small-dollar lending. At the field hearing, the Bureau heard testimony and received input from consumers, civil rights groups, consumer advocates, religious leaders, industry and trade association representatives, academics, and elected representatives and other governmental officials about consumers' experiences with small-dollar loan products. At the same time, the Bureau announced the launch of its program to conduct supervisory examinations of payday lenders pursuant to the Bureau's authority under section 1024 of the Dodd-Frank Act. As part of this initiative, the Bureau put in place a process to obtain loan-level records from a number of large payday lenders to assist in analyzing the nature and effects of such loans.

The Bureau transcribed the field hearing and posted the transcript on its Web site.[325] Concurrently, the Bureau placed a notice in the Federal Register inviting public comment on the issues discussed in the field hearing. The Bureau received 664 public comments in response to that request, which were reviewed and analyzed.

Nashville Field Hearing. In March 2014, the Bureau held a field hearing in Nashville, Tennessee to gather further input from a broad range of stakeholders.[326] The Bureau heard testimony from consumer groups, industry representatives, academics, and members of the public, including consumers of payday loans. The field hearing was held in conjunction with issuing the second of two research reports on findings by Bureau staff using the supervisory data that it had collected from a number of large payday lenders. In the Director's opening remarks, he noted three concerns associated with covered loans that had been identified in recent Bureau research: That a significant population of consumers were ending up in extended loan sequences; that some lenders use the electronic payments system in ways that pose risks to consumers; and that a troubling number of companies engage in collection activities that may be unfair or deceptive in one or more ways. While the Bureau was working on these reports and in the period following their release, the Bureau held numerous meetings with stakeholders on small-dollar lending in general and to hear their views on potential policy approaches.

Richmond Field Hearing. In March 2015, the Bureau held another field hearing in Richmond, Virginia to gather further input from a broad range of stakeholders.[327] The focus of this field hearing was the announcement the Bureau simultaneously made of the rulemaking proposals it had under consideration that would require lenders to take steps to make sure consumers can repay their loans and would restrict certain methods of collecting payments from consumers' bank accounts in ways that lead to substantial penalty fees. The Bureau heard testimony from consumer groups, industry representatives, faith leaders, and members of the public, including consumers of payday loans. In addition to the field hearing, the Bureau held separate roundtable discussions with consumer advocates and with industry Start Printed Page 54504members and trade associations to hear feedback on the rulemaking proposals under consideration.

A summary of the rulemaking proposals under consideration was released at the time of the Richmond field hearing. This marked the first stage in the process the Bureau is required to follow under the Small Business Regulatory Enforcement and Fairness Act (SBREFA),[328] which is discussed in more detail below. The summary was formally known as the Small Business Review Panel Outline. In addition to the discussions that occurred at the time of the Richmond field hearing, the Bureau has met on a number of other occasions with industry members and trade associations, including those representing storefront payday lenders, to discuss their feedback on the issues presented in the Outline.

Omaha Meeting and Other Events. At the Bureau's Consumer Advisory Board (CAB) meeting in June 2015 in Omaha, Nebraska, a number of meetings and field events were held about payday, vehicle title, and similar loans. The CAB advises and consults with the Bureau in the exercise of its functions under the Federal consumer financial laws, and provides information on emerging practices in the consumer financial products and services industry, including regional trends, concerns, and other relevant information. The CAB members over several years have included, among others, a payday lending executive and consumer advocates on payday lending. The Omaha events included a visit to a payday loan store to learn more about its operations first-hand and a day-long public session that focused on the Bureau's proposals in the Small Business Review Panel Outline and trends in payday and vehicle title lending. The CAB also held six subcommittee discussions on the Outline in the spring and summer of 2015, and three more subcommittee discussions on the proposed rule in the summer of 2016.

Kansas City Field Hearing. In June 2016, the Bureau held a field hearing in Kansas City, Missouri to gather further input on the issues surrounding potential new Federal regulations of small-dollar lending.[329] The focus of this field hearing was the announcement that the Bureau simultaneously made of the release of its notice of proposed rulemaking on payday, vehicle title, and certain high-cost installment loans. The proposed rule would require lenders to take steps to make a reasonable determination that consumers can afford to repay their loans and would restrict certain methods of collecting payments from consumers' bank accounts in ways that can lead to substantial penalty fees. The Bureau heard testimony on the proposed rule from consumer groups, industry representatives, and members of the public, including consumers of payday loans.

The release of the notice of proposed rulemaking commenced the formal notice-and-comment process under the Administrative Procedure Act. In the notice of proposed rulemaking, the Bureau stated that comments on the proposed rule would have to be received on or before October 7, 2016 to be considered by the Bureau. The notice of proposed rulemaking further specified the details of the methods by which comments would be received, which included email, electronic, mail, and hand delivery/courier. The Bureau also noted that all comments submitted would become part of the public record and would be subject to public disclosure.

Little Rock Meeting and Other Events. In June 2016, just a week after the field hearing in Kansas City announcing the public release of the proposed rule, the CAB held another public meeting on this topic in Little Rock, Arkansas. Among other things, Bureau officials gave a public briefing on the proposed rule to the CAB members, and the Bureau heard testimony from the general public on the subject.

Two of the Bureau's other advisory bodies have also provided input and feedback on the Bureau's work to develop appropriate provisions to regulate small-dollar loans. The Community Bank Advisory Council (CBAC) held two subcommittee discussions of the proposals contained in the Small Business Review Panel Outline in March 2015 and November 2015, a Council discussion on the proposed rule in July 2016, and two more subcommittee discussions of the proposed rule in the summer of 2016. In addition, the Bureau's Credit Union Advisory Council (CUAC) held two subcommittee discussions of the proposals in April 2015 and October 2015, discussed the Outline in its full meeting in March 2016, and held two subcommittee discussions of the proposed rule during the summer of 2016.

Faith Leaders. The Bureau has taken part in a large number of meetings with faith leaders, and coalitions of faith leaders, of all denominations to hear their perspective on how small-dollar loans affect their communities and the people they serve. In April 2016, the White House convened a meeting of national faith leaders for this purpose, which included the Bureau's director. The Bureau has also engaged in outreach to local and national leaders from churches, synagogues, mosques, and temples—both in Washington, DC and in many locations around the country. In these sessions, the Bureau has heard from faith leaders about the challenges some of them have faced in seeking to develop alternatives to payday loans that would mitigate what they perceive to be the harms caused to consumers.

General Outreach. Various Bureau leaders, including its director, and Bureau staff have participated in and spoken at dozens of events and conferences throughout the country, which have provided further opportunities to gather insight and recommendations from both industry and consumer groups about how to approach the issue of whether and how to regulate small-dollar loans. In addition to gathering information from meetings with lenders and trade associations and through regular supervisory and enforcement activities, Bureau staff made fact-finding visits to at least 12 non-depository payday and vehicle title lenders.

Inter-Agency Consultation. As discussed in connection with section 1022 of the Dodd-Frank Act below, the Bureau has consulted with other Federal consumer protection and prudential regulators about these issues and the approaches that the other regulators have taken to small-dollar lending over the years. The Bureau has provided other regulators with information about the proposals under consideration, sought their input, and received feedback that has assisted the Bureau in preparing this final rule. In addition, the Bureau was involved, along with its fellow Federal regulatory agencies, in meetings and other efforts to assist the U.S. Department of Defense as it developed and adopted regulations to implement updates to the Military Lending Act. That statute governs small-dollar loans in addition to various other loan products, and the Bureau developed insights from this work that have been germane to this rulemaking, especially in how to address the potential for lenders to find ways to evade or circumvent its provisions.

Consultation with State and Local Officials. The Bureau's outreach also has included a large number of meetings Start Printed Page 54505and calls with State Attorneys General, State financial regulators, and municipal governments, along with the organizations representing the officials charged with enforcing applicable Federal, State, and local laws on small-dollar loans. These discussions have occurred with officials from States that effectively disallow such loans by imposing strict usury caps, as well as with officials from States that allow such loans and regulate them through various frameworks with different substantive approaches. The issues discussed have involved both storefront and online loans. In particular, as the Bureau has worked to develop the proposed registered information system requirements, it has consulted with State agencies from those States that require lenders to provide information about certain small-dollar loans to statewide databases. A group of State Attorneys General submitted a comment claiming that the extent to which the Bureau consulted State and local officials was insufficient. Some other State officials submitted similar comments. Although it is true that the Bureau did not meet with every attorney general or interested official from every State to discuss issues involving the regulation of small-dollar loans, it did meet with many of them, some on multiple occasions. In addition, the Bureau did receive public comments from groups of State Attorneys General and other officials, including both regulators and legislators, and has carefully considered the issues they discussed, which presented many conflicting points of view.

Several State Attorneys General requested that the Bureau commit to consulting with State officials before enforcing this regulation. The Bureau will coordinate and consult with State regulators and enforcement officials in the same manner that it does in other enforcement and supervisory matters.

Tribal Consultations. The Bureau has engaged in consultation with Indian tribes about this rulemaking. The Bureau's Policy for Consultation with Tribal Governments provides that the Bureau “is committed to regular and meaningful consultation and collaboration with tribal officials, leading to meaningful dialogue with Indian tribes on Bureau policies that would be expressly directed to tribal governments or tribal members or that would have direct implications for Indian tribes.” [330] To date, the Bureau has held three formal consultation sessions related to this rulemaking. The first was held on October 27, 2014, at the National Congress of American Indians 71st Annual Convention and Marketplace in Atlanta, Georgia and before the release of the Bureau's small-dollar lending SBREFA materials. The timing of the consultation gave Tribal leaders an opportunity to speak directly with the small-dollar lending team about Tribal lender and/or consumer experiences prior to the drafting of proposals that would become the Small Business Review Panel Outline. A second consultation was held on June 15, 2015, at the Bureau's headquarters. At that consultation, Tribal leaders responded to the proposals under consideration set forth in the Outline that had recently been released. A third consultation was held on August 17, 2016, at the Sandra Day O'Connor College of Law in Phoenix, Arizona, after the release of the proposed rule. All Federally recognized Indian tribes were invited to attend these consultations, which generated frank and valuable input from Tribal leaders to Bureau senior leadership and staff about the effects such a rulemaking could have on Tribal nations and lenders. In addition, the Bureau has met individually with Tribal leaders, Tribal lenders, and Tribal lending associations in an effort to further inform its small-dollar lending work. A Tribal trade association dealing with financial services issues informed the Bureau that it believed these consultations were inadequate.

B. Supervisory and Enforcement Activity

In addition to these many channels of outreach, the Bureau has developed a broader understanding of small-dollar lending through its supervisory and enforcement work. This work is part of the foundation of the Bureau's expertise and experience with this market, which is informed by frequent contact with certain small-dollar lenders and the opportunity to scrutinize their operations and practices up close through supervisory examinations and enforcement investigations. Some illustrative details of this work are related below.

The Bureau's Supervisory Work. The Bureau has been performing supervisory examinations of small-dollar lenders for more than five years. During this time, the Bureau has written and published its guidelines on performing such examinations, which its exam teams have applied and refined further over time.[331] All of this work has provided the Bureau with a quite comprehensive vantage point on the operations of payday and other small-dollar lenders and the nature and effects of their loan products for consumers.

In its regular published reports known as Supervisory Highlights, the Bureau has summarized, while maintaining confidentiality of supervised entities, the types of issues and concerns that arise in its examinations of non-bank financial companies in general, and of small-dollar lenders in particular. In its Summer 2013 edition, for example, the Bureau emphasized its general finding that “nonbanks are more likely to lack a robust [Compliance Management System] as their consumer compliance-related activities have not been subject to examinations at the federal level for compliance with the Federal consumer financial laws prior to the Bureau's existence.” [332] The Bureau noted that it had identified “one or more instances of nonbanks that lack formal policies and procedures, have not developed a consumer compliance program, or do not conduct independent consumer compliance audits. Lack of an effective CMS has, in a number of instances, resulted in violations of Federal consumer financial laws.” [333]

In the Spring 2014 edition, the Bureau addressed its supervisory approach to short-term, small-dollar lending in more detail. At that time, the Bureau noted that its exercise of supervisory authority marked the first time any of these lenders had been subject to Federal compliance examinations. The Bureau described a number of shortcomings it had found and addressed with the compliance management systems implemented by small-dollar lenders, including lack of oversight, inadequate complaint management, lack of written policies and procedures, failure to train staff adequately, lack of effective compliance audit programs, and more generally a pervasive lack of accountability within the compliance program. It also catalogued many different violations and abuses in the collection methods these lenders used with their customers. Finally, the report noted that Bureau examinations found Start Printed Page 54506deceptive practices in the use of preauthorized ACH withdrawals from borrower checking accounts.[334]

The Summer 2016 edition included a discussion of debt collection issues, which are relevant to many payday lenders, and also included a section explicitly dedicated to small-dollar lending and issues associated with compliance with the Electronic Fund Transfer Act. The Bureau's examiners found that the “loan agreements of one or more entities failed to set out an acceptable range of amounts to be debited, in lieu of providing individual notice of transfers of varying amounts. These ranges could not be anticipated by the consumer because they contained ambiguous or undefined terms in their descriptions of the upper and lower limits of the range.” [335] And the Spring 2017 edition expressed concerns about production incentives relevant to many providers of financial services, noting that “many supervised entities choose to implement incentive programs to achieve business objectives. These production incentives can lead to significant consumer harm if not properly managed.” [336]

In the most recent Summer 2017 edition, the Bureau again described problems that it had addressed with short-term, small-dollar lending, including payday and vehicle title loans. Among them were a variety of collections issues, along with misrepresentations that several lenders had made in the marketing of such loans. Examiners reported that lenders had promised consumers that they could obtain such a loan without a credit check, yet this turned out to be untrue and, in some instances, to lead to loan denials based on the information obtained from the consumers' credit reports. They also found that certain lenders advertised products and services in their outdoor signage that they did not, in fact, offer. And some lenders advertised their products by making unsubstantiated claims about how they compared with those of competing lenders. These practices were found to be deceptive and changes were ordered to be made.[337]

The Bureau further found that some lenders misrepresented their processes to apply for a loan online, and others misused references provided by loan applicants on applications for origination purposes by marketing products to the persons listed. Finally, examiners observed that one or more lenders mishandled the payment process by debiting accounts automatically for payments that had already been made, leading to unauthorized charges and overpayments. The entities also failed to implement adequate processes to accurately and promptly identify and refund borrowers who paid more than they owed, who were unable to avoid the injury.[338]

The Bureau's Enforcement Work. The Bureau also has developed expertise and experience in this market over time by pursuing public enforcement actions against more than 20 small-dollar lenders, including brick-and-mortar storefront lenders, online lenders, and vehicle title lenders (as well as pawn lenders, which are not covered under the rule). A number of these actions have been resolved, but some remain pending in the courts at this time. In every instance, however, before the enforcement action was brought, it was preceded by a thorough investigation of the underlying facts in order to determine whether legal violations had occurred. The issues raised in these actions include engaging in misleading and deceptive marketing practices, making improper disclosures, training employees to hide or obfuscate fees, pushing customers into a cycle of debt by pressuring them to take out additional loans they could not afford, making false statements about whether and how transactions can be canceled or reversed, taking unauthorized and improper electronic withdrawals from customer accounts, and engaging in collections efforts that generate wide-ranging problems.[339] The Bureau has determined many of these practices to be violations of the prohibition against unfair, deceptive, or abusive acts or practices. The information and insights that the Bureau has gleaned from these investigations and enforcement actions has further advanced its understanding of this market and of the factual foundations for the policy interventions contained in this final rule.

For example, in 2013 the Bureau resolved a public enforcement action against Cash America, Inc. that arose out of an examination of this large national payday lender. The Bureau cited Cash America for committing three distinct unfair and deceptive practices: Robo-signing court documents in debt collection lawsuits; violating the Military Lending Act by overcharging servicemembers and their families; and improperly destroying records in advance of the Bureau's examination. Cash America was ordered to pay $14 million in refunds to consumers and to pay a civil penalty of $5 million for these violations.[340]

In 2014, the Bureau filed a public enforcement action against Ace Cash Express that developed out of the Bureau's prior exam work. The Bureau found through its examination and subsequent investigation that ACE had engaged in unfair, deceptive, and abusive practices by using illegal debt collection tactics to pressure overdue borrowers into taking out additional loans they could not afford. In fact, ACE's own training manual for its employees had a graphic illustrating this cycle of debt. According to the graphic, consumers begin by applying to ACE for a loan, which ACE approved. Start Printed Page 54507Next, if the consumer “exhausts the cash and does not have the ability to pay,” ACE “contacts the customer for payment or offers the option to refinance or extend the loan.” Then, when the consumer “does not make a payment and the account enters collections,” the cycle starts all over again—with the formerly overdue borrower applying for another payday loan.[341]

The Bureau's examination of ACE was conducted in coordination with the Texas Office of Consumer Credit Commissioner and resulted in an order imposing $5 million in consumer refunds and a $5 million civil penalty. The enforcement action was partially based on ACE's creation of a false sense of urgency to get delinquent borrowers to take out more payday loans—all while charging new fees each time.[342]

In September 2015, the Bureau took action against Westlake Services, an indirect auto finance company, and Wilshire Consumer Credit, its auto title lending subsidiary, which offered auto title loans directly to consumers, largely via the Internet, and serviced those loans; Wilshire also purchased and serviced auto title loans made by others. The Bureau concluded that Westlake and Wilshire had committed unfair and deceptive acts or practices by pressuring borrowers through the use of illegal debt collection tactics. The tactics included illegally deceiving consumers by using phony caller ID information (sometimes masquerading as pizza delivery services or flower shops), falsely threatening to refer borrowers for investigation or criminal prosecution, calling under false pretenses, and improperly disclosing information about debts to borrowers' employers, friends, and family. Wilshire also gave consumers incomplete information about the true cost of the loans it offered. The consent order resolving the matter required the companies to overhaul their debt collection practices and to cease advertising or marketing their products untruthfully. The companies were also ordered to provide consumers with $44.1 million in cash relief and balance reductions, and to pay a civil penalty of $4.25 million.

In December 2015, the Bureau resolved another enforcement action with EZCORP, Inc., a short-term, small-dollar lender. The action was initially generated from a supervisory exam that had exposed significant and illegal debt collection practices. These included in-person collection visits at consumers' homes or workplaces (which risked disclosing the consumer's debt to unauthorized third parties), falsely threatening consumers with litigation for not paying their debts, misrepresenting consumers' rights, and unfairly making multiple electronic withdrawal attempts from consumer accounts that caused mounting bank fees. These practices were found to be unfair and deceptive and to violate the Electronic Fund Transfer Act; as a result, the Bureau ordered EZCORP to refund $7.5 million to 93,000 consumers and pay a $3 million civil penalty, while halting collection of remaining payday and installment loan debts associated with roughly 130,000 consumers. That action also prompted the Bureau to issue an industry-wide warning about potentially unlawful conduct during in-person collections at homes or workplaces.[343]

In September 2016, the Bureau took action against TitleMax's parent company TMX Finance, one of the country's largest auto title lenders, for luring consumers into costly loan renewals by presenting them with misleading information about the terms and costs of the deals. The Bureau's investigation found that store employees, as part of their sales pitch for the 30-day loans, offered consumers a “monthly option” for making loan payments using a written guide that did not explain the true cost of the loan if the consumer renewed it multiple times, though TMX personnel were well aware of these true costs. In fact, the guide and sales pitch distracted consumers from the fact that repeatedly renewing the loan, as encouraged by TMX Finance employees, would dramatically increase the loan's cost, while making it difficult, if not impossible, for a consumer to compare costs for renewing the loan over a given period. The company then followed up with those who failed to repay by making intrusive visits to homes and workplaces that put consumers' personal information at risk. TMX Finance was ordered to stop its unlawful practices and pay a $9 million penalty.[344]

Likewise, in December 2016 the Bureau filed a public enforcement action against Moneytree, which offers payday loans and check-cashing services, for misleading consumers with deceptive online advertisements and collections letters. The company was ordered to cease its illegal conduct, refund $255,000 to consumers, and pay a civil penalty of $250,000. In addition to the deceptive advertising, the company was found to have deceptively told consumers that their vehicles could be repossessed when it had no right or ability to do so, and to have improperly withdrawn money from consumers' accounts without authorization to do so.[345]

From the Bureau's experience of carrying out investigations of these kinds of illegal practices and halting them through its enforcement efforts, the Bureau has become much more aware of the nature and likelihood of unfair, deceptive, or abusive practices in this market. And though the Bureau generally has devoted less attention in its supervisory and enforcement programs to issues that it has long intended to address separately, as here, through its rulemaking authority, the Bureau nonetheless has gained valuable experience and expertise from all of this work that it now brings to this rulemaking process. Since the inception of its supervision and enforcement program, the Bureau has worked continually to maximize compliance with the Federal consumer financial laws as they apply to payday and other types of small-dollar lenders. Sustained attention to compliance through the Bureau's supervision and enforcement work is an important adjunct to this rulemaking, but is not a sufficient substitute for it.

C. Research and Analysis of Small-Dollar Loans

Bureau White Papers. In April 2013, the Bureau issued a white paper on payday loans and deposit advance products, including findings by Bureau staff. For each of these loan products, Start Printed Page 54508the Bureau examined loan characteristics, borrower characteristics, intensity of use, and sustained use of the product. These findings were based largely on the data the Bureau had collected from some of the larger payday lenders under its supervisory authority, and covered approximately 15 million loans generated in 33 States and on approximately 15,000 deposit advance product transactions. The report took a snapshot of borrowers at the beginning of the study period and traced their usage of these products over the course of the study period. The report demonstrated that though some consumers use payday loans and deposit advances at relatively low to moderate levels, a sizable share of users conduct transactions on a long-term basis, suggesting they are unable to fully repay the loan and pay other expenses without taking out a new loan shortly thereafter.[346]

In March 2014, the Bureau issued another white paper on payday lending. This report was based on the supervisory data the Bureau had received from larger payday lenders, truncated somewhat to cover 12-month windows into borrowing patterns. These limitations yielded a dataset of over 12 million loans in 30 States. Responding to criticisms of the Bureau's white paper, this report focused on “fresh borrowers,” i.e., those who did not have a payday loan in the first month of the Bureau's data and whose usage began in the second month. After reviewing this data, the report yielded several key findings. First, of the loans taken out by these borrowers over a period of eleven months over 80 percent are rolled over or followed by another loan within 14 days. Half of all loans are made as part of a sequence that is at least ten loans long, and few borrowers amortize, meaning their principal amounts are not reduced between the first and last loan of a sequence. Monthly borrowers (the majority of whom are receiving government benefits) are disproportionately likely to stay in debt for eleven months or longer. And most borrowing involves multiple renewals following an initial loan, rather than multiple distinct borrowing episodes separated by more than fourteen days.[347]

Both before and after the release of these white papers, the Bureau held numerous meetings with stakeholders to obtain their perspectives and comments on the methodology and contents of this research. As is also noted below, the Bureau also hosted individual scholars in the field for research presentations

Additional Research Reports. In April and May of 2016, the Bureau published two additional research reports on small-dollar loans. In conducting this research, the Bureau used not only the data obtained from the supervisory examinations previously described but also data obtained through orders the Bureau had issued pursuant to section 1022(c)(4) of the Dodd-Frank Act, data obtained through civil investigative demands made by the Bureau pursuant to section 1052 of the Dodd-Frank Act, and data voluntarily supplied to the Bureau by several lenders.

The first report addressed how online payday and payday installment lenders use access to consumers' bank accounts to collect loan payments. It found that after a failed ACH payment request made by an online lender, subsequent payment requests to the same account are unlikely to succeed, though lenders often continue to present them, with many online lenders submitting multiple payment requests on the same day. The resulting harm to consumers is shown by the fact that accounts of borrowers who use loans from online lenders and experience a payment that is returned for insufficient funds are more likely to be closed by the end of the sample period than accounts experiencing a returned payment for products other than payday or payday installment loans.[348]

The other report addressed consumer usage and default patterns on short-term vehicle title loans. Similar to payday loans, the report determined that single-payment vehicle title lenders rely on borrowers who take out repeated loans, with borrowers stuck in debt for seven months or more supplying two-thirds of the title loan business. In over half the instances where the borrower takes out such a loan, they end up taking out four or more consecutive loans, which becomes an unaffordable, long-term debt load for borrowers who are already struggling with their financial situations. In addition to high rates of default, the Bureau found that these loans carried a further adverse consequence for many consumers, as one out of every five loan sequences ends up with the borrower having their vehicle seized by the lender in repossession for failure to repay.[349]

In June 2016, the Bureau issued a supplemental report on payday, payday installment, vehicle title loan, and deposit advance products that addressed a wide range of subjects pertinent to the proposed rule. The report studied consumers' usage and default patterns for title and payday installment loans; analyzed whether deposit advance consumers overdrew accounts or took out payday loans more frequently after banks stopped offering deposit advance products; examined the impact of State laws on payday lending; compared payday re-borrowing rates across States with different renewal and cooling-off period laws; provided findings on payday borrowing and default patterns, using three different loan sequence definitions; and simulated effects of certain lending and collection restrictions on payday and vehicle title loan markets.[350]

Consumer Complaint Information. The Bureau also has conducted analysis on its own consumer complaint information. Specifically, the Bureau had received, as of April 1, 2017, approximately 51,000 consumer complaints relating to payday and other small-dollar loan products. Of these complaints, about one-third were submitted by consumers as payday or other small-dollar loan complaints and two-thirds as debt collection complaints where the source of the debt was a payday loan.[351]

Industry representatives have frequently expressed the view that consumers seem to be satisfied with payday and other covered short-term loan products, as shown by low numbers of complaints and the submission of positive stories about them to the “Tell Your Story” function on the Bureau's Web site. Yet, the Bureau has observed from its consumer complaint data that from November 2013 through December 2016, approximately 31,000 debt collection complaints cited payday loans as the underlying debt, and over 11 percent of the complaints the Bureau has handled about debt collection stemmed directly from payday loans.[352]

In fact, when complaints about payday loans are normalized in comparison to other credit products, the numbers do not turn out to be low at all. For example, in 2016, the Bureau Start Printed Page 54509received about 4,400 complaints in which consumers reported “payday loan” as the complaint product and about 26,600 complaints about credit cards.[353] Yet there are only about 12 million payday loan borrowers annually, and about 156 million consumers have one or more credit cards.[354] Therefore, by way of comparison, for every 10,000 payday loan borrowers, the Bureau received about 3.7 complaints, while for every 10,000 credit cardholders, the Bureau received about 1.7 complaints. In addition, the substance of some of the consumer complaints about payday loans as catalogued by the Bureau mirrored many of the concerns that constitute the justification for this rule here.[355]

Moreover, faith leaders and faith groups of many denominations from around the country collected and submitted comments indicating that many borrowers may direct their personal complaints or dissatisfactions with their experiences elsewhere than to government officials.

Market Monitoring. The Bureau has also continuously engaged in market monitoring for the small-dollar loan market, just as it does for the other markets within its jurisdiction. This work involves regular outreach to industry members and trade associations, as well as other stakeholders in this marketplace. It also involves constant attention to news, research, trends, and developments in the market for small-dollar loans, including regulatory changes that may be proposed and adopted by the States and localities around the country. The Bureau has also carefully reviewed the published academic literature on small-dollar liquidity loans, along with research conducted or sponsored by stakeholder groups. In addition, a number of outside researchers have presented their own research at seminars for Bureau staff.

D. Small Business Review Panel

Small Business Regulatory Enforcement Fairness Act (SBREFA) Process. In April 2015, in accordance with SBREFA, the Bureau convened a Small Business Review Panel with the Chief Counsel for Advocacy of the SBA and the Administrator of the Office of Information and Regulatory Affairs within the Office of Management and Budget (OMB).[356] As part of this process, the Bureau prepared an outline of the proposals then under consideration and the alternatives considered (the Small Business Review Panel Outline), which it posted on its Web site for review and comment by the general public as well as the small entities participating in the panel process.[357]

Before formally convening, the Panel took part in teleconferences with small groups of the small entity representatives (SERs) to introduce the Outline and get feedback on the Outline, as well as a series of questions about their business operations and other issues. The Panel gathered information from representatives of 27 small entities, including small payday lenders, vehicle title lenders, installment lenders, banks, and credit unions. The meeting participants represented storefront and online lenders, State-licensed lenders, and lenders affiliated with Indian tribes. The Panel held a full-day meeting on April 29, 2015, to discuss the Small Business Review Panel Outline. The 27 small entities also were invited to submit written feedback, and 24 of them did so. The Panel considered input from the small entities about the potential compliance costs and other impacts on those entities and about impacts on access to credit for small businesses and made recommendations about potential options for addressing those costs and impacts. These recommendations are set forth in the Small Business Review Panel Report, which is made part of the administrative record in this rulemaking.[358] The Bureau carefully considered these findings and recommendations in preparing the proposed rule and completing this final rule, as detailed below in the section-by-section analysis of various provisions and in parts VII and VIII. The Bureau also continued its outreach and engagement with stakeholders on all sides since the SBREFA process concluded.

Comments Regarding the Bureau's SBREFA Process. Following the release of the proposed rule, a number of commenters criticized the SBREFA process. Some of these commenters were third parties such as trade associations who were familiar with the SBREFA process. Others were the SERs themselves. Some commenters argued that the Bureau failed to adequately consider the concerns raised and alternatives suggested by the SERs. Some commenters also expressed concerns about the SBREFA procedures.

Some commenters objected that in developing the proposed rule the Bureau did not consider policy suggestions made by SERs or recommendations made by the SBREFA Panel. For example, some commenters argued that the Bureau failed to consider whether, as some SERs contended, disclosures could prevent Start Printed Page 54510the consumer injury the Bureau is seeking to address in this rulemaking. Some commenters also suggested that the Bureau failed to adequately consider alternative approaches employed by various States. Some commenters criticized the Bureau for ignoring the Panel's recommendations in developing the proposal, including, for example, the recommendation that the Bureau consider whether the rule should permit loan sequences of more than three short-term loans. Other SER commenters argued that the Bureau should adopt the requirements imposed by certain States (like Illinois or Michigan or Utah) or should require lenders to offer off-ramps instead of the requirements herein. Some commenters indicated that they believed the Bureau ultimately ignored or underestimated the rule's potential impact on small businesses and inadequately considered the rule's potential impact on rural communities. Some commenters argued that the Bureau did not adequately address issues around the cost of credit to small entities. One commenter noted that some credit unions offer certain short-term loan products and that the Bureau did not consider the impact of the rule on credit union products and small credit unions.

The SBA Office of Advocacy submitted comments of its own on the proposed rule and on how it responded to the SBREFA process. Although Advocacy had no complaints about the procedures used or the input received in the process, it did present its views on whether the proposed rule sufficiently reflected the discussions and debates that had occurred during the Panel discussions and the SBREFA process as a whole. To begin with, Advocacy agreed with the Bureau that the proposed rule would have a significant economic impact on small entities, which it found to be a matter of concern and felt had been underestimated by the Bureau. It stated that the ability-to-repay requirements in the proposed rule would be burdensome, and the cooling-off periods in particular would harm small businesses. It encouraged the Bureau to exempt from the rule small businesses that operate in States that currently have payday lending laws and to mitigate its impact on credit unions, Indian tribes, and small communities. Advocacy also commented that the proposed rule would restrict access to credit for consumers and for certain small businesses, and suggested that an exception be made for situations where such a loan may be necessary to address an emergency.

The procedural objections to the SBREFA process raised by other commenters included concerns about the make-up of the SBREFA panel and whether it was representative of the small entities who would be most affected by the proposal; the timing of SBREFA meetings; the administration and management of SBREFA-related phone calls; the overall “sufficiency” of the process; and unheeded requests to convene additional Panel sessions or to conduct additional research on specific topics. One trade group commenter incorporated portions of a comment letter from a SER that was sent to the Bureau during the SBREFA process, which raised a number of procedural objections. Another stated the panel excluded open-end lenders. Some expressed concern that the process did not provide them adequate time to realize the full ramifications of the proposed rule and the effects it would have on their business activity. Others suggested that the process was flawed because the Bureau's analysis allegedly ignored the rule's potential costs. One commenter also suggested that the SBREFA process was tainted by the Bureau Director's public comments regarding small-dollar lending in the years preceding the rulemaking.

Some commenters noted that the SBREFA process had been effective in considering and responding to certain concerns, including input regarding PAL loans and checking customer borrowing history.

Responses to Comments. The Bureau disagrees with commenters arguing that the Bureau did not adequately consider the suggestions of SERs and the Panel. In the proposed rule, the Bureau modified certain aspects of the approach in the Small Business Review Panel Outline in response to feedback from SERs (and others). For example, the Outline included a 60-day cooling-off period after sequences of three short-term loans, but the proposed rule included a 30-day cooling-off period, and that change is retained in the final rule. In addition, the Bureau followed the Panel's recommendation to request comment on numerous specific issues. The feedback received by the Bureau also informed its decision to revise various aspects of the rule. For example, as discussed below, the Bureau revised the ability-to-repay requirements in a number of ways to provide greater flexibility and reduce the compliance burden, such as by not requiring income verification if evidence is not reasonably available. In addition, the rule no longer requires lenders to verify or develop estimates of rental housing expenses based on statistical data. And the Bureau considered all of the alternatives posited by the SERs, as noted where applicable throughout part V and in part VIII. More generally, the Bureau considered and made appropriate modifications to the rule based upon feedback received during the SBREFA process and in response to other feedback provided by the small business community. The Bureau obtained important input through the SBREFA process and all articulated viewpoints were understood—and considered—prior to the promulgation of the final rule.

The Bureau disagrees with commenters that it did not consider alternative approaches. For example, in the proposal, the Bureau explained why it believed that disclosures would not be sufficient to address the identified harms and why the approaches of various States also appeared to be insufficient to address those harms. The Bureau likewise explains in this final rule its conclusions about why those approaches would not be sufficient.

The Bureau both agrees and disagrees with various comments from Advocacy, and a fuller treatment of these issues is presented below in part VII, which addresses the potential benefits, costs, and impacts of the final rule, including reductions in access to financial products and services and impacts on rural issues, and in part VIII, which addresses among other things the economic impact of the final rule on small entities, including small businesses. But more briefly here, the Bureau would note that it has made many changes in the final rule to reduce the burdens of the specific underwriting criteria in the ability-to-repay requirements; that Advocacy has stated that it appreciates the modification of the 60-day cooling-off period presented in the SBREFA Panel Outline to the 30-day cooling-off period in the proposed rule and now in the final rule; that Advocacy thanked the Bureau for clarifying that the proposed rule (and now the final rule) will not apply to business loans; that adoption of the conditional exemption from the final rule for alternative loans mitigates its impact on credit unions; that the Bureau did engage in another formal Tribal consultation after release of the proposed rule as Advocacy had urged; that the Bureau had consulted further with a range of State officials prior to finalizing the rule; and that the Bureau has extended the implementation period of the final rule.

The Bureau also disagrees with commenters who criticized procedural aspects of the SBREFA process. With respect to the composition of the SERs that participated in the SBREFA process, the Bureau followed legal Start Printed Page 54511requirements for categorizing which entities qualified as small entities. The Bureau collaborated with the SBA Office of Advocacy so that the SERs included a variety of different types of lenders that could be affected by the rulemaking, ensuring that participants included a geographically diverse group of storefront payday lenders, online lenders, vehicle title lenders, installment lenders, and banks and credit unions. As noted above, to help ensure that the formal Panel meeting would allow for efficient and effective discussion of substantive issues, the Panel convened several telephone conferences before the formal meeting to provide information about the Outline and to obtain information from the SERs.

The Bureau disagrees, further, with the comments raising more specific procedural objections about the teleconferences and the Panel meeting. The Bureau provided agendas in advance of the calls and extended the length of the calls as needed to ensure that SERs were able to participate and provide feedback. While the Bureau appreciates that some SERs may have desired additional time to consider and provide feedback on the Outline, the Bureau notes that the Panel is required by law to report on the SERs' comments and advice within 60 days after the Panel is convened. The Bureau conducted the process diligently and in accordance with its obligations under the Regulatory Flexibility Act and consistent with prior SBREFA processes.

With respect to comments suggesting that the Bureau failed to adequately consider the costs and impact on small businesses and in rural areas, the Bureau notes that the costs and impacts were addressed in the notice of proposed rulemaking, and, for the final rule, are addressed in parts VII and VIII.

E. Consumer Testing

In developing the disclosures for this rule, the Bureau engaged a third-party vendor, Fors Marsh Group (FMG), to coordinate qualitative consumer testing for the disclosures that were being considered. The Bureau developed several prototype disclosure forms and tested them with participants in one-on-one interviews. Three categories of forms were developed and tested: (1) Origination disclosures that informed consumers about limitations on their ability to receive additional short-term loans; (2) upcoming payment notices that alerted consumers about lenders' future attempts to withdraw money from consumers' accounts; and (3) expired authorization notices that alerted consumers that lenders would no longer be able to attempt to withdraw money from the consumers' accounts. Observations and feedback from the testing were incorporated into the model forms developed by the Bureau.

Through this testing, the Bureau sought to observe how consumers would interact with and understand prototype forms developed by the Bureau. In late 2015, FMG facilitated two rounds of one-on-one interviews, each lasting 60 minutes. The first round was conducted in September 2015 in New Orleans, Louisiana, and the second round was conducted in October 2015 in Kansas City, Missouri. At the same time the Bureau released the proposed rule, it also made available a report that FMG had prepared on the consumer testing.[359] The testing and focus groups were conducted in accordance with OMB Control Number 3170-0022. A total of 28 individuals participated in the interviews. Of these 28 participants, 20 self-identified as having used a small-dollar loan within the past two years.

Highlights from Interview Findings. FMG asked participants questions to assess how well they understood the information on the forms.

For the origination forms, the questions focused on whether participants understood that their ability to roll this loan over or take out additional loans may be limited. Each participant reviewed one of two different prototype forms: Either one for loans that would require an ability-to-repay determination (ATR Form) or one for loans that would be offered under the conditional exemption for covered short-term loans (Alternative Loan Form). During Round 1, many participants for both form types recognized and valued information about the loan amount and due date; accordingly, that information was moved to the beginning of all the origination forms for Round 2. For the ATR Forms, few participants in Round 1 understood that the “30 days” language was describing a period when future borrowing may be restricted. Instead, several read the language as describing the loan term. In contrast, nearly all participants reviewing the Alternative Loan Form understood that it was attempting to convey that each successive loan they took out after the first in this series had to be smaller than the previous loan, and that after taking out three loans they would not be able to take out another for 30 days. Some participants also reviewed a version of this Alternative Loan Form for when consumers are taking out their third loan in a sequence. The majority of participants who viewed this notice understood it, acknowledging that they would have to wait until 30 days after the third loan was paid off to be considered for another similar loan.

During Round 2, participants reviewed two new versions of the ATR Form. One adjusted the “30 days” phrasing and the other completely removed the “30 days” language, replacing it with the phrase “shortly after this one.” The Alternative Loan Form was updated with similar rephrasing of the “30 days” language. In order to simplify the table, the “loan date” column was removed.

The results in Round 2 were similar to Round 1. Participants reviewing the ATR forms focused on the language notifying them they should not take out this loan if they are unable to pay the full balance by the due date. Information about restrictions on future loans went largely unnoticed. The edits appeared to have a positive impact on comprehension since no participants interpreted either form as providing information on their loan term. There did not seem to be a difference in comprehension between the group with the “30 days” version and the group with the “shortly” version. As in Round 1, participants who reviewed the Alternative Loan Form noticed and understood the schedule detailing maximum borrowable amounts. These participants understood that the purpose of the Alternative Loan Form was to inform them that any subsequent loans must be smaller.

Questions for the payment notices focused on participants' ability to identify and understand information about the upcoming payment. Participants reviewed one of two payment notices: An Upcoming Withdrawal Notice or an Unusual Withdrawal Notice. Both forms provided details about the upcoming payment attempt and a payment breakdown table. The Unusual Withdrawal Notice also indicated that the withdrawal was unusual because the payment was higher than the previous withdrawal amount. To obtain feedback on participants' likelihood to open notices delivered in an electronic manner, these notices were presented as a sequence to simulate an email message.

In Round 1, all participants, based on seeing the subject line in the email Start Printed Page 54512inbox, said that they would open the Upcoming Withdrawal email and read it. Nearly all participants said they would consider the email legitimate. They reported having no concerns about the email because they would have recognized the company name, and because it included details specific to their account along with the lender contact information. When shown the full Upcoming Withdrawal Notice, participants understood that the lender would be withdrawing $40 from their account on a particular date. Several participants also pointed out that the notice described an interest-only payment. Round 1 results were similar for the Unusual Withdrawal Notice; all participants who viewed this notice said they would open the email, and all but one participant—who was deterred due to concerns with the appearance of the link's URL—would click on the link leading to additional details. The majority of participants indicated that they would want to read the email right away, because the words “alert” and “unusual” would catch their attention, and would make them want to determine what was going on and why a different amount was being withdrawn.

For Round 2, the payment amount was increased because some participants found it too low and would not directly answer questions about what they would do if they could not afford payment. The payment breakdown tables were also adjusted to address feedback about distinguishing between principal, finance charges, and loan balance. The results for both the Upcoming Payment and Unusual Payment Notices were similar to Round 1 in that the majority of participants would open the email, thought it was legitimate and from the lender, and understood the purpose.

For the consumer rights notice (referred to an “expired authorization notice” in the report), FMG asked questions about participant reactions to the notice, participant understanding of why the notice was being sent, and what participants might do in response to the notice information. As with the payment notices, these notices were presented as a sequence to simulate an email message.

In Round 1, participants generally understood that the lender had tried twice to withdraw money from their account and would not be able to make any additional attempts to withdraw payment. Most participants expressed disappointment with themselves for being in a position where they had two failed payments and interpreted the notice to be a reprimand from the lender.

For Round 2, the notice was edited to clarify that the lender was prohibited by Federal law from making additional withdrawals. For example, the email subject line was changed from “Willow Lending can no longer withdraw loan payments from your account” to “Willow Lending is no longer permitted to withdraw loan payments from your account.” Instead of simply saying “federal law prohibits us from trying to withdraw payment again,” language was added to both the email message and the full notice saying, “In order to protect your account, federal law prohibits us from trying to withdraw payment again.” More information about consumer rights and the CFPB was also added. Some participants in Round 2 still reacted negatively to this notice and viewed it as reflective of something they did wrong. However, several reacted more positively to this prototype and viewed the notice as protection.

To obtain feedback about consumer preferences on receiving notices through text message, participants were also presented with an image of a text of the consumer rights notice and asked how they would feel about getting this notice by text. Overall, the majority of participants in Round 1 (8 of 13) disliked the idea of receiving notices via text. One of the main concerns was privacy; many mentioned that they would be embarrassed if a text about their loan situation displayed on their phone screen while they were in a social setting. In Round 2, the text image was updated to match the new subject line of the consumer rights notice. The majority (10 of the 14) of participants had a negative reaction to the notification delivered via text message. Despite this, the majority of participants said that they would still open the text message and view the link.

Most participants (25 out of 28) also listened to a mock voice message of a lender contacting the participant to obtain renewed payment authorization after two payment attempts had failed. In Round 1, most participants reported feeling somewhat intimidated by the voicemail message and were inclined to reauthorize payments or call back based on what they heard. Participants had a similar reaction to the voicemail message in Round 2.

F. The Bureau's Proposal

Overview. In June 2016, the Bureau released for public comment a notice of proposed rulemaking on payday, vehicle title, and certain high-cost installment loans, which were referred to as “covered loans.” The proposal was published in the Federal Register in July 2016.[360]

Pursuant to its authority under the Dodd-Frank Act,[361] the Bureau proposed to establish new regulatory provisions to create consumer protections for certain consumer credit products. The proposed rule was primarily grounded on the Bureau's authority to identify and prevent unfair, deceptive, or abusive acts or practices,[362] but also drew on the Bureau's authority to prescribe rules and make exemptions from such rules as is necessary or appropriate to carry out the purposes and objectives of the Federal consumer financial laws,[363] its authority to facilitate supervision of certain non-bank financial service providers (including payday lenders),[364] and its authority to require disclosures to convey the costs, benefits, and risks of particular consumer financial products or services.[365]

In the proposal, the Bureau stated its concern that lenders that make covered loans have developed business models that deviate substantially from the practices in other credit markets by failing to assess consumers' ability to repay their loans and by engaging in harmful practices in the course of seeking to withdraw payments from consumers' accounts. The Bureau preliminarily concluded that there may be a high likelihood of consumer harm in connection with these covered loans because a substantial population of consumers struggles to repay their loans and find themselves ending up in extended loan sequences. In particular, these consumers who take out covered loans appear to lack the ability to repay them and face one of three options when an unaffordable loan payment is due: Take out additional covered loans, default on the covered loan, or make the payment on the covered loan and fail to meet other major financial obligations or basic living expenses. Many lenders may seek to obtain repayment of covered loans directly from consumers' accounts. The Bureau stated its concern that consumers may be subject to multiple fees and other harms when lenders make repeated unsuccessful attempts to withdraw funds from consumers' accounts.

Scope of the Proposed Rule. The Bureau's proposal would have applied to two types of covered loans. First, it would have applied to short-term loans Start Printed Page 54513that have terms of 45 days or less, including typical 14-day and 30-day payday loans, as well as single-payment vehicle title loans that are usually made for 30-day terms. Second, the proposal would have applied to longer-term loans with terms of more than 45 days that have (1) a total cost of credit that exceeds 36 percent; and (2) either a lien or other security interest in the consumer's vehicle or a form of “leveraged payment mechanism” that gives the lender a right to initiate transfers from the consumer's account or to obtain payment through a payroll deduction or other direct access to the consumer's paycheck. Included among covered longer-term loans was a subcategory of loans with a balloon payment, which require the consumer to pay all of the principal in a single payment or make at least one payment that is more than twice as large as any other payment.

The Bureau proposed to exclude several types of consumer credit from the scope of the proposal, including: (1) Loans extended solely to finance the purchase of a car or other consumer good in which the good secures the loan; (2) home mortgages and other loans secured by real property or a dwelling if recorded or perfected; (3) credit cards; (4) student loans; (5) non-recourse pawn loans; and (6) overdraft services and lines of credit.

Underwriting Requirements for Covered Short-Term Loans. The proposed rule preliminarily identified it as an unfair and abusive practice for a lender to make a covered short-term loan without reasonably determining that the consumer will have the ability to repay the loan, and would have prescribed requirements to prevent the practice. Before making a covered short-term loan, a lender would first be required to make a reasonable determination that the consumer would be able to make the payments on the loan and be able to meet the consumer's other major financial obligations and basic living expenses without needing to re-borrow over the ensuing 30 days. Specifically, a lender would have to:

  • Verify the consumer's net income;
  • verify the consumer's debt obligations using a national consumer report and, if available, a consumer report from a “registered information system” as described below;
  • verify the consumer's housing costs or use a reliable method of estimating a consumer's housing expense based on the housing expenses of similarly situated consumers;
  • estimate a reasonable amount of basic living expenses for the consumer—expenditures (other than debt obligations and housing costs) necessary for a consumer to maintain the consumer's health, welfare, and ability to produce income;
  • project the amount and timing of the consumer's net income, debt obligations, and housing costs for a period of time based on the term of the loan; and
  • determine the consumer's ability to repay the loan and continue paying other obligations and basic living expenses for a period of thirty days thereafter based on the lender's projections of the consumer's income, debt obligations, and housing costs and estimate of basic living expenses for the consumer.

Under certain circumstances, a lender would be required to make further assumptions or presumptions when evaluating a consumer's ability to repay a covered short-term loan. The proposal specified certain assumptions for determining the consumer's ability to repay a line of credit that is a covered short-term loan. In addition, if a consumer were to seek a covered short-term loan within 30 days of a covered short-term or longer-term balloon-payment loan, a lender generally would be required to presume that the consumer is not able to afford the new loan. A lender could overcome the presumption of unaffordability for a new covered short-term loan only if it could document a sufficient improvement in the consumer's financial capacity. Furthermore, a lender would have been prohibited for a period of 30 days from making a covered short-term loan to a consumer who has already taken out three covered short-term loans within 30 days of each other.

Under the proposal, a lender would also have been allowed to make a covered short-term loan without complying with all the underwriting criteria just specified, as long as the conditionally exempt loan satisfied certain prescribed terms to prevent and mitigate the risks and harms of unaffordable loans leading to extended loan sequences, and the lender confirmed that the consumer met specified borrowing history conditions and provided required disclosures to the consumer. Among other conditions, a lender would have been allowed to make up to three covered short-term loans in short succession, provided that the first loan had a principal amount no larger than $500, the second loan had a principal amount at least one-third smaller than the principal amount on the first loan, and the third loan had a principal amount at least two-thirds smaller than the principal amount on the first loan. In addition, a lender would not have been allowed to make a covered short-term loan under the alternative requirements if it would result in the consumer having more than six covered short-term loans during a consecutive 12-month period or being in debt for more than 90 days on covered short-term loans during a consecutive 12-month period. Under the proposal, a lender would not be permitted to take vehicle security in connection with these loans.

Underwriting Requirements for Covered Longer-Term Loans. The proposed rule would have identified it as an unfair and abusive practice for a lender to make certain covered longer-term loans without reasonably determining that the consumer will have the ability to repay the loan. The coverage would have been limited to high-cost loans of this type and for which the lender took a leveraged payment mechanism, including vehicle security. The proposed rule would have prescribed requirements to prevent the practice for these loans, subject to certain exemptions and conditions. Before making a covered longer-term loan, a lender would have had to make a reasonable determination that the consumer has the ability to make all required payments as scheduled. This determination was to be made by focusing on the month in which the payments under the loan would be the highest. The proposed ability-to-repay requirements for covered longer-term loans closely tracked the proposed requirements for covered short-term loans with an added requirement that the lender, in assessing the consumer's ability to repay a longer-term loan, must reasonably account for the possibility of volatility in the consumer's income, obligations, or basic living expenses during the term of the loan.

The Bureau has determined not to finalize this aspect of the proposal at this time (other than for covered longer-term balloon-payment loans), and will take any appropriate further action on this subject after the issuance of this final rule.

Payments Practices Related to Small-Dollar Loans. The proposed rule would have identified it as an unfair and abusive practice for a lender to attempt to withdraw payment from a consumer's account in connection with a covered loan after the lender's second consecutive attempt to withdraw payment from the account has failed due to a lack of sufficient funds, unless the lender obtains from the consumer a new and specific authorization to make further withdrawals from the account. This prohibition on further withdrawal attempts would have applied whether the two failed attempts are initiated through a single payment channel or different channels, such as the Start Printed Page 54514automated clearinghouse system and the check network. The proposed rule would have required that lenders provide notice to consumers when the prohibition has been triggered and follow certain procedures in obtaining new authorizations.

In addition to the requirements related to the prohibition on further payment withdrawal attempts, the proposed rule would require a lender to provide a written notice at least three business days before each attempt to withdraw payment for a covered loan from a consumer's checking, savings, or prepaid account. The notice would have contained key information about the upcoming payment attempt, and, if applicable, alerted the consumer to unusual payment attempts. A lender could provide electronic notices as long as the consumer consented to electronic communications.

Additional Requirements. The Bureau also proposed to require lenders to furnish to provisionally registered and registered information systems certain information concerning covered loans at loan consummation, any updates to that information over the life of the loan, and certain information when the loan ceases to be outstanding. To be eligible to become a provisionally registered or registered information system, an entity would have to satisfy the eligibility criteria prescribed in the proposed rule. The Bureau proposed a sequential process to allow information systems to be registered and lenders to be ready to furnish at the time the furnishing obligation in the proposed rule would take effect. For most covered loans, registered information systems would provide a reasonably comprehensive record of a consumer's recent and current borrowing. Before making most covered loans, a lender would have been required to obtain and consider a consumer report from a registered information system.

The proposal would require a lender to establish and follow a compliance program and retain certain records, which included developing and following written policies and procedures that are reasonably designed to ensure compliance with the proposed requirements. A lender would also be required to retain the loan agreement and documentation obtained for a covered loan, and electronic records in tabular format regarding origination calculations and determinations for a covered loan, for a consumer who qualifies for an exception to or overcomes a presumption of unaffordability for a covered loan, and regarding loan type, terms, payment history, and loan performance. The proposed rule also included an anti-evasion clause and a severability clause.

Effective Date. The Bureau proposed that, in general, the final rule would become effective 15 months after publication of the final rule in the Federal Register. It also proposed that certain provisions necessary to implement the consumer reporting components of the proposal would become effective 60 days after publication of the final rule in the Federal Register to facilitate an orderly implementation process.

G. Public Comments on the Proposed Rule

Overview. Reflecting the broad public interest in this subject, the Bureau received more than 1.4 million comments on the proposed rulemaking. This is the largest comment volume associated with any rulemaking in the Bureau's history. Comments were received from consumers and consumer advocacy groups, national and regional industry trade associations, industry participants, banks, credit unions, nonpartisan research and advocacy organizations, members of Congress, program managers, payment networks, payment processors, fintech companies, Tribal leaders, faith leaders and coalitions of faith leaders, and State and local government officials and agencies. The Bureau received well over 1 million comments from individuals regarding the proposed rule, often describing their own circumstances or those of others known to them in order to illustrate their views, including their perceptions of how the proposed rule might affect their personal financial situations. Some individuals submitted multiple separate comments.

The Bureau has not attempted to tabulate precise results for how to tally the comments on both sides of the rule. Nor would it be easy to do so in any practical way, and of course some of the comments did not appear to take a side in advocating for or against the rule, though only a small number would fall in this category. Nonetheless, it was possible to achieve a rough approximation that broke down the universe of comments in this manner and the Bureau made some effort to do so. As an approximation, of the total comments submitted, more than 300,000 comments generally approved of the Bureau's proposal or suggested that the Bureau should adopt a rule that is more restrictive of these kinds of loans in some way or other. Over one million comments generally opposed the proposed rule and took the view that its provisions would be too restrictive of these kinds of loans.

The Bureau received numerous submissions generated through mass mail campaigns and other organized efforts, including signatures on a petition or multiple letters, postcards, emails, or web comments. These campaigns were conducted by opponents and supporters of the proposed rule. The Bureau also received stand-alone comments submitted by a single commenter, individual, or organization.

Of the approximately 1.4 million comments submitted, a substantial majority were generated by mass-mail campaigns or other organized efforts. In many cases, these submissions contained the same or similar wording. Of those 1.4 million comments, approximately 300,000 were handwritten and often had either the same or similar content or advanced substantially similar themes and arguments. These comments were posted as attachments to the electronic docket at www.regulations.gov.

For many of the comments that were submitted as part of mass mail campaigns or other organized efforts, a sample comment was posted to the electronic docket at www.regulations.gov, with the total number of such comments received reflected in the docket entries. Accordingly, these comments, whose content is represented on the electronic docket via the sample comment, were not individually posted to the electronic docket at www.regulations.gov.

In addition, the 1.4 million comments included more than 100,000 signatures or comments contained on petitions, with some petitions containing tens of thousands of signatures. These petitions were posted as attachments to the electronic docket at www.regulations.gov. Whenever relevant to the rulemaking, these submissions and comments were considered in the development of the final rule.

Form of Submission. As detailed in the proposed rule,[366] the Bureau accepted comments through four methods: Email, electronic,[367] regular mail, and hand delivery or courier (including delivery services like FedEx). Approximately 800,000 comments, or roughly 60% of the total, were paper comments received by mail or couriers, while approximately 600,000 (or about 40%) were submitted electronically, either directly to the electronic docket at www.regulations.gov or by email. The electronic submissions included Start Printed Page 54515approximately 100,000 scanned paper comments sent as PDF attachments to thousands of emails.

In addition, the Bureau also processed and considered comments that were received after the comment period had closed, as well as more than 50 ex parte submissions. The ex parte materials were generally presentations and summary memoranda relevant to the rulemaking that were provided to Bureau personnel in the normal course of their work, but outside the procedures for submitting written comments to the rulemaking docket referenced above. They were considered in accordance with the Bureau's established rulemaking procedures governing ex parte materials.

Materials on the record, including ex parte submissions and summaries of ex parte meetings and telephone conferences, are publicly available at www.regulations.gov. Other relevant information is discussed below as appropriate. In the end, the Bureau considered all of the comments it received about the proposed rule prior to finalizing the rule.

Stand-Alone Comments. Tens of thousands appear to have been “stand-alone” comments—comments that did not appear to have been submitted as part of a mass mail campaign or other organized effort. Nevertheless, many of these stand-alone comments contained language and phrasing that were highly similar to other comments. In addition, pre-printed postcards or other form comments with identical language submitted as part of an organized effort sometimes also included additional notations, such as “we need this product” or “don't take this away.” Some comment submissions also attached material, including copies of news articles, loan applications, loan advertisements, and even personal financial documents.

Many of the comments from lenders, trade associations, consumer advocacy groups, research and advocacy organizations, and government officials included specific discussion about particular provisions of the proposed rule, and the substantive issues raised in those comments are discussed in connection with those provisions. However, as noted above, a high volume of comments were received from individuals, rather than from such entities (or their official representatives). Many of these individual comments focused on personal experiences rather than legal or financial analysis of the details of the provisions of the proposed rule. The discussion below summarizes what the commenters—more than a million in total—had to say to the Bureau about the proposed rule. The comments can be broken into three general categories: (1) Individual comments made about the rule that were more factual in nature regarding the uses and benefits of covered short-term loans; (2) individual comments stating or explaining the grounds on which the commenters opposed the rule, both generally and in more specific respects; and (3) individual comments stating or explaining the grounds on which the commenters supported the rule, again both generally and in more specific respects. The individual comments as so categorized are set forth below, and they have helped inform the Bureau's consideration of the issues involved in deciding whether and how to finalize various aspects of the proposed rule.

Comments Not Specifically Supporting or Opposing the Rule. Many commenters noted, as a factual matter, the uses they make of covered short-term loans. These uses include: Rent, childcare, food, vacation, school supplies, car payments, power/utility bills, cell phone bills, credit card bills, groceries, medical bills, insurance premiums, student educational costs, daily living costs, gaps between paychecks, money to send back to a home country, necessary credit, to “make ends meet,” “hard times,” and “bills.” In considering these types of comments, the Bureau generally interpreted them as critical of the rule for going too far to regulate covered short-term loans.

Some individual commenters talked about how they would cover various costs and expenses if the rule caused previously available payday loans to become less available or unavailable. Among the alternatives they cited were credit cards, borrowing from family or friends, incurring NSF or overdraft charges, or seeking bank loans.

The comments included many suggestions about the consumer financial marketplace that reached beyond the scope of the proposed rule. Some of these comments suggested that the Bureau should regulate interest rates or limit the amounts that could be charged for such loans by imposing a nationwide usury cap.

Comments Opposing the Proposed Rule. The nature of criticism varied substantially. Some commenters were broadly opposed to the rule without further explanation, while others objected to the government's participation in regulating the activity affected by the rule. Some objected to the means by which the rule was being considered or enacted while others objected to various substantive aspects of the rule. Some commenters combined these various types of criticisms. Unexplained opposition included some very brief comments like “No” or “Are you crazy?”

Others based their opposition on general anti-government sentiments. Some objected simply to the fact of the rulemaking. These objections included comments like “I'm against Washington stopping me from getting a loan.” More specific comments stated that the government should not be in the business of limiting how much people can borrow and that consumers can manage their own funds. Others contended that similar regulatory efforts in other countries had been unsuccessful. Some were opposed on the ground that the proposed rule was too complicated, with a few objecting simply to its length and complexity or its reliance on dated evidence.

A considerable number of commenters, including some State and local governmental officials, opined that existing State laws and regulations adequately addressed any regulatory need in this area. Some suggested that any regulation of covered short-term loans should be left to the States or that the Bureau should “work with state governments.” Some suggested that the Bureau had not adequately consulted with State officials before proposing the rule. And though the specific intent of the comments was not always made clear, some suggested that, either in promulgating or implementing the rule, the Bureau should consult State law and compare different rates and requirements in different States. Some comments were implicitly critical of the proposal, even if not expressly so, when they proposed alternative approaches like the suggestion that the Bureau “should follow the Florida Model.”

Many comments were from individuals who indicated they were users of payday loans, were able to reliably pay them back, and objected to new restrictions. Some of those comments came with notations that they had been specifically asked by loan providers to submit such comments. Many opposed the rule in whole or in part. Some supported some parts of the rule and opposed other parts.

Hundreds of thousands of individuals submitted comments generally supporting the availability of small-dollar loans that would have been covered by the proposed rule. Many but not all were submitted by consumers of these loans, who mentioned their need for access to small loans to address financial issues they faced with paying bills or dealing with unexpected expenses. Certain consumers stated that Start Printed Page 54516they could not access other forms of credit and favored the convenience and simplicity of these loans. Many expressed their opposition to caps or limits on the number of times they would be able to borrow money on such loans.

As noted above, many commenters simply indicated that they like and use payday loans. The Bureau generally understood these comments as expressions of concerns that the proposed rule might or would restrict their access to covered loans. In contending for greater availability of such loans, commenters specifically noted their use of payday loans for a substantial range of financial needs and reasons. They explained that these loans are used to cover, among other financial needs, overdraft fees, the last piece of tuition rather than losing enrollment, a portion of rent so as not to incur a rent penalty, various bills so as to avoid incurring late fees, utilities so they would not be turned off, college student necessities not covered by student loans, and funds to cover a gap in available resources before the next paycheck. Several commenters specifically noted that payday loan costs were cheaper than bank overdraft fees that would otherwise be incurred. Some indicated they had no alternative to payday products because they lacked credit for credit cards and could not borrow from family or friends or relatives.

Some commenters focused on the favorable environment they experienced in using payday loans, often in juxtaposition to their less welcoming experience with banks. A number of loan providers commented that low-income, non-English speaking immigrants are treated well by those who make these loans to them. Various borrowers related that they have been treated well at payday storefronts and that employees are helpful with their loan applications.

Others indicated that local communities support local payday lenders and the loans they provide and these lenders in turn are leading small businesspersons in their communities. Others noted that payday lenders often provide other services like check cashing, bill paying, and loading of pre-paid cards, sometimes with no fees. Still others echoed that payday lenders do more than other lenders to help their individual customers, and are all about “finding a solution” for the customer. Some commented that payday lenders do not pressure customers to take out loans whereas banks do.

One commenter noted that even with substantial income, payday loans still provided convenience due to a favorable ongoing relationship with the lender. Others commented more generally that the loans are convenient because they require no application and no credit check, they are easy to get and easy to renew, and they are provided at locations where it is convenient to get a check cashed. One expressly noted that despite the recognized expense of such loans, their availability and convenience made them worth it.

Various commenters noted that small loans were difficult or impossible to obtain from banks. Others objected that banks require too much personal information when lending funds, like credit checks and references. Some noted that they had a poor credit history or insufficient credit history and therefore could not get loans from banks or credit cards. Some indicated that small-dollar loans may be necessary for assuring available cash flow at some small businesses. These commenters indicated that payday loans are often critical when bank loans have been denied, the business is awaiting customer payments, and funds are needed to make payroll. Some said that alternatives were unsafe or unable to meet their needs. Others claimed that pawn shops have a bad reputation, that loan sharks might be an available option but for the possible “outcome,” and foreign and “underground” lenders were not viable options.

Some merely signed their name to the contents of printed text. Others sometimes added related messages in filling out such forms. Other forms provided space for and encouraged individualized messages and explanations rather than simply presenting uniform prepared text. Some comments opposing the proposed rule were submitted by lender employees, and those comments also ranged fairly widely in the extent of their individualized content; some referred to their fears of losing their jobs if the proposed rule were to become effective in its current form.

Some of these commenters indicated that payday loan proceeds were used to pay bills for which non-payment would result in penalties or late fees or suspension of vital services; many of them expressed, or seemed implicitly to suggest, concern that the rule would restrict their access to funds for meeting these needs.

Some commenters discussed general or specific concerns about their understanding of the effect the rule would have without expressly indicating support for or opposition to the rule, though a fair reading of their comments showed them to be expressing concern that the proposed rule would, or might restrict their access to covered loans and thus appeared to be critical of the proposed rule. For example, specific concerns about the perceived negative effects of the rule included its potential effect on the cost of covered loans, including fees and interest rates, restrictions on product availability because of re-borrowing limits, and lack of clarity about what products would replace those made unavailable by the rule. A number of comments expressed concern or confusion about the alternative lending options they would have following the enactment of the rule, and whether these alternatives would be acceptable options.

Some had very specific concerns about the potential effects of the rule, including a potential lack of liquidity in the market, and expressed a general concern that the rule might lead to increased consumer fraud. Others were concerned about the security of the personal financial information they would have to provide to get a loan. Some expressed concern that the new requirements would lead to loan denials that would hurt their credit scores. Many employees of the lenders affected by the proposed rule were concerned about their continued employment status if the rule were to be adopted.

Some commenters proposed exclusions from the effects of the rule, either directly or indirectly, indicating, for example, the auto title or credit union loans should be unaffected by the final rule. It was also suggested that there should be a safe harbor if lenders do their own underwriting or engage in income verification. Others suggested that various types of lenders should be excluded from the rule. These included credit unions, on the ground that they make “responsible” loans that use the ability to repay as an eligibility screen already, and “flex loans” because they are like lines of credit. At least one commenter suggested that the Bureau should exempt FDIC-regulated banks from any coverage under the rule.

In addition to more general criticisms of the rule, individual commenters also offered objections and concerns about the substantive provisions of the proposed rule. Some were general, like the suggestion that repayment should be more flexible. Others were more focused on specific features of the rule, including claims that the proposed rule would violate existing laws in unspecified ways.

Many commenters were concerned about the burdens and length of the “30-day waiting period” or cooling-off period, noting that they would be Start Printed Page 54517unable to access such loans during those periods even if they had an urgent need for funds. Others similarly commented that the various requirements and restrictions would result in loan denials and impede their ability to access needed funds easily and quickly. Many specifically noted the need for funds for unexpected emergencies, like car repairs. Some simply declared these limits “unwarranted,” saying that they understood the risks associated with these loans and appreciated their availability nonetheless.

Some commenters focused on the procedural difficulties of obtaining covered loans under the rule. They objected to the length and detail of the loan application process when funds were needed quickly and easily to cope with emergencies, with car repairs cited frequently. They stated that the process for getting a small-dollar loan should be short and easy and that otherwise it was not worth the effort. Others felt that the proposed rule would require them to disclose too much information about their income and expenses, which would invade their privacy. Some stated that credit checks should not be required for small-dollar loans. Still others expressed concern that the government should not be able to demand such information or require that borrowers provide it.

A few commenters noted that it would be hard for lenders to comply with the rule, which would impose additional compliance costs. A few specifically suggested that the Bureau should consider having lenders use the State databases that lenders must currently use rather than the approach laid out in the proposed rule.

Finally, though the vast majority of critical comments opposed the proposed rule and the restrictions it would impose, a substantial number of individual commenters were critical because they did not believe the rule went far enough or imposed enough restrictions. These included views that allowing consumers to receive as many as six loans a year or more would sink them into further debt, that “big banks” would benefit from the rule, or that the rule should “go after big banks” rather than smaller payday lenders. Many critics of the proposed rule stated that it should more directly impose a cap on interest rates, as many States have done and as has proved effective in limiting the making of these kinds of loans. Others suggested that the proposed rule could have “unintended consequences,” though without clearly explaining what those consequences might be, and that more should be done to prevent them.

Comments Supporting the Proposed Rule. Many individuals submitted comments that either supported the thrust of the proposed rule or argued that it needed to be strengthened in particular ways to accomplish its purposes. Some were submitted by consumers of these loans, and others were submitted through groups such as nonprofit organizations or coalitions of faith leaders who organized the presentation of their individual stories. Many were submitted as part of campaigns organized by consumer advocacy groups and a variety of nonprofit organizations concerned about the dangers they perceived to flow from these types of loans. These comments tended to dwell on the risks and financial harms that many consumers incur from small-dollar loans. These accounts consistently centered on those borrowers who find themselves ending up in extended loan sequences and bearing the negative collateral consequences of re-borrowing, delinquency, and default, especially the inability to keep up with their other major financial obligations and the loss of control over their budgetary decisions. Many of these commenters cited the special risks posed by loans that are extended without a reasonable determination of the consumer's ability to repay the loan without re-borrowing. Some went further and urged that such loans be outlawed altogether based on their predatory nature and the extremely high costs to consumers of most of these loan products.

Some of these comments described their first-hand experiences with extended loan sequences and the financial harms that had resulted either to themselves or to friends or family members. Some colored their accounts with considerable anger and frustration about these experiences, how they were treated, and the effects that these loans had in undermining or ruining their financial situations.

Many comments were generated or collected by faith leaders and faith groups, with individuals often presenting their views in terms of moral considerations, as well as financial effects. Some of these comments cited scripture and offered religiously based objections to covered loan activity, with particular opposition to the high interest rates associated with covered loans. Others, without necessarily grounding their concerns in a specific religious orientation, noted that current covered loans harm certain financially vulnerable populations, including the elderly, low-income consumers, and single mothers. They also recounted efforts they and others had made to develop so-called “rescue” products to extricate members of their congregations from the cumulative harms of extended loan sequences. Some employees of lenders, especially credit unions, offered views in favor of the proposed rule based on what they had seen of the negative experiences that their customers had encountered with these types of loans.

Many commenters who favored the proposed rule dwelled on their concerns about the risks posed by the types of covered loans that are currently available to consumers. Overall, these comments tended to focus on the risks and financial harms that many consumers incur when using short-term small-dollar loans. They expressed concerns about borrowers who find themselves in extended loan sequences and bearing increasingly negative effects as a result. Commenters often stressed that these situations left consumers unable to keep up with other major financial obligations and that they lost control over their personal budgetary decisions.

Like the favorable comments regarding current payday loan activity—which the Bureau understood to be critical of the proposed rule—critics of current covered loan practices did not always specify their views about the proposed rule. Nonetheless, absent specific indications to the contrary, comments that were critical of current payday lending activity were understood to be supportive of the proposed rule as an effective potential response to those concerns.

Some comments simply indicated a general policy view that there was a need to “stop the debt trap” or that rollover loans were “out of hand.” Others objected to the perception that covered loans are “geared to people with fixed incomes.” Many opposed what they viewed as the common situation that these loans were unaffordable and put people in a position in which they are unable to pay off the principal and must roll over the loans to avoid default.

Some comments focused on the specific consumer protective nature of the proposed rule, indicating that the rule was needed because current lenders do not care about people's ability to repay the loans, knowing that they can profit from continuing re-borrowing. A handful of comments from current or former employees of such lenders said they supported the proposed rule because of the negative experiences they had seen their customers encounter with these types of loans. One commenter opined that even NSF fees were less damaging to consumers than Start Printed Page 54518the cumulative effects of these loans, with the fees they imposed and frequency with which they landed many consumers in continued debt traps.

Many others commenting on these types of loans indicated that their “debt trap” nature was reinforced in the context of vehicle loans, since repossession of a vehicle could dramatically deepen the downward debt spiral. Still, one commenter argued that even the repossession of the borrower's vehicle might not be as bad as the continuing predicament of self-perpetuating loan sequences with their escalating fees and loan balances.

Some indicated that other loans were better alternatives to payday loans, sometimes citing PAL loans in this regard. And some were concerned about the character of the lenders associated with covered loans, with one comment relating that a recent payday lender had been indicted for illegal conduct associated with payday lending.

Some individual commenters indicated that they were representatives of or otherwise affiliated with national consumer organizations, and other national organizations, and were supportive of the rule. Some commenters noted that they were current payday loan borrowers working to pay off their loans and were supportive of the rule. Others supported the rule based on their own generally negative personal experiences with covered loans, with some specifying that they only supported the rule as applied to lenders that made loans without determining whether borrowers had the ability to repay them.

Many individual commenters indicated support for time limits on these loans and the proposed “cooling-off period” because they believed it would ultimately help consumers better manage their funds. Some thought that the rule would have the effect of lowering interest rates.

Some individual commenters who identified themselves as State officials, including individual legislators, commented that the rule would favorably supplement existing statutes that dealt with covered loans in their respective States. Individuals affiliated with some industry groups indicated their general support for the rule, but expressed concern that, in unexplained ways, the rule may go “too far.” In contrast, others recommended that the standards in the proposed rule should be applied in the context of all consumer lending rather than just in this market.

The Bureau's Consideration of Individual Comments. Although the specific treatment of discrete issues is addressed more fully in part V below, which presents the section-by-section analysis explaining the components of the final rule, it may be useful here to provide some of the uses that the Bureau made of the individual comments. First, it is a notable and commendable fact that over a million individual commenters would take the time and effort to respond to the Bureau with their thoughts and reactions, both pro and con, to this proposed rule. Public comments are not just an obligatory part of the rulemaking process required by the Administrative Procedure Act, they are welcome as a means of providing insight and perspective in fashioning such rules. Perhaps needless to say, that inviting solicitation was put to the test here.

As noted earlier, many of the individual comments turned out to be duplicative and redundant of one another. In part, that was because both the industry groups, on the one side, and the consumer and community groups, on the other side, employed campaigns to solicit large numbers of individual comments. The Bureau does not view any of those efforts as improper or illegitimate, and it has not discounted any comments on their merits as a result of their apparent origins. It did create challenges, however, for figuring out how to manage this large volume of comments—how to receive and process them, how to handle and organize them, and how to review and consider them. In the end, the Bureau proceeded as laid out in its earlier discussion in this section, and though the process took many months and considerable effort, it was eventually completed in a satisfactory way.

The Bureau also does not view the repetition and redundancy among many of the comments as being immaterial. The Bureau considered not only what views the public has, but how intensely they are felt and maintained. The Bureau has frequently noted, in its handling of consumer complaints, that when the same concern arises more frequently, it may reflect an emerging pattern and be worthy of more attention than if the same concern arises only once or twice and thus appears to reflect a more isolated set of circumstances. The same may be true here, with the caveat that, depending on the circumstances, comments generated primarily through campaigns may or may not truly reflect any widespread or deeply felt convictions, depending on the level of the individual's actual involvement.

Having said that, the processes that Congress has created for Federal administrative rulemaking, both in the Administrative Procedure Act generally and here in the Dodd-Frank Act in particular, were not designed or intended to be governed by some rough assessment of majority vote or even majority sentiment. While rough estimates of pro and con submissions are provided above, the Bureau has simply sought to understand the consumer experiences reported in these comments and address the substance of these comments on their merits.

As a general matter, the individual comments have helped inform the Bureau's understanding of factual matters surrounding the circumstances and use of covered loans. In the sections on Market Concerns—Underwriting and Market Concerns—Payments, they helped add depth and content to the Bureau's description of issues such as borrower characteristics, the circumstances of borrowing, their expectations of and experience with extended loan sequences, including harms they have suffered as a consequence of delinquency, default, and loss of control over budgeting. Many of these concerns were already known at the outset of the rule-writing process, as a result of extensive outreach and feedback the Bureau has received on the subject, as well as through the research that the Bureau and others have performed on millions of covered loans, all of which is discussed above.

Nonetheless, the Bureau's review of large numbers of individual comments has reinforced certain points and prompted further consideration of others. For example, many individuals stated great concern that the proposed rule would make the underwriting process for small-dollar loans too burdensome and complex. They commented positively on the speed and convenience of obtaining such loans, and were concerned that the process described in the proposed rule would lead to fewer such loans being offered or made. This has influenced the Bureau's consideration of the details of the underwriting process addressed in § 1041.5 of the final rule and contributed to the Bureau's decision to modify various aspects of that process. At the same time, many other individual commenters had much to say about the perils of extended loan sequences and how they had harmed either themselves or others, which helped underscore the need for the Bureau to finalize a framework that would be sufficiently protective of consumers. In particular, many commenters supported the general requirement that lenders must reasonably assess the borrower's ability to repay before making a loan according Start Printed Page 54519to specific underwriting criteria, and that limited exceptions to those criteria would be made only where other conditions applied to ensure that lenders would not end up in extended loan sequences. There are also many other places in the Bureau's discussion and explanation of the final rule where individual comments played a role in the Bureau's analysis.

Further Inter-Agency Consultation. In addition to the inter-agency consultation that the Bureau engaged in prior to issuing the notice of proposed rulemaking, pursuant to section 1022(b)(2) of the Dodd-Frank Act, the Bureau has consulted further with the appropriate prudential regulators and the FTC during the comment process. As a result of these consultations, the Bureau has made a number of changes to the rule and has provided additional explanation for various determinations it has made about the provisions of the rule, which have been discussed with the other regulators and agencies during the consultation process.

Ex Parte Submissions. In addition, the Bureau considered the comments it received after the comment period had closed, as well as other input from more than 50 ex parte submissions, meetings, and telephone conferences.[368] All such materials in the record are available to the public at http://www.regulations.gov. Relevant information received is discussed below in the section-by-section analysis and subsequent parts of this notice, as applicable. The Bureau considered all the comments it received about the proposal, made certain modifications, and is adopting the final rule as described more fully in part V below.

IV. Legal Authority

The Bureau is issuing this final rule pursuant to its authority under the Dodd-Frank Act. The rule relies on rulemaking and other authorities specifically granted to the Bureau by the Dodd-Frank Act, as discussed below.

A. Section 1031 of the Dodd-Frank Act

Section 1031(b)—The Bureau's Authority To Identify and Prevent UDAAPs

Section 1031(b) of the Dodd-Frank Act provides the Bureau with authority to prescribe rules to identify and prevent unfair, deceptive, or abusive acts or practices, or UDAAPs. Specifically, section 1031(b) of the Act authorizes the Bureau to prescribe rules “applicable to a covered person or service provider identifying as unlawful unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.” Section 1031(b) of the Act further provides that, “Rules under this section may include requirements for the purpose of preventing such acts or practice.”

There are notable similarities between the Dodd-Frank Act and the Federal Trade Commission Act (FTC Act) provisions relating to unfair and deceptive acts or practices. Accordingly, these FTC Act provisions, and case law and Federal agency rulemakings relying on them, inform the scope and meaning of the Bureau's rulemaking authority with respect to unfair and deceptive acts or practices under section 1031(b) of the Dodd-Frank Act.[369]

Courts evaluating exercise of agency rulemaking authority under the unfairness and deception standards of the FTC Act have held that there must be a “reasonable relation” between the act or practice identified as unlawful and the remedy chosen by the agency.[370] The Bureau agrees with this approach and therefore maintains it is reasonable to interpret section 1031(b) of the Dodd-Frank Act to permit the imposition of requirements to prevent acts or practices that are identified by the Bureau as unfair or deceptive, as long as the preventive requirements being imposed by the Bureau have a reasonable relation to the identified acts or practices.

The Bureau likewise maintains that it is reasonable to interpret section 1031(b) of the Dodd-Frank Act to provide that same degree of discretion to the Bureau with respect to the imposition of requirements to prevent acts or practices that are identified by the Bureau as abusive. Throughout this rulemaking process, the Bureau has relied on and applied this interpretation in formulating and designing requirements to prevent acts or practices identified as unfair or abusive.

Section 1031(c)—Unfair Acts or Practices

Section 1031(c)(1) of the Dodd-Frank Act provides that the Bureau shall have no authority under section 1031 to declare an act or practice in connection with a transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service, to be unlawful on the grounds that such act or practice is unfair, unless the Bureau “has a reasonable basis” to conclude that: The act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers; and such substantial injury is not outweighed by countervailing benefits to consumers or to competition.[371] Section 1031(c)(2) of the Act provides that, “[i]n determining whether an act or practice is unfair, the Bureau may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primary basis for such determination.” [372]

In sum, the unfairness standard under section 1031(c) of the Dodd-Frank Act requires primary consideration of three elements: The presence of a substantial injury, the absence of consumers' ability to reasonably avoid the injury, and the countervailing benefits to consumers or to competition associated with the act or practice. The Dodd-Frank Act also permits secondary consideration of public policy objectives.

As noted above, the unfairness provisions of the Dodd-Frank Act are similar to the unfairness standard under the FTC Act.[373] That standard was developed, in part, when in 1994, Section 5(n) of the FTC Act was amended to incorporate the principles set forth in the FTC's December 17, 1980 “Commission Statement of Policy on the Start Printed Page 54520Scope of Consumer Unfairness Jurisdiction” (the FTC Policy Statement on Unfairness).[374]

Due to the similarities between unfairness provisions in the Dodd-Frank and FTC Acts, the scope and meaning of the Bureau's authority under section 1031(b) of the Dodd-Frank Act to issue rules that identify and prevent acts or practices that the Bureau determines are unfair pursuant to section 1031(c) of the Dodd-Frank Act are naturally informed by the FTC Act unfairness standard, the FTC Policy Statement on Unfairness, FTC and other Federal agency rulemakings,[375] and related case law. The Bureau believes it is reasonable to interpret section 1031 of the Dodd-Frank Act consistent with the specific positions discussed in this section on Legal Authority. The Bureau's interpretations are based on its expertise with consumer financial products, services, and markets, and its experience with implementing this provision in supervisory and enforcement actions. The Bureau also generally finds persuasive the reasons provided by the authorities supporting these positions as discussed in this section.

Substantial Injury

The first element required for a determination of unfairness under section 1031(c)(1) of the Dodd- Frank Act is that the act or practice causes, or is likely to cause, substantial consumer injury. As noted above, Bureau rulemaking regarding the meaning of the elements of this unfairness standard is informed by the FTC Act unfairness standard, the FTC Policy Statement on Unfairness, FTC and other Federal agency rulemakings, and related case law.

The FTC noted in the FTC Policy Statement on Unfairness that substantial injury ordinarily involves monetary harm, and that trivial or speculative harms are not cognizable under the test for substantial injury.[376] The FTC also noted that an injury is “sufficiently substantial” if it consists of a small amount of harm to a large number of individuals or if it raises a significant risk of harm.[377]

In addition, the FTC has also found that substantial injury may involve a large amount of harm experienced by a small number of individuals.[378] And while the FTC has said that emotional impact and other more subjective types of harm ordinarily will not constitute substantial injury,[379] the D.C. Circuit held that psychological harm can form part of the substantial injury along with financial harm.[380]

Not Reasonably Avoidable

The second element required for a determination of unfairness under section 1031(c)(1) of the Dodd-Frank Act is that the substantial injury is not reasonably avoidable by consumers. Again, the FTC Act unfairness standard, the FTC Policy Statement on Unfairness, FTC and other Federal agency rulemakings, and related case law inform the meaning of this element of the unfairness standard.

The FTC has noted that knowing the steps for avoiding injury is not enough for the injury to be reasonably avoidable; rather, the consumer must also understand the necessity of taking those steps.[381] As the FTC explained in its Policy Statement on Unfairness, most unfairness matters are brought to “halt some form of seller behavior that unreasonably creates or takes advantage of an obstacle to the free exercise of consumer decision making.” [382] The D.C. Circuit held that such behavior can create a “market failure” and the agency “may be required to take corrective action.” [383] Reasonable avoidability also takes into account the costs of making a choice other than the one made and the availability of alternatives in the marketplace.[384]

Countervailing Benefits to Consumers or Competition

The third element required for a determination of unfairness under section 1031(c)(1) of the Dodd- Frank Act is that the act or practice's countervailing benefits to consumers or to competition do not outweigh the substantial consumer injury. Once again, the FTC Act unfairness standard, the FTC Policy Statement on Unfairness, FTC and other Federal agency rulemakings, and related case law inform the meaning of this element of the unfairness standard.

In applying the FTC Act's unfairness standard, the FTC has stated that it is important to consider both the costs of imposing a remedy and any benefits that consumers enjoy as a result of the practice.[385] Authorities addressing the FTC Act's unfairness standard indicate that the countervailing benefits test does not require a precise quantitative analysis of benefits and costs, because such an analysis may be unnecessary or, in some cases, impossible. Rather, the agency is expected to gather and Start Printed Page 54521consider reasonably available evidence.[386]

Public Policy

As noted above, section 1031(c)(2) of the Dodd-Frank Act provides that, “[i]n determining whether an act or practice is unfair, the Bureau may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primary basis for such determination.” [387]

Section 1031(d)—Abusive Acts or Practices

The Dodd-Frank Act, in section 1031(b), authorizes the Bureau to identify and prevent abusive acts and practices. The Bureau believes that Congress intended for the statutory phrase “abusive acts or practices” to encompass conduct by covered persons that is beyond what would be prohibited as unfair or deceptive acts or practices, although such conduct could overlap and thus satisfy the elements for more than one of the standards.[388]

Under section 1031(d) of the Dodd-Frank Act, the Bureau “shall have no authority . . . to declare an act or practice abusive in connection with the provision of a consumer financial product or service” unless the act or practice meets at least one of several enumerated conditions. For example, under section 1031(d)(2)(A) of the Act, an act or practice might “take[ ] unreasonable advantage of” a consumer's “lack of understanding . . . of the material risks, costs, or conditions of the [consumer financial] product or service” (i.e., the lack of understanding prong).[389] Under section 1031(d)(2)(B) of the Act, an act or practice might “take[ ] unreasonable advantage of” the “inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service” (i.e., the inability to protect prong).[390] The Dodd-Frank Act does not further elaborate on the meaning of these terms, leaving it to the Bureau to interpret and apply these standards.

Although the legislative history on the meaning of the Dodd-Frank Act's abusiveness standard is fairly limited, it suggests that Congress was particularly concerned about the widespread practice of lenders making unaffordable loans to consumers. A primary focus was on unaffordable home mortgages and mortgages made without adequate or responsible underwriting.[391]

However, there is some indication that Congress also intended the Bureau to use the authority under section 1031(d) of the Dodd-Frank Act to address payday lending through the Bureau's rulemaking, supervisory, and enforcement authorities. For example, the Senate Committee on Banking, Housing, and Urban Affairs report on the Senate version of the legislation listed payday loans as one of several categories of consumer financial products and services, other than mortgages, where “consumers have long faced problems” because they lack “adequate Federal rules and enforcement,” noting further that “[a]busive lending, high and hidden fees, unfair and deceptive practices, confusing disclosures, and other anti-consumer practices have been a widespread feature in commonly available consumer financial products such as credit cards.” [392] The same section of the Senate committee report included a description of the basic features of payday loans and the problems associated with them, specifically noting that many consumers are unable to repay the loans while meeting their other obligations and that many of these borrowers re-borrow, which results in a “perpetual debt treadmill.” [393] These portions of the legislative history reinforce other indications in the Dodd-Frank Act that Congress consciously intended to confer direct authority upon the Bureau to address issues concerning payday loans.[394]

B. Section 1032 of the Dodd-Frank Act

Section 1032(a) of the Dodd-Frank Act provides that the Bureau may prescribe rules to ensure that the features of any consumer financial product or service, “both initially and over the term of the product or service,” are “fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks associated with the product or service, in light of the facts and circumstances.” [395] This authority is broad, and empowers the Bureau to prescribe rules regarding the disclosure of the “features” of consumer financial products and services generally.

Accordingly, the Bureau may prescribe rules containing disclosure requirements even if other Federal Start Printed Page 54522consumer financial laws do not specifically require disclosure of such features. Section 1032(c) of the Dodd-Frank Act provides that, in prescribing rules pursuant to section 1032 of the Act, the Bureau “shall consider available evidence about consumer awareness, understanding of, and responses to disclosures or communications about the risks, costs, and benefits of consumer financial products or services.” [396]

Section 1032(b)(1) of the Dodd-Frank Act provides that “any final rule prescribed by the Bureau under this section requiring disclosures may include a model form that may be used at the option of the covered person for provision of the required disclosures.” [397] Section 1032(b)(2) of the Act provides that such a model form “shall contain a clear and conspicuous disclosure that, at a minimum—(A) uses plain language comprehensible to consumers; (B) contains a clear format and design, such as an easily readable type font; and (C) succinctly explains the information that must be communicated to the consumer.” [398]

Section 1032(b)(3) of the Dodd-Frank Act provides that any such model form “shall be validated through consumer testing.” [399] And section 1032(d) of the Act provides that, “Any covered person that uses a model form included with a rule issued under this section shall be deemed to be in compliance with the disclosure requirements of this section with respect to such model form.” [400]

C. Other Authorities Under the Dodd-Frank Act

Section 1022(b)(1) of the Dodd-Frank Act provides that the Bureau's director “may prescribe rules and issue orders and guidance, as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof.” [401] “Federal consumer financial law” includes rules prescribed under Title X of the Dodd-Frank Act,[402] including sections 1031(b) to (d) and 1032.

Section 1022(b)(2) of the Dodd-Frank Act prescribes certain standards for rulemaking that the Bureau must follow in exercising its authority under section 1022(b)(1) of the Act.[403] For a discussion of the Bureau's standards for rulemaking under section 1022(b)(2) of the Act, see part VII below.

Section 1022(b)(3)(A) of the Dodd-Frank Act authorizes the Bureau, by rule, to “conditionally or unconditionally exempt any class of covered persons, service providers, or consumer financial products or services” from any provision of Title X or from any rule issued under Title X as the Bureau determines “necessary or appropriate to carry out the purposes and objectives” of Title X. In doing so, the Bureau must, “tak[e] into consideration the factors” set forth in section 1022(b)(3)(B) of the Act,[404] which specifies three factors that the Bureau shall, as appropriate, take into consideration in issuing such an exemption.[405]

Furthermore, §§ 1041.10 and 1041.11 of the final rule are authorized by other Dodd-Frank Act authorities, such as sections 1021(c)(3),[406] 1022(c)(7),[407] 1024(b)(1),[408] and 1024(b)(7) of the Act.[409] A more complete description of the Dodd-Frank Act authorities on which the Bureau is relying for §§ 1041.10 and 1041.11 of the final rule is contained in the section-by-section analysis of those provisions.

D. Section 1041 of the Dodd-Frank Act and Preemption

Section 1041(a)(1) of the Dodd-Frank Act provides that Title X of the Act, other than sections 1044 through 1048, “may not be construed as annulling, altering, or affecting, or exempting any person subject to the provisions of [Title X] from complying with,” the statutes, regulations, orders, or interpretations in effect in any State (sometimes hereinafter, State laws), “except to the extent that any such provision of law is inconsistent with the provisions of [Title X], and then only to the extent of the inconsistency.” [410] Section 1041(a)(2) of the Act provides that, for purposes of section 1041, “a statute, regulation, order, or interpretation in effect in any State is not inconsistent with” the Title X provisions “if the protection that such statute, regulation, order, or interpretation affords to consumers is greater than the protection provided” under Title X.[411] This section further provides that a determination regarding whether a statute, regulation, order, or interpretation in effect in any State is inconsistent with the provisions of Title X may be made by the Bureau on its own motion or in response to a nonfrivolous petition initiated by any interested person.[412]

The requirements of the final rule set minimum Federal standards for the regulation of covered loans. They thus accord with the common preemption principle that Federal law provides a floor and not a ceiling on consumer financial protection,[413] as provided in section 1041(a)(2) of the Dodd-Frank Act. The requirements of this rule will thus coexist with State laws that pertain to the making of loans that the rule treats as covered loans (hereinafter, “applicable State laws”). Consequently, any person subject to the final rule will be required to comply with both the requirements of this rule and all applicable State laws, except to the extent that the applicable State laws are inconsistent with the requirements of the rule.[414] This approach reflects the established framework of cooperative federalism between Federal and State laws in many other substantive areas. Accordingly, the arguments advanced by some commenters that the payday rule would “occupy the field” are incorrect. Where Federal law occupies an entire field, “even complementary State regulation is impermissible” because field preemption “foreclose[s] any State regulation in the area, even if it is parallel to Federal standards.” [415] This rule would not have that effect.

As noted above, section 1041(a)(2) of the Dodd-Frank Act specifies that State Start Printed Page 54523laws which afford greater consumer protection than is provided under Title X are not inconsistent with the provisions of Title X. Specifically, as discussed in part II, different States have taken different approaches to regulating loans that are treated as covered loans under the final rule, with many States electing to permit the making of such loans according to varying conditions, and other States choosing not to do so by imposing usury caps that effectively render it impractical to make such loans in those States.

Particularly in the States where fixed usury caps effectively prohibit these types of loans, nothing in this rule is intended or should be construed to undermine or cast doubt on whether those provisions are sound public policy. Because Title X does not confer authority on the Bureau to establish usury limits,[416] its policy interventions, as embodied in the final rule, are entirely distinct from such measures as are beyond its statutory authority. Therefore, nothing in this rule should be construed as annulling or even as inconsistent with a regulatory or policy approach to such loans based on usury caps, which are wholly within the prerogative of the States to lawfully impose. Indeed, as described in part II, South Dakota became the most recent State to impose a usury cap on payday loans after conducting a ballot initiative in 2016 in which the public voted to approve the measure by a substantial margin.

The requirements of the final rule will coexist with different approaches and frameworks for the regulation of such covered loans as reflected in applicable State laws.[417] The Bureau is aware of certain applicable State laws that may afford greater protections to consumers than do the requirements of this rule. For example, as described in part II and just discussed above, certain States have fee or interest rate caps (i.e., usury limits) that payday lenders may find are set too low to sustain their business models. The Bureau regards the fee and interest rate caps in these States as providing greater consumer protections than, and thus as not inconsistent with, the requirements of the final rule.

Aside from those provisions of State law just discussed, the Bureau declines to determine definitively in this rulemaking whether any other individual statute, regulation, order, or interpretation in effect in any State is inconsistent with the rule. Comments on the proposal and internal analysis have led the Bureau to conclude that specific questions of preemption should be decided upon application, and the Bureau will respond to nonfrivolous petitions initiated by interested persons in accordance with section 1041(a)(2) of the Dodd-Frank Act. The Bureau believes that in most cases entities can apply the principles articulated above in a straightforward manner to determine their rights and obligations under both the rule and State law. Moreover, in light of the variety of relevant State law provisions and the range of practices that may be covered by those laws, it is impossible for the Bureau to provide a definitive description of all interactions or to anticipate all areas of potential concern.

Some commenters argued that because section 1041 of the Dodd-Frank Act includes only the term “this title,” and not “any rule or order prescribed by the Bureau under this title,” Congress contemplated only statutory and not regulatory preemption of State law. The Bureau disagrees and believes section 1041 is best interpreted to apply to Title X and rules prescribed by the Bureau under that Title. Section 1041 was modeled in large part on similar provisions from certain enumerated consumer laws. Consistent with longstanding case law holding that State laws can be pre-empted by Federal regulations promulgated in the exercise of delegated authority,[418] those provisions were definitively interpreted to apply to requirements imposed by implementing regulations, even where the statutory provisions include explicit reference only to the statutes themselves.[419] Congress is presumed to have been aware of those applications in enacting Title X, and section 1041 is best interpreted similarly. Moreover, the Bureau's interpretation furthers principles of consistency, uniformity, and manageability in interpreting Title X and legislative rules with the force and effect of law implementing that statute. Finally, while section 1041 of the Act instructs preemption analyses, any actual pre-emptive force derives from the substantive provisions of Title X and its implementing rules, not from section 1041 itself. A reading that section 1041 would apply only to Title X itself could lead to the conclusion that rules prescribed by the Bureau under Title X have broader preemptive effect than does Title X itself. The better interpretation is that the preemptive effect of regulations exercised under delegated authority should be guided by the provisions of section 1041.

Lastly, the Bureau intends this rule to interact in the same manner with laws or regulations at other government levels, like city or locality laws or regulations.

E. General Comments on the Bureau's Legal Authority

In addition to setting out the Bureau's legal authority for this rulemaking and responding to comments directed to specific sources of authority, it is necessary to address several more general comments that challenged or criticized certain aspects of the Bureau's ability to proceed to finalize this rule. They will be addressed here.

Some industry commenters and State Attorneys General have contended that the Bureau lacks the legal authority to adopt this rule because the Bureau itself or its statutory authority is unconstitutional on various grounds, including separation-of-powers, the non-delegation doctrine, and the 10th Amendment. No court has ever held that the Bureau is unable to issue regulations on the basis that it is unconstitutional, and in fact the Bureau has issued dozens of regulations to date, including many major rules that have profoundly affected key consumer markets such as mortgages, prepaid accounts, remittance transfers, and others—a number of which were mandated by Congress. In addition, longstanding precedent has established that a government agency lacks the authority to decide the constitutionality of congressional enactments.[420]

One commenter argued that the timing of the proposed rule prevented the Bureau from using data gathered in Treasury Department Financial Empowerment Studies on small dollar loans conducted under Title XII of the Dodd-Frank Act, and that the Start Printed Page 54524combination of Title XII and section 1022 of the Dodd-Frank Act evidence Congress's intent to not grant the Bureau authority to issue a rule that reduces the availability of payday loans. There is nothing in either the plain language or structure of the Dodd-Frank Act to suggest that Congress intended the Bureau to postpone any regulation of unfair and abusive payday lending practices until after Treasury had established the multiyear grant program that Congress authorized Treasury to establish. Indeed, it is noteworthy that Title XII does not mandate that Treasury create such programs—it merely authorizes Treasury to do so. Moreover, contrary to the commenter's assertions, the final rule will not end payday lending and it will not undermine the rationale for the grants for which Congress provided in Title XII. There is no basis to conclude that the Bureau is under any obligation to wait for such grant programs to play out to prevent UDAAPs.

Some industry commenters have made the claim that the Bureau had impermissibly prejudged the evidence about whether and how to proceed with this rule and failed to comply with its own ex parte policy by engaging in improper communications with special interest groups prior to the publication of the notice of proposed rulemaking. The Bureau does not agree with these claims for several reasons. First, part III of the final rule, which summarizes in detail the Bureau's rulemaking process, shows that these claims are without basis. That discussion reflects the Bureau's considerable experience with these issues and with this market for over five years of steady work. It also includes a description of the Bureau's approach to handling the great volume of public comments received on the proposed rule, as well as a number of ex parte communications, which have been documented and incorporated into the administrative record and are available to the public at www.regulations.gov. Second, both the proposed rule and the final rule are based on the Bureau's careful review of the relevant evidence, including evidence generated by the Bureau's own studies, as well as evidence submitted by a broad range of stakeholders, including industry stakeholders. Finally, the numerous changes made in the final rule in response to stakeholder comments, including industry stakeholders, is further evidence that the Bureau has not prejudged any issues.

A number of industry commenters have argued that the rule conflicts with the Bureau's statutory purpose under section 1021(b)(4) of the Dodd-Frank Act, which is to enforce the law consistently for all persons, regardless of their status as depository institutions, because it addresses covered loans but does not address other types of financial products, such as overdraft services or credit card accounts. The Bureau notes in response that each of these products has its own features, characteristics, historical background, and prior regulatory treatment, as discussed further in the section-by-section analysis of § 1041.3(d). Just as it has not been judged to be impermissibly inconsistent for Federal and State authorities (including the Congress) to treat these distinct products differently as a matter of statutory law and regulation, despite certain similarities of product features and uses, even so it is not inconsistent for the Bureau to do so for the purposes of this rule. Further, while it may be true that more nonbanks will be impacted by this rule than banks by virtue of the products that banks and nonbanks are currently providing, that does not mean that this rule conflicts with section 1021(b)(4), but simply reflects the current makeup of this marketplace.

Finally, and more narrowly, some Tribal and industry commenters have averred that the Bureau lacks authority to adopt regulations pursuant to section 1031 of the Dodd-Frank Act that apply to Indian tribes or to any of the entities to which they have delegated Tribal authority. These arguments raised on behalf of Tribal lenders have also been raised in Tribal consultations that the Bureau has held with federally recognized Indian Tribes, as discussed in part III, and in various court cases to date. They rest on what the Bureau believes is a misreading of the Act and of Federal law and precedents governing the scope of Tribal immunity, positions that the Bureau has briefed extensively to the Federal courts in some key cases testing these issues.[421]

V. Section-by-Section Analysis

Subpart A—General

Section 1041.1 Authority and Purpose

Proposed § 1041.1 provided that the rule is being issued pursuant to Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act.[422] It also provided that the purpose of this part is to identify certain unfair and abusive acts or practices in connection with certain consumer credit transactions; to set forth requirements for preventing such acts or practices; and to prescribe requirements to ensure that the features of those consumer credit transactions are fully, accurately, and effectively disclosed to consumers. It also noted that this part prescribes processes and criteria for registration of information systems.

The Bureau did not receive any comments on proposed § 1041.1 and is finalizing this provision as proposed.

Section 1041.2 Definitions

Proposed § 1041.2 set forth definitions for certain terms relevant to the proposal. Additional definitions were set forth in proposed §§ 1041.3, 1041.5, 1041.9, 1041.14, and 1041.17 for further terms used in those respective sections. To the extent those definitions are used in the final rule and have not been moved into § 1041.2, as discussed below, they are addressed in the context of those particular sections (some of which have been renumbered in the final rule).

In general, the Bureau proposed to incorporate a number of defined terms under the Dodd-Frank Act and under other statutes or regulations and related commentary, particularly Regulation Z and Regulation E as they implement the Truth in Lending Act (TILA) [423] and the Electronic Fund Transfer Act (EFTA),[424] respectively. The Bureau believed that basing the proposal's definitions on previously defined terms may minimize regulatory uncertainty and facilitate compliance, especially where the other regulations are likely to apply to the same transactions in their own right. However, as discussed further below, the Bureau proposed, in certain definitions, to expand or modify the existing definitions or the concepts enshrined in such definitions for purposes of the proposal to ensure that the rule had its intended scope of effect, particularly as industry practices may evolve.

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The Bureau received numerous comments about these proposed terms and their definitions, as well as some suggestions to define additional concepts left undefined in the proposal. The Bureau is finalizing § 1041.2 with some revisions and deletions from the proposal, as discussed further below, including the addition of a rule of construction as § 1041.2(b) to provide general guidance concerning the incorporation of terms from other statutes and regulations in the context of part 1041.

2(a) Definitions

2(a)(1) Account

Proposed § 1041.2(a)(1) would have defined account by cross-referencing to the definition of that same term in Regulation E, 12 CFR part 1005. Regulation E generally defines account to include demand deposit (checking), savings, or other consumer asset accounts (other than an occasional or incidental credit balance in a credit plan) held directly or indirectly by a financial institution and established primarily for personal, family, or household purposes.[425] The term account was also used in proposed § 1041.3(c), which would provide that a loan is a covered loan if, among other requirements, the lender or service provider obtains repayment directly from a consumer's account. This term was also used in proposed § 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 § 1041.15, which would require lenders to provide notices to consumers before attempting to withdraw payments from consumers' accounts. The Bureau stated that defining this term consistently with an existing regulation would reduce the risk of confusion among consumers, industry, and regulators. The Bureau considered the Regulation E definition to be appropriate because that definition is broad enough to capture the types of transactions that may implicate the concerns addressed by this part. Proposed comment 2(a)(1)-1 also made clear that institutions may rely on 12 CFR 1005.2(b) and its related commentary in determining the meaning of account.

One commenter stated that the definition of account should be expanded to include general-use prepaid cards, regardless of whether they are labeled and marketed as a gift card, as defined in 12 CFR 1005.20(a)(3). The Bureau recently finalized a separate rule creating comprehensive consumer protections for prepaid accounts, and in the process amended the definition of account in 12 CFR 1005.2(b) to include “a prepaid account,” so the thrust of the comment is already effectively addressed.[426] The definition of “prepaid account” in that rulemaking only excludes gift cards that are both labeled and marketed as a gift card, which are subject to separate rules under Regulation E.[427] The Bureau does not believe that such products are likely to be tendered as a form of leveraged payment mechanism, but will monitor the market for this issue and take appropriate action if it appears that lenders are using such products to evade coverage under the rule. The Bureau did not receive any other comments on this portion of the proposal and is finalizing this definition as proposed. Proposed comment 2(a)(1)-1 has now been incorporated into comment 2(b)(1)-1 to illustrate the broader rule of construction discussed in § 1041.2(b).

2(a)(2) Affiliate

Proposed § 1041.2(a)(2) would have defined affiliate by cross-referencing to the definition of that same term in the Dodd-Frank Act, 12 U.S.C. 5481(1). The Dodd-Frank Act defines affiliate as any person that controls, is controlled by, or is under common control with another person. Proposed §§ 1041.6 and 1041.10 would have imposed certain limitations on lenders making loans to consumers who have outstanding covered loans with an affiliate of the lender, and the Bureau's analyses of those proposed sections discussed in more detail the particular requirements related to affiliates. The Bureau stated that defining this term in the proposal consistently with the Dodd-Frank Act would reduce the risk of confusion among consumers, industry, and regulators. Although the limitations in proposed §§ 1041.6 and 1041.10 are not being finalized, the final rule includes a number of other provisions in which the term affiliate is used, including the conditional exemption in § 1041.3(f). The Bureau did not receive any comments on this portion of the proposal and is finalizing this definition as proposed.

2(a)(3) Closed-End Credit

Proposed § 1041.2(a)(3) would have defined closed-end credit as an extension of credit to a consumer that is not open-end credit under proposed § 1041.2(a)(14). This term is used in various parts of the rule where the Bureau proposed to tailor provisions specifically for closed-end and open-end credit in light of their different structures and durations. Most notably, proposed § 1041.2(a)(18) prescribed slightly different methods of calculating the total cost of credit for closed-end and open-end credit. Proposed § 1041.16(c) also required lenders to furnish information about whether a covered loan is closed-end or open-end credit to registered information systems. Proposed comment 2(a)(3)-1 also made clear that institutions may rely on 12 CFR 1026.2(a)(10) and its related commentary in determining the meaning of closed-end credit, but without regard to whether the credit is consumer credit or is extended to a consumer, as those terms are defined in 12 CFR 1026.2(a).

The Bureau did not receive any comments on the definition of closed-end credit contained in the proposal and is finalizing the definition and commentary as proposed. The Bureau did, however, receive a number of comments on the definition of open-end credit contained in the proposal and made some changes to that definition in light of the comments received, all as discussed below. Because the term closed-end credit is defined in contradistinction to the term open-end credit, the changes made to the latter definition will affect the parameters of this definition as well.

2(a)(4) Consumer

Proposed § 1041.2(a)(4) would have defined consumer by cross-referencing the definition of that term in the Dodd-Frank Act, which defines consumer as an individual or an agent, trustee, or representative acting on behalf of an individual.[428] The term is used in numerous provisions across proposed part 1041 to refer to applicants for and borrowers of covered loans. The Bureau stated that this definition, rather than the arguably narrower Regulation Z definition of consumer—which defines consumer as “a cardholder or natural person to whom consumer credit is offered or extended”—is appropriate to Start Printed Page 54526capture the types of transactions that may implicate the concerns addressed by the proposed rule. In particular, the definition of this term found in the Dodd-Frank Act expressly includes agents and representatives of individuals, rather than just individuals themselves. The Bureau believed this definition might more comprehensively foreclose possible evasion of the specific consumer protections imposed by proposed part 1041 than would the definition found in Regulation Z. The Bureau did not receive any comments on this portion of the proposal and is finalizing this definition as proposed.

2(a)(5) Consummation

Proposed § 1041.2(a)(5) would have defined consummation as the time that a consumer becomes contractually obligated on a new loan, which is consistent with the definition of the term in Regulation Z § 1026.2(a)(13), or the time that a consumer becomes contractually obligated on a modification of an existing loan that increases the amount of the loan. The proposal used the term both in defining certain categories of covered loans and in defining the timing of certain proposed requirements. The time of consummation was important both in applying certain proposed definitions for purposes of coverage and in applying certain proposed substantive requirements. For example, under proposed § 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 § 1041.3(b)(2)(i), the determination of whether a loan is subject to a total cost of credit exceeding 36 percent per annum would be made at the time of consummation. Pursuant to proposed §§ 1041.6 and 1041.10, certain limitations would potentially apply to lenders making covered loans based on the consummation dates of those loans. Pursuant to proposed § 1041.15(b), lenders would have to furnish certain disclosures before a loan subject to the requirements of that section is consummated.

In the proposal, the Bureau stated that defining this term consistently with Regulation Z with respect to new loans would reduce the risk of confusion among consumers, industry, and regulators. Proposed comment 2(a)(5)-1 also made clear that the question of when a consumer would become contractually obligated with regard to a new loan is a matter to be determined under applicable law; for example, a contractual commitment agreement that binds the consumer to the loan would be a consummation. However, the comment stated that consummation does not occur merely because the consumer has made some financial investment in the transaction (for example, by paying a non-refundable fee), unless applicable law holds otherwise. The Bureau also provided guidance as to consummation with respect to particular loan modifications, so as to further the intent of proposed §§ 1041.3(b)(1) and (2), 1041.5(b), and 1041.9(b), all of which would impose requirements on lenders as of the time that the loan amount increases on an existing loan. The Bureau concluded that defining these increases in loan amounts as consummations would improve clarity for consumers, industry, and regulators. The above-referenced sections, as proposed, would impose no duties or limitations on lenders when a loan modification decreases the amount of the loan. Accordingly, in addition to incorporating Regulation Z commentary as to the general definition of consummation for new loans, proposed comment 2(a)(5)-2 explained the time at which certain modifications of existing loans would be considered to be a consummation for purposes of the rule. Proposed comment 2(a)(5)-2 explained that a modification would be considered a consummation if the modification increases the amount of the loan. Proposed comment 2(a)(5)-2 also explained that a cost-free repayment plan, or “off-ramp” as it is commonly known in the market, would not result in a consummation under proposed § 1041.2(a)(5).

In the proposal, the Bureau stated that it considered expressly defining a new loan in order to clarify when lenders would need to make the ability-to-repay determinations prescribed in proposed §§ 1041.5 and 1041.9. The definition that the Bureau considered would have defined a new loan as a consumer-purpose loan made to a consumer that (a) is made to a consumer who is not indebted on an outstanding loan, (b) replaces an outstanding loan, or (c) modifies an outstanding loan, except when a repayment plan, or “off-ramp” extends the term of the loan and imposes no additional fees.

Although some commenters requested more guidance to distinguish a loan modification from an instance of re-borrowing or a loan refinancing, the Bureau has concluded that the examples provided in the commentary sufficiently address all of the relevant scenarios where ambiguity could arise about whether consummation occurs. No other comments were received on any other aspect of this portion of the proposal. The Bureau has reworded parts of comment 2(a)(5)-2 for clarity in describing what types of loan modifications trigger substantive requirements under part 1041, but otherwise is finalizing this definition and the commentary as proposed.

2(a)(6) Cost of Credit

Proposed § 1041.2(a)(18) set forth the method for lenders to calculate the total cost of credit to determine whether a longer-term loan would be covered under proposed § 1041.3(b)(2). Proposed § 1041.2(a)(18) generally would have defined the total cost of credit as the total amount of charges associated with a loan expressed as a per annum rate, including various charges that do not meet the definition of finance charge under Regulation Z. The charges would be included even if they were paid to a party other than the lender. The Bureau proposed to adopt this approach to defining loan costs from the Military Lending Act, and also to have adopted the MLA's 36 percent threshold in defining what covered longer-term loans were subject to part 1041. The effect would have been that a loan with a term of longer than 45 days must have a total cost of credit exceeding a rate of 36 percent per annum in order to be a covered loan. The Bureau thus proposed using an all-in measure of the total cost of credit rather than the definition of annual percentage rate (APR) under Regulation Z because it was concerned that lenders might otherwise shift their fee structures to fall outside traditional Regulation Z concepts. This in turn would lead them to fall outside the proposed underwriting criteria for covered longer-term loans, which they could do, for example, by imposing charges in connection with a loan that are not included in the calculation of APR under Regulation Z.

The Bureau acknowledged that lenders were less familiar with the approach involving the MLA calculations than they are with the more traditional APR approach and calculations under Regulation Z. Therefore, the Bureau specifically sought comment on the compliance burdens of the proposed approach and whether to use the more traditional APR approach instead.

The Bureau received many comments on the definition of the total cost of credit, which reflected its functional position in the proposed rule as the trigger for the additional underwriting criteria applicable to covered longer-term loans. A number of comments addressed what kinds of fees and charges should be included or excluded from the total cost of credit and demanded more technical guidance, Start Printed Page 54527which reflected the increased complexity of using this method. One lender noted a specific loan program that would only be included in the rule because of the inclusion of participation fees in the proposed definition. Various commenters noted the greater simplicity of the APR calculation in Regulation Z, and contended that greater burdens would be imposed and less clarity achieved by applying the proposed definition of total cost of credit. The latter, they suggested, would confuse consumers who are accustomed to Regulation Z's APR definition, would be difficult to administer properly, and would be likely to have unintended consequences, such as causing many lenders to choose not to offer optional ancillary products like credit life and disability insurance, to the detriment of borrowers. Consumer groups, by contrast, generally preferred the proposed definition of total cost of credit, though they offered suggestions to tighten and clarify it in several respects.

As noted earlier, the Bureau is not finalizing the portions of the proposed rule governing underwriting criteria for covered longer-term loans at this time. Given that covered longer-term loans are only subject to the payment requirements in subpart C, and in view of the comments received, the Bureau concludes that the advantages of simplicity and consistency militate in favor of adopting an APR threshold as the measure of the cost of credit, which is widely accepted and built into many State laws, and which is the cost that will be disclosed to consumers under Regulation Z. Moreover, the Bureau believes that the other changes in the rule mean that the basis for concern that lenders would shift their fee structures to fall outside traditional Regulation Z definitions has been reduced. Instead, the cost-of-credit threshold is now relevant only to determine whether the portions of the final rule governing payments apply to longer-term loans, which the Bureau has concluded are much less likely to prompt lenders to seek to modify their fee structures simply to avoid the application of those provisions.

The Bureau notes that in determining here that the Regulation Z definition of cost of credit would be simpler and easier to use for the limited purpose of defining the application of the payment provisions of subpart C of this rule, the Bureau does not intend to decide or endorse this measure of the cost of credit—as contrasted with the total cost of credit adopted under the MLA—for any subsequent rule governing the underwriting of covered longer-term loans without balloons. The stricter and more encompassing measure used for the MLA rule may well be more protective of consumers,[429] and the Bureau will consider the applicability of that measure as it considers how to address longer-term loans in a subsequent rule.

To effectuate this change, the Bureau has adopted as the final rule's defined term “cost of credit,” which is an APR threshold rather than a threshold based on the total cost of credit as defined in the proposed rule. The cost of credit is defined to be consistent with Regulation Z and thus includes finance charges associated with the credit as stated in Regulation Z, 12 CFR 1026.4. As discussed further below in connection with § 1041.3(b)(3), for closed-end credit, the total cost of credit must be calculated at consummation and according to the requirements of Regulation Z, 12 CFR 1026.22, but would not have to be recalculated at some future time, even if a leveraged payment mechanism is not obtained until later. For open-end credit, the total cost of credit must be calculated at consummation and, if it does not cross the 36 percent threshold at that time, at the end of each billing cycle thereafter according to the rules for calculating the effective annual percentage rate for a billing cycle as stated in Regulation Z, 12 CFR 1026.14(c) and (d). This is a change from the proposal in order to determine coverage in situations in which there may not be an immediate draw, which was not expressly addressed in the proposal.

The Bureau has concluded that defining the term cost of credit consistently with Regulation Z would reduce the risk of confusion among consumers, industry, and regulators. It also reduces burden and avoids undue complexities, especially now that the Bureau is not finalizing the underwriting criteria that were proposed for covered longer-term loans at this time. For these reasons, the Bureau is finalizing the definition of cost of credit in a manner consistent with the discussion above, as renumbered, and with some minor additional wording revisions from the proposed rule for clarity and consistency. The proposed commentary associated with the term total cost of credit is no longer relevant and has been omitted from the final rule.

2(a)(7) Covered Longer-Term Balloon-Payment Loan

Proposed § 1041.2(a)(7) would have defined a covered longer-term balloon-payment loan as a covered longer-term loan described in proposed § 1041.3(b)(2)—as further specified in the next definition below—where the consumer is required to repay the loan in a single payment or through at least one payment that is more than twice as large as any other payment(s) under the loan. Proposed § 1041.9(b)(2) contained certain rules that lenders would have to follow when determining whether a consumer has the ability to repay a covered longer-term balloon-payment loan. Moreover, some of the restrictions imposed in proposed § 1041.10 would apply to covered longer-term balloon-payment loans in certain situations.

The term covered longer-term balloon-payment loan would include loans that are repayable in a single payment notwithstanding the fact that a loan with a “balloon” payment is often understood in other contexts to mean a loan repayable in multiple payments with one payment substantially larger than the other payments. In the proposal, the Bureau found as a preliminary matter that both structures pose similar risks to consumers, and proposed to treat both types of loans the same way for the purposes of proposed §§ 1041.9 and 1041.10. Accordingly, the Bureau proposed to use a single defined term for both loan types to improve the proposal's readability.

Apart from including single-payment loans within the definition of covered longer-term balloon-payment loans, the proposed term substantially tracked the definition of balloon payment contained in Regulation Z § 1026.32(d)(1), with one additional modification. The Regulation Z definition requires the larger loan payment to be compared to other regular periodic payments, whereas proposed § 1041.2(a)(7) required the larger loan payment to be compared to any other payment(s) under the loan, regardless of whether the payment is a regular periodic payment. Proposed comments 2(a)(7)-2 and 2(a)(7)-3 explained that payment in this context means a payment of principal or interest, and excludes certain charges such as late fees and payments that are accelerated upon the consumer's default. Proposed comment 2(a)(7)-1 would have specified that a Start Printed Page 54528loan described in proposed § 1041.3(b)(2) is considered to be a covered longer-term balloon-payment loan if the consumer must repay the entire amount of the loan in a single payment.

A coalition of consumer advocacy groups commented that this proposed definition is under-inclusive because it fails to include other loans that create risk that consumers will need to re-borrow because larger payments inflict payment shock on the borrowers. The commenter suggested that a more appropriate definition would be the one found in the North Carolina Retail Installment Sales Act, which defines a balloon payment as a payment that is more than 10 percent greater than other payments, except for the final payment, which is a balloon payment if it is more than 25 percent greater than other payments. In light of this comparison, the commenter recommended that any payment that is 10 percent greater than any other payment should be considered a balloon payment.

The Bureau recognizes these concerns, but notes that the proposed definition is generally consistent with how balloon-payment loans are defined and treated under Regulation Z, and therefore believes that adopting that definition for purposes of this rule would promote consistency and reduce the risk of confusion among consumers, industry, and regulators. The Bureau will be alert to the risk that smaller irregular payments that are not as large as twice the amount of the other payments could still cause expense shock for some consumers and lead to the kinds of problems addressed here, and thus could trigger a finding of unfairness or abusiveness in particular circumstances. In addition, the Bureau has experience with the rules adopted to implement the Military Lending Act, where loan products and lending practices adopted by some lenders in this industry evolved to circumvent the provisions of those rules. In particular, as noted in the proposal, lenders began offering payday loans greater than 91 days in duration and vehicle title loans greater than 181 days in duration, along with open-end products, in a direct response intended to evade the MLA rules—a development that prompted further Congressional and regulatory intervention. If problems begin to appear in this market from practices that are intended to circumvent the provisions of this rule, the Bureau and other regulators would be able to address any unfair or abusive practices with respect to such loan products through supervision or enforcement authority, or by amending this rule to broaden the definition.

Some industry commenters contended that the Bureau's concerns about re-borrowing for covered longer-term loans were most applicable to loans with balloon-payment structures, and they therefore argued that any ability-to-repay restrictions and underwriting criteria should be limited to longer-term balloon-payment loans. The Bureau agrees that many of its concerns about covered longer-term balloon-payment loans are similar to its concerns about covered short-term loans. Yet the Bureau also has considerable concerns about certain lending practices with respect to other covered longer-term loans, and will continue to scrutinize those practices under its supervision and enforcement authority and in a future rulemaking. At this time, however, as described more fully below in the section on Market Concerns—Underwriting, the Bureau has observed longer-term loans involving balloon payments where the lender does not reasonably assess the borrower's ability to repay before making the loan, and in those circumstances it has observed many of the same types of consumer harms that it has observed when lenders fail to reasonably assess the borrower's ability to repay before making covered short-term loans.

As noted in part I, for a number of reasons the Bureau has decided not to address the underwriting of all covered longer-term loans at this time. Nonetheless, as just mentioned and as discussed more fully below in Market Concerns—Underwriting, the Bureau is concerned that if subpart B is not applied to covered longer-term balloon-payment loans, then lenders would simply extend the terms of their current short-term products beyond 45 days, without changing the payment structures of those loans or their current inadequate underwriting practices, as a way to circumvent the underwriting criteria for covered short-term loans. As stated above, the balloon-payment structure of these loans tend to pose very similar risks and harms to consumers as for covered short-term loans, including likely poses similar forecasting problems for consumers in repaying such loans. Therefore, in § 1041.5 of the final rule, the specific underwriting criteria that apply to covered short-term loans are made applicable to covered longer-term balloon-payment loans also. The Bureau has also modified the definition of covered longer-term balloon-payment loan so that it applies to all loans with the payment structures described in the proposal. This represents an expansion in scope as compared to the proposal, as longer-term balloon-payment loans are now being covered without regard to the cost of credit or whether the lender has taken a leveraged payment mechanism in connection with the loan. In the proposal, the Bureau specifically sought comment on this potential modification, and the reasons for it are set out more extensively below in Market Concerns—Underwriting. And along with other covered longer-term loans, these particular loans remain covered by the sections of the final rule on payments as well.

In light of the decision to treat covered longer-term balloon-payment loans differently from other covered longer-term loans, the Bureau decided to shift the primary description of the requirements for covered longer-term balloon-payment loans to § 1041.3(b)(2). Accordingly, the language of § 1041.2(a)(7) of the final rule has been revised to mirror the language of § 1041.2(a)(8) and (10), which simply cross-reference the descriptions of the various types of covered loans specified in proposed § 1041.3(b). As a housekeeping matter, therefore, the substantive definition for longer-term balloon-payment loans is now omitted from this definition and is addressed instead in a comprehensive manner in § 1041.3(b)(2) of this final rule, where it has been expanded to address in more detail various loan structures that constitute covered longer-term balloon-payment loans. For the same reason, proposed comments 2(a)(7)-1 to 2(a)(7)-3 are omitted from the final rule and those matters are addressed in comments 3(b)(2)-1 to 3(b)(2)-4 of the final rule, as discussed below.

The term covered longer-term balloon-payment loan is therefore defined in the final rule as a loan described in § 1041.3(b)(2).

2(a)(8) Covered Longer-Term Loan

Proposed § 1041.2(a)(8) would have defined a covered longer-term loan to be a loan described in proposed § 1041.3(b)(2). That proposed section, in turn, described a covered loan as one made to a consumer primarily for personal, family, or household purposes that is not subject to any exclusions or exemptions, and which can be either: (1) Closed-end credit that does not provide for multiple advances to consumers, where the consumer is not required to repay substantially the entire amount due under the loan within 45 days of consummation; or (2) all other loans (whether open-end credit or closed-end credit), where the consumer is not required to repay Start Printed Page 54529substantially the entire amount of the advance within 45 days of the advance under the loan and, in either case, two other conditions are satisfied—the total cost of credit for the loan exceeds an annual rate of 36 percent, as measured at specified times; and the lender or service provider obtains a leveraged payment mechanism, including but not limited to vehicle security, at specified times.

Some restrictions in proposed part 1041 would have applied only to covered longer-term loans described in proposed § 1041.3(b)(2). For example, proposed § 1041.9 would have prescribed the ability-to-repay determination that lenders are required to perform when making covered longer-term loans. Proposed § 1041.10 would have imposed limitations on lenders making covered longer-term loans to consumers in certain circumstances that may indicate the consumer lacks the ability to repay. The Bureau proposed to use a defined term for the loans described in proposed § 1041.3(b)(2) for clarity.

The Bureau received many comments on this definition that focused primarily on whether the definition was appropriate for purposes of the proposed underwriting requirements or for inclusion in the rulemaking generally, rather than with regard to the payment interventions in particular. A law firm representing a traditional installment lending client commented that the definition of covered longer-term loan in the proposed rule would include traditional installment loans to a greater extent than the Bureau anticipated, with a correspondingly larger impact on credit availability as installment lenders would be forced to replace their proven underwriting techniques with burdensome and untried approaches. Others contended that the Bureau had presented no evidence indicating that the practices associated with traditional installment loans are unfair or abusive.

Several commenters noted that a number of traditional installment loan products may exceed a total cost of credit of 36 percent, and some may even exceed a 36 percent annual percentage rate under TILA as well. A trade association said that such a stringent all-in annual percentage rate could encompass many bank loan products. More broadly, some commenters criticized the use of any form of interest rate threshold to determine the legal status of any loans as potentially violating the prohibition in section 1027(o) of the Dodd-Frank Act against imposing usury limits on extensions of consumer credit.

Many commenters offered their views on the prong of the definition that focused on the taking of a leveraged payment mechanism or vehicle security, again often in the context of application of the underwriting requirements rather than the payment requirements. Those concerns have largely been addressed or mooted by the Bureau's decisions to apply only the payment requirements to covered longer-term loans and to narrow the definition of such loans to focus only on those types of leveraged payment mechanisms that involve the ability to pull money from consumers' accounts, rather than vehicle security. Comments focusing on that narrower definition of leveraged payment mechanism are addressed in more depth in connection with § 1041.3(c) below.

Therefore, in light of these comments and the considerations discussed above and in connection with § 1041.3(b)(3) below, the Bureau is finalizing the definition of covered longer-term loan in § 1041.2(a)(8) as discussed, with the cross-reference to proposed § 1041.3(b)(2) now edited and renumbered as § 1041.3(b)(3). As for the latter section now referenced in this definition, it too has been edited to clarify that covered longer-term loans no longer encompass covered longer-term balloon-payment loans, which are now treated separately, as the former are no longer subject to specific underwriting criteria whereas the latter are subject to the same specific underwriting criteria as covered short-term loans, which are set out in § 1041.5 of the final rule.

The term covered longer-term loan is therefore defined in the final rule, as described in § 1041.3(b)(3), as one made to a consumer primarily for personal, family, or household purposes that is not subject to any exclusions or exemptions, and which can be neither a covered short-term loan nor a covered longer-term balloon-payment loan—and thus constitutes a covered longer-term loan without a balloon-payment structure—and which meets both of the following conditions: The cost of credit for the loan exceeds a rate of 36 percent per annum; and the lender or service provider obtains a leveraged payment mechanism as defined in § 1041.3(c) of the final rule.

The details of that description, and how it varies from the original proposed description of a covered longer-term loan, are provided and explained more fully in the section-by-section analysis of § 1041.3(b)(3) of the final rule.

2(a)(9) Covered Person

The Bureau has decided to include in the final rule a definition of the term covered person, which the final rule defines by cross-referencing the definition of that same term in the Dodd-Frank Act, 12 U.S.C. 5481(6). In general, the Dodd-Frank Act defines covered person as any person that engages in offering or providing a consumer financial product or service and any affiliate of such person if the affiliate acts as a service provider to such person. The Bureau concludes that defining the term covered person consistently with the Dodd-Frank Act is a mere clarification that reduces the risk of confusion among consumers, industry, and regulators, since this term is used throughout the final rule. The Bureau therefore is including this definition in the final rule as § 1041.2(a)(9).

2(a)(10) Covered Short-Term Loan

Proposed § 1041.2(a)(6) would have defined a covered short-term loan to be a loan described in proposed § 1041.3(b)(1). That proposed section, in turn, described a covered loan as one made to a consumer primarily for personal, family, or household purposes that is not subject to any exclusions or exemptions, and which can be either: Closed-end credit that does not provide for multiple advances to consumers, where the consumer is required to repay substantially the entire amount due under the loan within 45 days of consummation, or all other loans (whether open-end credit or closed-end credit), where the consumer is required to repay substantially the entire amount of the advance within 45 days of the advance under the loan. Some provisions in proposed part 1041 would apply only to covered short-term loans as described in proposed § 1041.3(b)(1). For example, proposed § 1041.5 would prescribe the ability-to-repay determination that lenders are required to perform when making covered short-term loans. Proposed § 1041.6 would impose limitations on lenders making sequential covered short-term loans to consumers. And proposed § 1041.16 would impose the payment provisions on covered short-term loans as well. The Bureau proposed to use a defined term for the loans described in § 1041.3(b)(1) for clarity.

Various commenters stated that this definition is extraordinarily broad and sweeps in many different types of short-term loans, and institutions and trade associations both argued for exempting the types of loans they or their members commonly make. For example, one credit union commenter argued that the Bureau should exclude loans with total cost of credit under 36 percent. Consumer advocates argued, to the contrary, that broad coverage under the Start Printed Page 54530proposed rule is necessary to capture the relevant market, which can differ legally and functionally from one State to another. The Bureau finds that covered short-term loans pose substantial risks and harms for consumers, as it has detailed more thoroughly below in Market Concerns—Underwriting and the section-by-section analysis for § 1041.4 of the final rule. At the same time, the Bureau is adopting various exclusions and exemptions from coverage under the rule in § 1041.3(d), (e), and (f) below, and has discussed commenters' requests for exclusions of various categories of loans and lenders in connection with those provisions. The Bureau has expanded the alternative loan exclusion, which now triggers off of cost of credit as defined under Regulation Z, and thus, it appears likely that the products of the credit union noted above are excluded. In light of the aggregate effect of this broad definition coupled with those exclusions and exemptions, the Bureau concludes that its definition of covered short-term loan is specific, yet necessarily broad in its coverage, in order to effectuate protections for consumers against practices that the Bureau has found to be unfair and abusive in the market for these loans. The Bureau is finalizing as proposed other than renumbering. Likewise, the provision referenced in this definition—proposed § 1041.3(b)(1)—is being finalized with only non-substantive language changes, though additional commentary on that provision has been added in the final rule and will be addressed below in the discussion of that portion of the rule.

2(a)(11) Credit

Proposed § 1041.2(a)(9) would have defined credit by cross-referencing the definition of credit in Regulation Z, 12 CFR part 1026. Regulation Z defines credit as the right to defer payment of debt or to incur debt and defer its payment. This term was used in numerous places throughout the proposal to refer generically to the types of consumer financial products that would be subject to the requirements of proposed part 1041. The Bureau stated that defining this term consistently with an existing regulation would reduce the risk of confusion among consumers, industry, and regulators. The Bureau also stated that the definition in Regulation Z is appropriately broad so as to capture the various types of transaction structures that implicate the concerns addressed by proposed part 1041. Proposed comment 2(a)(9) further made clear that institutions may rely on 12 CFR 1026.2(a)(14) and its related commentary in determining the meaning of credit.

One consumer group commented that the definition of credit did not include a definition of loan and that these commonly related terms should be clarified to avoid the potential for confusion—a point that is addressed in §§ 1041.2(a)(13) and 1041.3(a) of the final rule. The Bureau did not receive any other comments on this portion of the proposal and is finalizing this definition and the commentary as proposed.

2(a)(12) Electronic Fund Transfer

Proposed § 1041.2(a)(10) would have defined electronic fund transfer by cross-referencing the definition of that same term in Regulation E, 12 CFR part 1005. Proposed § 1041.3(c) would provide that a loan may be a covered longer-term loan if the lender or service provider obtains a leveraged payment mechanism, which can include the ability to withdraw payments from a consumer's account through an electronic fund transfer. Proposed § 1041.14 would impose limitations on how lenders use various payment methods, including electronic fund transfers. Proposed comment 2(a)(10)-1 also made clear that institutions may rely on 12 CFR 1005.3(b) and its related commentary in determining the meaning of electronic fund transfer. The Bureau stated that defining this term consistently with an existing regulation would reduce the risk of confusion among consumers, industry, and regulators. The Bureau did not receive any comments on this portion of the proposal and is finalizing this definition as renumbered and the commentary as proposed.

2(a)(13) Lender

Proposed § 1041.2(a)(11) would have defined lender as a person who regularly makes loans to consumers primarily for personal, family, or household purposes. This term was used throughout the proposal to refer to parties that are subject to the requirements of proposed part 1041. This proposed definition is broader than the general definition of creditor under Regulation Z in that, under this proposed definition, the credit that the lender extends need not be subject to a finance charge as that term is defined by Regulation Z, nor must it be payable by written agreement in more than four installments.

The Bureau proposed a broader definition than in Regulation Z for many of the same reasons that it proposed using the total cost of credit as a threshold for covering longer-term loans rather than the traditional definition of annual percentage rate as defined by Regulation Z, which was discussed in the analyses of §§ 1041.2(a)(11) and 1041.3(b)(2)(i) of the proposed rule. In both instances, the Bureau was concerned that lenders might otherwise shift their fee structures to fall outside of traditional Regulation Z concepts and thus outside the coverage of proposed part 1041. For example, the Bureau stated that some loans that otherwise would meet the requirements for coverage under proposed § 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 § 1041.3(b)(1) are repayable in a single payment, so those same lenders might also fall outside the Regulation Z trigger for loans payable in fewer than four installments. Thus, the Bureau proposed to use a definition that is broader than the one contained in Regulation Z to ensure that the provisions proposed in part 1041 would apply as intended.

The Bureau proposed to carry over from the Regulation Z definition of creditor the requirement that a person “regularly” makes loans to a consumer primarily for personal, family, or household purposes in order to be considered a lender under proposed part 1041. Proposed comment 2(a)(11)-1 explained that the test for determining whether a person regularly makes loans is the same as in Regulation Z, as explained in 12 CFR 1026.2(a)(17)(v), and depends on the overall number of loans made to a consumer for personal, family, or household purposes, not just covered loans. The Bureau stated in the proposal that it would be appropriate to exclude from the definition of lender those persons who make loans for personal, family, or household purposes on an infrequent basis so that persons who only occasionally make loans would not be subject to the requirements of proposed part 1041. Such persons could include charitable, religious, or other community institutions that make loans very infrequently or individuals who occasionally make loans to family members.

Consumer groups noted in commenting on the definition of lender that the proposed rule did not explicitly Start Printed Page 54531define what a loan is and urged the Bureau to include a definition of this term as well, as it is used frequently throughout the rule. They also commented that the definition of lender should be broadened to encompass service providers as well.

For the reasons explained above in the section-by-section analysis of § 1041.2(a)(6), with respect to the definition of the term cost of credit, the Bureau has now narrowed the coverage of longer-term loans by using a threshold that is based on finance charges under Regulation Z rather than the broader range of items included in the proposed definition of total cost of credit. At the same time, it has decided to maintain the broader definition of lender, which includes parties that extend credit even if it is not subject to a finance charge as defined in Regulation Z, nor payable by written agreement in more than four installments. With regard to covered short-term and longer-term balloon-payment loans, the Bureau has concluded that it is important to maintain broad coverage over such products, even if the companies that provide them may try to structure them so as to avoid qualifying as a “creditor” under Regulation Z. The reasons for revising the definition of cost of credit, again as explained further below, were driven in large part by the Bureau's decision not to address the underwriting of other covered longer-term loans in this rule at this time, given the benefits of alignment with Regulation Z and greater simplicity. The broader definition of lender remains germane, however, to the types of loans that are subject to the underwriting provisions of the final rule.

In addition, the Bureau does not find it necessary to supplement these definitions further by adding a new definition of loan in addition to the modified definitions of credit and lender. Instead, the Bureau is addressing the commenters' point by modifying the definition of lender in § 1041.2(a)(13) to refer to a person who regularly “extends credit” rather than making loans, and has revised § 1041.3(a) to refer to a lender who “extends credit by making covered loans.” The loans covered by the final rule are credit as defined in the rule and are made by lenders as defined in the rule. In addition, key subsets of the broader universe of loans—including covered short-term loans, covered longer-term loans, and covered longer-term balloon-payment loans—are also defined explicitly in the final rule. And these definitions are premised in turn on the explication of what is a covered loan in proposed § 1041.3(b). As for the relationship between the terms lender and service provider, the Bureau is satisfied that these relationships and their effects are addressed in a satisfactory manner by defining lender as set forth here and by including separate definitions of covered person and service provider in conformity to the Dodd-Frank Act, as discussed in § 1041.2(a)(9) and (18) of the final rule. The relationship between lender and service provider is discussed further below in the section-by-section analysis of § 1041.2(a)(18), which concerns the definition of service provider.

One other segment of commenters sought to be excluded or exempted from coverage under this rule, raising many of the same points that they had raised during Bureau outreach prior to release of the proposal.

As stated in the proposal, some stakeholders had suggested to the Bureau that the definition of lender should be narrowed so as to exempt financial institutions that predominantly make loans that would not be covered loans under the proposed rule. They stated that some financial institutions only make loans that would be covered loans as an accommodation to existing customers, and that providing such loans is such a small part of the overall business that it would not be practical for the institutions to develop the required procedures for making covered loans. The Bureau solicited comment on whether it should narrow the definition of lender based on the quantity of covered loans an entity offers, and, if so, how to define such a de minimis test. Similarly, during the comment period many commenters, including but not limited to smaller depository institutions, presented their views that this kind of accommodation lending is longstanding and widespread and so should not be subject to coverage under the rule.

At the same time, stakeholders had urged and the Bureau recognized at the time it issued the proposed rule that some newly formed companies are providing services that, in effect, allow consumers to draw on money they have earned but not yet been paid. Certain of these services do not require the consumer to pay any fees or finance charges, relying instead on voluntary “tips” to sustain the business, while others are compensated through electronic fund transfers from the consumer's account. Some current or future services may use other business models. The Bureau also noted the existence of some newly formed companies providing financial management services to low- and moderate-income consumers that include features to smooth income. The Bureau solicited comment on whether such entities should be considered lenders under the regulation.

During the public comment period, a coalition of consumer groups, some “fintech” firms, and others expressed concern about how the definition of lender would apply to new businesses that are creating services to consumers to access earned income for a fee—thereby jeopardizing certain promising innovations by making them subject to the constraining provisions of this rule—and others offered views on that set of issues as well. Commenters also offered their thoughts on other innovative income-smoothing and financial-management initiatives.

The Bureau has decided to address the issues raised by commenters that were seeking an exclusion or exemption from this rule not by altering the definition of lender but instead by fashioning specific exclusions and conditional exemptions as addressed below in § 1041.3(d), (e), and (f) of the final rule.

Therefore in light of the comments and responses, the Bureau is finalizing this definition as renumbered and the commentary as proposed, with the one modification—use of the phrase “extends credit”—as discussed above.

2(a)(14) Loan Sequence or Sequence

Proposed § 1041.2(a)(12) generally would have defined a loan sequence or sequence as a series of consecutive or concurrent covered short-term loans in which each of the loans (other than the first loan) is made while the consumer currently has an outstanding covered short-term loan or within 30 days thereafter. It would define both loan sequence and sequence the same way because the terms are used interchangeably in various places throughout the proposal. Furthermore, it also specified how to determine a given loan's place within a sequence (for example, whether a loan constitutes the first, second, or third loan in a sequence), which would implicate other provisions of the proposed rule.

The Bureau's rationale for proposing to define loan sequence in this manner was discussed in more detail in the section-by-section analysis of proposed §§ 1041.4 and 1041.6. The Bureau also sought comment on whether alternative definitions of loan sequence may better address its concerns about how a consumer's inability to repay a covered loan may cause the need for a successive covered loan.Start Printed Page 54532

Some consumer advocates commented that this definition would be clarified by including language from local ordinances or State laws that have the same effective meaning so as to avoid any confusion in compliance and enforcement. Consumer groups commented that the rule should treat a loan made within 60 days of another loan, rather than 30 days, as part of the same loan sequence in order to better effectuate its purpose of addressing the flipping of both short-term and longer-term loans and to include late fees as rollover fees. Some industry commenters argued for a shorter period.

The Bureau has considered a number of ways to specify and clarify the definition of loan sequences in order to minimize or avoid evasions of the final rule. Adopting local or State definitions would not appear to clarify the issues, as they are inconsistent from one jurisdiction to another. However, as discussed in greater detail below in Market Concerns—Underwriting and in §§ 1041.4 and 1041.5(d) of the final rule, the Bureau has decided to incorporate covered longer-term balloon-payment loans into this definition, reflecting concerns about the harms that can occur to consumers who take out a series of covered longer-term balloon-payment loans in quick succession as well as the Bureau's concerns about potential evasions of the underwriting criteria.

As discussed in the proposal, the Bureau also has considered various time frames for the definition of loan sequence, including 14 days as well as 30 days and 60 days, and decided in finalizing the rule to adhere to 30 days as a reasonable and appropriate frequency for use in this definition, to align with consumer expense cycles, which often involve recurring expenses that are typically a month in length. This is designed to account for the fact that where repaying a loan causes a shortfall, the consumer may seek to return during the same expense cycle to get funds to cover downstream expenses. In addition, a number of consumers receive income on a monthly basis. The various considerations involved in resolving these issues are discussed more fully in the section-by-section analysis of § 1041.5(d) of the final rule.

In light of the discussion above, the Bureau otherwise is finalizing this renumbered definition as modified. In addition, wherever the proposed definition had referred to a covered short-term loan, the definition in the final rule refers instead to a covered short-term loan or a covered longer-term balloon-payment loan—or, where pluralized, the definition in the final rule refers instead to covered short-term loans or covered longer-term balloon-payment loans, or a combination thereof.

2(a)(15) Motor Vehicle

In connection with proposing to subject certain longer-term loans with vehicle security to part 1041, in proposed § 1041.3(d) the Bureau would have defined vehicle security to refer to the term motor vehicle as defined in section 1029(f)(1) of the Dodd-Frank Act. That definition encompasses not only vehicles primarily used for on-road transportation, but also recreational boats, motor homes, and other categories. As described below, the Bureau has now decided to narrow the definition of covered-longer term loan to focus only on loans that meet a certain rate threshold and involve the taking of a leveraged payment mechanism as defined in § 1041.3(c) of the final rule, without regard to whether vehicle security is taken on the loan. However, the definitions of vehicle security and motor vehicle are still relevant to § 1041.6(b)(3), which prohibits lenders from making covered short-term loans under § 1041.6 if they take vehicle security in connection with such a loan, for the reasons explained in the section-by-section analysis of that provision.

Upon further consideration in light of this context and its experience from other related rulemakings, the Bureau has decided to narrow the definition of motor vehicle in the final rule to focus on any self-propelled vehicle primarily used for on-road transportation, but not including motor homes, recreational vehicles, golf carts, and motor scooters. Some commenters did suggest that vehicle title loans should encompass boats, motorcycles, and manufactured homes. Nonetheless, the Bureau has concluded that it is more appropriate to use a narrower definition because the term motor vehicle is germane to the vehicle title loans addressed in the final rule, which involve the prospect of repossession of the vehicle for failing to repay the loan. The impact to consumers from default or repossession likely operates differently for basic on-road transportation used to get to work or manage everyday affairs, thus creating different pressures to repay loans based on these kinds of vehicles as compared to loans based on other forms of transportation.

Moreover, from the Bureau's prior experience of writing rules with respect to vehicles, most notably in the Bureau's larger participant rule authorizing its supervision authority over certain entities in the market for auto loans, it is aware that treatment of this category of items requires clarification in light of what can be some difficult and unexpected boundary issues. The definition included here in § 1041.2(a)(15) of the final rule is thus similar to the language used in the Bureau's larger participant rule for the auto loan market,[430] which generally encompasses the kinds of vehicles—specifically cars and trucks and motorcycles—that consumers primarily use for on-road transportation rather than for housing or recreation. The Bureau also notes that it had proposed to exclude loans secured by manufactured homes under § 1041.3(e)(2), and has finalized that provision in § 1041.3(d)(2) as discussed below.

2(a)(16) Open-End Credit

Proposed § 1041.2(a)(14) would have defined open-end credit by cross-referencing the definition of that same term in Regulation Z, 12 CFR part 1026, but without regard to whether the credit is consumer credit, as that term is defined in Regulation Z § 1026.2(a)(12), is extended by a creditor, as that term is defined in Regulation Z § 1026.2(a)(17), or is extended to a consumer, as that term is defined in Regulation Z § 1026.2(a)(11). In general, Regulation Z § 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 § 1041.2(a)(9), was substituted for the term consumer credit in the Regulation Z definition of open-end credit; the term lender, as defined in proposed § 1041.2(a)(11), was substituted for the term creditor in the same Regulation Z definition; and the term consumer, as defined in proposed § 1041.2(a)(4), was substituted for the term consumer in the Regulation Z definition of open-end credit.

The term open-end credit was used in various parts of the proposal where the Bureau tailored requirements separately for closed-end and open-end credit in light of their different structures and durations. Most notably, proposed § 1041.2(a)(18) would require lenders to employ slightly different methods when Start Printed Page 54533calculating the total cost of credit of closed-end versus open-end loans. Proposed § 1041.16(c) also would require lenders to report whether a covered loan is a closed-end or open-end loan.

In the proposal, the Bureau stated that generally defining this term consistently across regulations would reduce the risk of confusion among consumers, industry, and regulators. With regard to the definition of consumer, however, the Bureau proposed that, for the reasons discussed in connection with proposed § 1041.2(a)(4), it would be more appropriate to incorporate the definition from the Dodd-Frank Act rather than the definition from Regulation Z, which is arguably narrower. Similarly, the Bureau indicated that it would be more appropriate to use the broader definition of lender contained in proposed § 1041.2(a)(11) than the Regulation Z definition of creditor.

One commenter recommended that the Bureau defer action on lines of credit entirely (not just overdraft lines of credit as would be excluded in proposed § 1041.3) and address these loan products in a future rulemaking. A number of commenters stated that the underwriting criteria for such products should be aligned with the provisions of the Credit CARD Act and the Bureau's rule on prepaid accounts, and raised questions about the timing calculations on line-of-credit payments.

In response, the Bureau continues to judge it to be important to address open-end lines of credit in this rule in order to achieve more comprehensive coverage, outside of those lines of credit that are excluded under final § 1041.3(d)(6) as discussed below. In response to many comments, including those urging closer alignment with other standards for assessing ability to repay under other statutory schemes, the Bureau has also modified the underwriting criteria in § 1041.5 of the final rule in a number of respects, as explained further below.

The Bureau is therefore finalizing § 1041.2(a)(16) largely as proposed, with one substantive clarification that credit products that otherwise meet the definition of open-end credit under Regulation Z should not be excluded from the definition of open-end credit under § 1041.2(a)(16) because they do not involve a finance charge. This change will assure that products are appropriately classified as open-end credit under part 1041, rather than as closed-end credit. The Bureau has also revised comment 2(a)(16)-1 to reflect this change and to streamline guidance clarifying that for the purposes of defining open-end credit under part 1041, the term credit, as defined in § 1041.2(a)(11), is substituted for the term consumer credit, as defined in 12 CFR 1026.2(a)(12); the term lender, as defined in § 1041.2(a)(13), is substituted for the term creditor, as defined in 12 CFR 1026.2(a)(17); and the term consumer, as defined in § 1041.2(a)(4), is substituted for the term consumer, as defined in 12 CFR 1026.2(a)(11).

For all the reasons discussed above, the Bureau is finalizing this definition and the commentary as renumbered and revised.

2(a)(17) Outstanding Loan

Proposed § 1041.2(a)(15) would have generally defined outstanding loan as a loan that the consumer is legally obligated to repay, except that a loan ceases to be outstanding if the consumer has not made any payments on the loan within the previous 180 days. Under this definition, a loan is an outstanding loan regardless of whether the loan is delinquent or subject to a repayment plan or other workout arrangement if the other elements of the definition are met. Under proposed § 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 §§ 1041.6 and 1041.7 would impose certain limitations on lenders making covered short-term loans within loan sequences, including a prohibition on making additional covered short-term loans for 30 days after the third loan in a sequence.

In the proposal, the Bureau stated that if the consumer has not made any payment on the loan for an extended period of time, it may be appropriate to stop considering the loan to be an outstanding loan for the purposes of various provisions of the proposed rule. Because outstanding loans are counted as major financial obligations for purposes of underwriting and because treating a loan as outstanding would trigger certain restrictions on further borrowing by the consumer under the proposed rule, the Bureau attempted to balance several considerations in crafting the proposed definition. One is whether it would be appropriate for very stale and effectively inactive debt to prevent the consumer from accessing credit, even if so much time has passed that it seems relatively unlikely that the new loan is a direct consequence of the unaffordability of the previous loan. Another is how to define such stale and inactive debt for purposes of any cut-off, and to account for the risk that collections might later be revived or that lenders would intentionally exploit a cut-off in an attempt to encourage new borrowing by consumers.

The Bureau proposed a 180-day threshold as striking an appropriate balance, and noted that this approach would generally align with the policy position taken by the Federal Financial Institutions Examination Council (FFIEC), which generally requires depository institutions to charge off open-end credit at 180 days of delinquency. Although that policy also requires that closed-end loans be charged off after 120 days, the Bureau found as a preliminary matter that a uniform 180-day rule for both closed-end and open-end loans may be more appropriate, given the underlying policy considerations discussed above, as well as for simplicity.

Proposed comment 2(a)(15)-1 would clarify that the status of a loan that otherwise meets the definition of outstanding loan does not change based on whether the consumer is required to pay a lender, affiliate, or service provider or whether the lender sells the loan or servicing rights to a third party. Proposed comment 2(a)(15)-2 would clarify that a loan ceases to be an outstanding loan as of the earliest of the date the consumer repays the loan in full, the date the consumer is released from the legal obligation to repay, the date the loan is otherwise legally discharged, or the date that is 180 days following the last payment that the consumer made on the loan. Additionally, proposed comment 2(a)(15)-2 would explain that any payment the consumer makes restarts the 180-day period, regardless of whether the payment is a scheduled payment or in a scheduled amount. Proposed comment 2(a)(15)-2 would further clarify that once a loan is no longer an outstanding loan, subsequent events cannot make the loan an outstanding loan. The Bureau proposed this one-way valve to ease compliance burden on lenders and to reduce the risk of consumer confusion.

One consumer group commented that, with respect to loans that could include more than one payment, it would be helpful for the definition to refer to an installment in order to ensure its alignment with terms used in State and local laws. Other consumer groups suggested various other changes to clarify details of timing addressed in this definition, as well as urging that the 180-day period should be changed to 365 days so that more loans would be considered as outstanding. Several commented that the definition should be changed so that the 180-day period should run from either the date of the Start Printed Page 54534last payment by the consumer or from the date of the last debt collection activity by the collector, in order to more accurately determine what is truly stale debt and to broaden the scope of what loans are outstanding to ensure that older loans are not being used by lenders to encourage consumers to re-borrow. To support compliance under the modified definition, they also urged that lenders be required to report collection activity to the registered information systems.

The Bureau has concluded that language in final comment 2(a)(17)-2 emphasizing that any payment restarts the 180-day clock is sufficient to address the commenter's concern without having to incorporate new terminology to align the term with its use in State and local laws. With respect to the comments about the time frame, and 365 days in particular, the Bureau was not persuaded of the reasoning or need to broaden the scope of outstanding loans to this extent. The Bureau's proposed 180-day period was already aligned to the longer end of the FFIEC treatment of these issues, by adopting the 180 days that the FFIEC has applied to open-end credit rather than the 120 days that it has applied to closed-end credit. In addition, the Bureau's experience with these markets suggests that these types of lenders typically write off their debts even sooner than 180 days.

The Bureau concludes that the various suggested changes that were offered to tighten the proposed standard are not necessary to be adopted at this time, though such matters could be revisited over time as supervision and enforcement of the final rule proceed in the future. In particular, the comment that lenders should be required to report collection activity to the registered information systems would have broadened the requirements of the rule and the burdens imposed in significant and unexpected ways that did not seem warranted at this juncture.

The Bureau also carefully considered the comments made about extending the period of an outstanding loan, which suggested that it should run not just 180 days from the date of the last payment made on the loan but also 180 days from the date of the last debt collection activity on the loan. The Bureau declines to adopt this proposed change, for several reasons. It would add a great deal of complexity that would encumber the rule, not only in terms of ensuring compliance but in terms of carrying out supervision and enforcement responsibilities as well. For example, this modification would appear not to be operational unless debt collection activities were reported to the registered information systems, which as noted above would add significant and unexpected burdens to the existing framework. Moreover, timing the cooling-off period to any debt collection activity could greatly extend how long a consumer would have to wait to re-borrow after walking away from a debt, thereby disrupting the balance the Bureau was seeking to strike in the proposal between these competing objectives. The Bureau also judged that if the comment was aimed at addressing and discouraging certain types of debt collection activities, it would be better addressed in the rulemaking process that the Bureau has initiated separately to govern debt collection issues. Finally, this suggestion seems inconsistent with the Bureau's experience, which indicates that lenders in this market typically cease their own collection efforts within 180 days.

For these reasons, the Bureau is finalizing this definition as renumbered and the commentary as proposed with minor changes for clarity. The Bureau has also added a sentence to comment 2(a)(17)-2 to expressly state that a loan is outstanding for 180 days after consummation if the consumer does not make any payments on it, the consumer is not otherwise released from the legal obligation to pay, and the loan is not otherwise legally discharged.

2(a)(18) Service Provider

Proposed § 1041.2(a)(17) would have defined service provider by cross-referencing the definition of that same term in the Dodd-Frank Act, 12 U.S.C. 5481(26). In general, the Dodd-Frank Act defines service provider as any person that provides a material service to a covered person in connection with the offering or provision of a consumer financial product or service, including one that participates in designing, operating, or maintaining the consumer financial product or service or one that processes transactions relating to the consumer financial product or service. Moreover, the Act specifies that the Bureau's authority to identify and prevent unfair, deceptive, or abusive acts or practices through its rulemaking authority applies not only to covered persons, but also to service providers.[431] Proposed § 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 § 1041.3(c) and (d) were designed to reflect the fact that in some States, covered loans are extended to consumers through a multi-party transaction. In these transactions, one entity will fund the loan, while a separate entity, often called a credit access business or a credit services organization, will interact directly with, and obtain a fee or fees from, the consumer. This separate entity will often service the loan and guarantee the loan's performance to the party funding the loan. The credit access business or credit services organization, and not the party funding the loan, will in many cases obtain the leveraged payment mechanism or vehicle security. In these cases, the credit access business or credit services organization is performing the responsibilities normally performed by a party funding the loan in jurisdictions where this particular business arrangement is not used. Despite the formal division of functions between the nominal lender and the credit access business, the loans produced by such arrangement are functionally the same as those covered loans issued by a single entity and appear to present the same set of consumer protection concerns. Accordingly, the Bureau stated in the proposal that it is appropriate to bring loans made under these arrangements within the scope of coverage of proposed part 1041. Proposed comment 2(a)(17)-1 further made clear that persons who provide a material service to lenders in connection with the lenders' offering or provision of covered loans during the course of obtaining for consumers, or assisting consumers in obtaining, loans from lenders are service providers, subject to the specific limitations in section 1002(26) of the Dodd-Frank Act.

The Bureau stated that defining the term service provider consistently with the Dodd-Frank Act reduces the risk of confusion among consumers, industry, and regulators. Consumer groups commented that the rule should apply to service providers, including credit service organizations and their affiliates, whenever it applies to lenders and their affiliates. The Bureau concludes that the definitions of and references to lender and service provider, including incorporation of the statutory definitions of covered person and service provider into the regulatory definitions, throughout the regulation text and commentary are sufficiently well articulated to make these points clear as to the applicability and scope of coverage of part 1041. Both section 1031(a) and section 1036(a) of the Dodd-Frank Act specify that a service provider Start Printed Page 54535can be held liable on the same terms as a covered person—which includes a lender as defined by § 1041.2(13)—to the extent that a service provider engages in conduct that violates this rule on behalf of a lender, or entities such as credit access businesses and credit service organizations that provide a material service to a lender in making these kinds of covered loans.[432] The Bureau did not receive any other comments on this portion of the proposal and is finalizing this definition and the commentary as just discussed and as renumbered.

2(a)(19) Vehicle Security

The Bureau has decided to make “vehicle security” a defined term, incorporating language that described the practice of taking vehicle security from proposed § 1041.3(d). Its role is now more limited, however, due to other changes in the rule, which no longer governs the underwriting of covered longer-term loans (other than balloon-payment loans), which instead are now subject only to the payment provisions. Nonetheless, the Bureau is preserving the language explaining vehicle security and moving it here for purposes of defining the exclusion of vehicle title loans from coverage under § 1041.6 of the final rule, which provides for conditionally exempted loans.

As to the definition itself, the proposal would have stated that for purposes of defining a covered loan, a lender or service provider obtains vehicle security if it obtains an interest in a consumer's motor vehicle (as defined in section 1029(f)(1) of the Dodd-Frank Act) as a condition of the credit, regardless of how the transaction is characterized by State law, including: (1) Any security interest in the motor vehicle, motor vehicle title, or motor vehicle registration whether or not the security interest is perfected or recorded; or (2) a pawn transaction in which the consumer's motor vehicle is the pledged good and the consumer retains use of the motor vehicle during the period of the pawn agreement. Under the proposal, the lender or service provider would obtain vehicle security if the consumer is required, under the terms of an agreement with the lender or service provider, to grant an interest in the consumer's vehicle to the lender in the event that the consumer does not repay the loan.

As noted in the proposal, because of exclusions contained in proposed § 1041.3(e)(1) and (5), the term vehicle security would have excluded loans made solely and expressly for the purpose of financing a consumer's initial purchase of a motor vehicle in which the lender takes a security interest as a condition of the credit, as well as non-recourse pawn loans in which the lender has sole physical possession and use of the property for the entire term of the loan. Proposed comment 3(d)(1)-1 also would have clarified that mechanic liens and other situations in which a party obtains a security interest in a consumer's motor vehicle for a reason that is unrelated to an extension of credit do not trigger coverage.

The Bureau proposed that the security interest would not need to be perfected or recorded in order to trigger coverage under proposed § 1041.3(d)(1). The Bureau reasoned that consumers may not be aware that the security interest is not perfected or recorded, nor would it matter in many cases. Perfection or recordation protects the lender's interest in the vehicle against claims asserted by other creditors, but does not necessarily affect whether the consumer's interest in the vehicle is at risk if the consumer does not have the ability to repay the loan. Even if the lender or service provider does not perfect or record its security interest, the security interest can still change a lender's incentives to determine the consumer's ability to repay the loan and exacerbate the harms the consumer experiences if the consumer does not have the ability to repay the loan.

The Bureau received many comments on the prong of the definition that focused on the taking of a leveraged payment mechanism or vehicle security, again often in the context of application of the underwriting requirements rather than the payment requirements. Those concerns have largely been addressed or mooted by the Bureau's decisions to apply only the payment requirements to covered longer-term loans and to narrow the definition of such loans to focus only on those types of leveraged payment mechanisms that involve the ability to pull money from consumers' accounts, rather than vehicle security. Comments focusing on that narrower definition of leveraged payment mechanism are addressed in more depth in connection with § 1041.3(c) below.

Importantly, the term vehicle security as defined in proposed § 1041.3(d) was further limited in its effect by the provisions of proposed § 1041.3(b)(3)(ii), which had stated that a lender or service provider did not become subject to the proposed underwriting criteria merely by obtaining vehicle security at any time, but instead had to obtain vehicle security before, at the same time as, or within 72 hours after the consumer receives the entire amount of funds that the consumer is entitled to receive under the loan. Many commenters criticized the 72-hour requirement as undermining consumer protections and fostering evasion of the rule. Because of various changes that have occurred in revising the coverage of the underwriting criteria and reordering certain provisions in the final rule, this limitation is no longer necessary to effectuate any of those purposes of the rule. The definition of vehicle security remains relevant to the provisions of § 1041.6 of the final rule, but it is unclear how a 72-hour limitation is germane to establishing the scope of coverage under that section, and so it has been eliminated from the final rule.

One consumer group suggested that a vehicle title loan should be covered under the rule regardless of whether the title was a condition of the loan. The Bureau does not find it necessary to alter the definition in this manner in order to accomplish the purpose of covering vehicle title loans, particularly in light of the language in comment 2(a)(19)-1, which indicates that vehicle security will attach to the vehicle for reasons that are related to the extension of credit.

With respect to comments on the details of the definition of vehicle security, one commenter had suggested that the final rule should make clear that the proposed restrictions on this form of security interest do not interfere with or prohibit any statutory liens that have been authorized by Congress. Because nothing in the language of the final rule purports to create any such interference or prohibition, the Bureau does not find it necessary to modify its definition of vehicle security in this regard. Other commenters made various points about the meaning and coverage of the term motor vehicle in the Bureau's treatment of the term vehicle security. Those comments are addressed separately in the discussion of the definition of motor vehicle in § 1041.2(a)(15) of the final rule.

The Bureau has moved the discussion of vehicle security from proposed § 1041.3(d) to § 1041.2(a)(19) in the Start Printed Page 54536general definitions section, and has narrowed the definition of motor vehicle contained in section 1029(f)(1) of the Dodd-Frank Act, replacing it with the somewhat narrower definition of motor vehicle contained in § 1041.2(a)(15) of the final rule as described above. The definition of vehicle security still includes the other elements of the proposal, as slightly rewritten for clarity to focus on this term itself rather than on the actions of a lender or service provider.

Accordingly, the term vehicle security is defined in the final rule as an interest in a consumer's motor vehicle obtained by the lender or service provider as a condition of the credit, regardless of how the transaction is characterized by State law, including: (1) Any security interest in the motor vehicle, motor vehicle title, or motor vehicle registration whether or not the security interest is perfected or recorded; or (2) a pawn transaction in which the consumer's motor vehicle is the pledged good and the consumer retains use of the motor vehicle during the period of the pawn agreement. This definition also carries with it proposed comment 3(d)(1)-1, now finalized as comment 2(a)(19)-1, which explains that an interest in a consumer's motor vehicle is a condition of credit only to the extent the security interest is obtained in connection with the credit, and not for a reason that is unrelated to an extension of credit, such as the attachment of a mechanic's lien. This comment is finalized with the language unchanged.[433]

2(b) Rule of Construction

After reserving this provision in the proposal, the Bureau has determined to add a rule of construction for purposes of part 1041, which states that where definitions are incorporated from other statutes or regulations, the terms have the meaning and incorporate the embedded definitions, appendices, and commentary from those other laws except to the extent that part 1041 provides a different definition for a parallel term. The Bureau had included versions of this basic principle in the regulation text and commentary for certain individual provisions of the proposed rule, but has concluded that it would be helpful to memorialize it as a general rule of construction. Accordingly, the Bureau moved certain proposed commentary for individual definitions to comment 2(b)-1 of the final rule in order to provide examples of the rule of construction, and streamlined certain other proposed commentary as described above.

Section 1041.3 Scope of Coverage; Exclusions; Exemptions

The primary purpose of proposed part 1041 was to identify and adopt rules to prevent unfair and abusive practices as defined in section 1031 of the Dodd-Frank Act in connection with certain consumer credit transactions. Based upon its research, outreach, and analysis of available data, the Bureau proposed to identify such practices with respect to two categories of loans to which it proposed to apply this rule: (1) Consumer loans with a duration of 45 days or less; and (2) consumer loans with a duration of more than 45 days that have a total cost of credit above a certain threshold and that are either repayable directly from the consumer's income stream, as set forth in proposed § 1041.3(c), or are secured by the consumer's motor vehicle, as set forth in proposed § 1041.3(d).

In the proposal, the Bureau tentatively concluded that it is an unfair and abusive practice for a lender to make a covered short-term loan without determining that the consumer has the ability to repay the loan. The Bureau likewise tentatively concluded that it is an unfair and abusive practice for a lender to make a covered longer-term loan without determining the consumer's ability to repay the loan. Accordingly, the Bureau proposed to apply the protections of proposed part 1041 to both categories of loans.

In particular, proposed §§ 1041.5 and 1041.9 would have required that, before making a covered loan, a lender must determine that the consumer has the ability to repay the loan. Proposed §§ 1041.6 and 1041.10 would have imposed certain limitations on repeat borrowing, depending on the type of covered loan. Proposed §§ 1041.7, 1041.11, and 1041.12 would have provided for alternative requirements that would allow lenders to make covered loans, in certain limited situations, without first determining that the consumer has the ability to repay the loan. Proposed § 1041.14 would have imposed consumer protections related to repeated lender-initiated attempts to withdraw payments from consumers' accounts in connection with covered loans. Proposed § 1041.15 would have required lenders to provide notices to consumers before attempting to withdraw payments on covered loans from consumers' accounts. Proposed §§ 1041.16 and 1041.17 would have required lenders to check and report borrowing history and loan information to certain information systems with respect to most covered loans. Proposed § 1041.18 would have required lenders to keep certain records on the covered loans that they make. And proposed § 1041.19 would have prohibited actions taken to evade the requirements of proposed part 1041.

The Bureau did not propose to extend coverage to several other types of loans and specifically proposed excluding, to the extent they would otherwise be covered under proposed § 1041.3, certain purchase money security interest loans, certain loans secured by real estate, credit cards, student loans, non-recourse pawn loans, and overdraft services and lines of credit. The Bureau likewise proposed not to cover loans that have a term of longer than 45 days if they are not secured by a leveraged payment mechanism or vehicle security or if they have a total cost of credit below a rate of 36 percent per annum.

By finalizing application of the underwriting requirements with respect to certain categories of loans as described above, and excluding certain other types of loans from the reach of the rule, the Bureau does not mean to signal any definitive conclusion that it could not be an unfair or abusive practice to make any other types of loans, such as loans that are not covered by part 1041, without reasonably assessing a consumer's ability to repay. Moreover, this rule does not supersede or limit any protections imposed by other laws, such as the Military Lending Act and implementing regulations. The coverage limits in the rule simply reflect the fact that these are the types of loans the Bureau has studied in depth to date and has chosen to address within the scope of the proposal. Indeed, the Bureau issued, concurrently with the proposal, a Request for Information (RFI), which solicited information and evidence to help assess whether there are other categories of loans for which lenders do not determine the consumer's ability to repay that may pose risks to consumers. The Bureau also sought comment in response to the RFI as to whether other lender practices associated with covered loans may warrant further action by the Bureau.

The Bureau thus is reinforcing the point that all covered persons within the meaning of the Dodd-Frank Act have Start Printed Page 54537a legal duty not to engage in unfair, deceptive, or abusive acts or practices. The Bureau is explicitly authorized to consider, on a case-by-case basis, through its supervisory or enforcement activities, whether practices akin to those addressed here are unfair, deceptive, or abusive in connection with loans not covered by the rule. The Bureau also is emphasizing that it may decide to engage in future rulemaking with respect to other types of loans or other types of practices associated with covered loans at a later date.

3(a) General

In proposed § 1041.3(a), the Bureau provided that proposed part 1041 would apply to a lender that makes covered loans. The Bureau received no specific comments on proposed § 1041.3(a), and is finalizing this provision as proposed except that it has adopted language as discussed above in connection with the definition of lender in § 1041.2(a)(13) to refer to a person who “extends credit by making covered loans.”

3(b) Covered Loan

In the proposal, the Bureau noted that section 1031(b) of the Dodd-Frank Act empowers it to prescribe rules to identify and prevent unfair, deceptive, or abusive acts or practices associated with consumer financial products or services. Section 1002(5) of the Dodd-Frank Act defines such products or services as those offered or provided for use by consumers primarily for personal, family, or household purposes or, in certain circumstances, those delivered, offered, or provided in connection with another such consumer financial product or service. Proposed § 1041.3(b) would have provided, generally, that a covered loan means closed-end or open-end credit that is extended to a consumer primarily for personal, family, or household purposes that is not excluded by § 1041.3(e).

By proposing to apply the rule only to loans that are extended to consumers primarily for personal, family, or household purposes, the Bureau intended it not to apply to loans that are made primarily for a business, commercial, or agricultural purpose. But the proposal explained that a lender would violate proposed part 1041 if it extended a loan ostensibly for a business purpose and failed to comply with the requirements of proposed part 1041 for a loan that is, in fact, primarily for personal, family, or household purposes. In this regard, the Bureau referenced the section-by-section analysis of proposed § 1041.19, which provided further discussion of evasion issues.

Proposed comment 3(b)-1 would have clarified that whether a loan is covered is generally based on the loan terms at the time of consummation. Proposed comment 3(b)-2 would have clarified that a loan could be a covered loan regardless of whether it is structured as open-end or closed-end credit. Proposed comment 3(b)-3 would have explained that the test for determining the primary purpose of a loan is the same as the test prescribed by Regulation Z § 1026.3(a) and clarified by the related commentary in supplement I to part 1026. The Bureau stated that lenders are already familiar with the Regulation Z test and that it would be appropriate to apply that same test here to maintain consistency in interpretation across credit markets, though the Bureau also requested comment on whether more tailored guidance would be useful here as the related commentary in supplement I to part 1026, on which lenders would be permitted to rely in interpreting proposed § 1041.3(b), did not discuss particular situations that may arise in the markets that would be covered by proposed part 1041.

One commenter noted that while business loans are outside the scope of the rule, many small business owners use their personal vehicles to secure title loans for their businesses, and asserted that it will be difficult for lenders to differentiate the purposes of a loan in such instances. Another commenter suggested that provisions should be added to ensure that loans are made for personal use only. More generally, one commenter stated that the breadth of the definition of covered loan would enhance the burden that the proposed rule would impose on credit unions.

In response, the Bureau notes that its experience with these markets has made it aware that the distinction between business and household purposes is necessarily fact-specific, yet the basic distinction is embedded as a jurisdictional matter in many consumer financial laws and has long been regarded as a sensible line to draw. Further, the concern about the breadth of this definition as affecting credit unions is addressed substantially by the measures adopted in the final rule to reduce burdens for lenders, along with the exclusions and exemptions that have been adopted, including the conditional exemption for alternative loans.

The Bureau is finalizing § 1041.3(b) as proposed. The commentary is finalized as proposed, except proposed comment 3(b)-1, which the Bureau is not finalizing. That comment had proposed that whether a loan is covered is generally determined based on the loan terms at the time of consummation. As noted below, final comment 3(b)(3)-3 makes clear that a loan may become a covered longer-term loan at any such time as both requirements of § 1041.3(b)(3)(i) and (ii) are met, even if they were not met when the loan was initially made.

3(b)(1)

Proposed § 1041.3(b)(1) would have brought within the scope of proposed part 1041 those loans in which the consumer is required to repay substantially the entire amount due under the loan within 45 days of either consummation or the advance of loan proceeds. Loans of this type, as they exist in the market today, typically take the form of single-payment loans, including payday loans, vehicle title loans, and deposit advance products. However, coverage under proposed § 1041.3(b)(1) was not limited to single-payment products, but rather included any single-advance loan with a term of 45 days or less and any multi-advance loan where repayment is required within 45 days of a credit draw.[434] Under proposed § 1041.2(a)(6), this type of covered loan was defined as a covered short-term loan.

Specifically, proposed § 1041.3(b)(1) prescribed different tests for determining whether a loan is a covered short-term loan based on whether or not the loan is closed-end credit that does not provide for multiple advances to consumers. For this type of credit, a loan would be a covered short-term loan if the consumer is required to repay substantially the entire amount of the loan within 45 days of consummation. For all other types of loans, a loan would be a covered short-term loan if the consumer is required to repay substantially the entire amount of an advance within 45 days of the advance.

As proposed comment 3(b)(1)-1 explained, a loan does not provide for multiple advances to a consumer if the loan provides for full disbursement of the loan proceeds only through disbursement on a single specific date. The Bureau stated that a different test to determine whether a loan is a covered short-term loan is appropriate for loans that provide for multiple advances to consumers, because open-end credit and closed-end credit providing for multiple advances may be consummated long Start Printed Page 54538before the consumer incurs debt that must be repaid. If, for example, the consumer waited more than 45 days after consummation to draw on an open-end line, but the loan agreement required the consumer to repay the full amount of the draw within 45 days of the draw, the loan would not be practically different than a closed-end loan repayable within 45 days of consummation. The Bureau preliminarily found that it is appropriate to treat the loans the same for the purposes of proposed § 1041.3(b)(1).

As the Bureau described in part II of the proposal, the terms of short-term loans are often tied to the date the consumer receives his or her paycheck or benefits payment. While pay periods typically vary from one week to one month, and expense cycles are typically one month, the Bureau proposed 45 days as the upper bound for covered short-term loans in order to accommodate loans that are made shortly before a consumer's monthly income is received and that extend beyond the immediate income payment to the next income payment. These circumstances could result in loans that are somewhat longer than a month in duration, but the Bureau believed that they nonetheless pose similar risks of harm to consumers as loans with durations of a month or less.

The Bureau also considered proposing to define covered short-term loans as loans that are substantially repayable within either 30 days of consummation or advance, 60 days of consummation or advance, or 90 days of consummation or advance. The Bureau, nonetheless, did not propose the 30-day period because, as described above, some loans for some consumers who are paid on a monthly basis can be slightly longer than 30 days, yet still would essentially constitute a one-pay-cycle, one-expense-cycle loan. The Bureau stated that it did not propose either the 60-day or 90-day period because loans with those terms encompass multiple income and expense cycles, and thus may present somewhat different risks to consumers, though such loans would have been covered longer-term loans if they met the criteria set forth in proposed § 1041.3(b)(2).

As discussed in the proposal, the Bureau proposed to treat longer-term loans, as defined in proposed § 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 § 1041.3(c) and (d). The Bureau did not propose similar limitations with respect to the definition of covered short-term loans because the evidence available to the Bureau seemed to suggest that the structure and short-term nature of these loans give rise to consumer harm even in the absence of costs above the 36 percent threshold or particular means of repayment.

Proposed comment 3(b)(1)-2 noted that both open-end credit and closed-end credit may provide for multiple advances to consumers. The comment explained that open-end credit is self-replenishing even though the plan itself has a fixed expiration date, as long as during the plan's existence the consumer may use the line, repay, and reuse the credit. Likewise, closed-end credit may consist of a series of advances. For example, under a closed-end commitment, the lender might agree to lend a fixed total amount in a series of advances as needed by the consumer, and once the consumer has borrowed the maximum, no more is advanced under that particular agreement, even if there has been repayment of a portion of the debt.

Proposed comment 3(b)(1)-3 explained that a determination of whether a loan is substantially repayable within 45 days requires assessment of the specific facts and circumstances of the loan. Proposed comment 3(b)(1)-4 provided guidance on determining whether loans that have alternative, ambiguous, or unusual payment schedules would fall within the definition. The comment explained that the key principle in determining whether a loan would be a covered short-term loan or a covered longer-term loan is whether, under applicable law, the consumer would be considered to be in breach of the terms of the loan agreement if the consumer failed to repay substantially the entire amount of the loan within 45 days of consummation.

As noted above, § 1041.3(b)(1) provides the substance of the definition of covered short-term loan as referenced in § 1041.2(a)(10) of the final rule. The limited comments on this provision are presented and addressed in the section-by-section analysis of that definition. For the reasons stated there, the Bureau is finalizing § 1041.3(b)(1) as proposed, with only non-substantive language changes. One modification has been made in the commentary, however, to address comments received about deposit advance products. New comment 3(b)(1)-4 in the final rule states that a loan or advance is substantially repayable within 45 days of consummation or advance if the lender has the right to be repaid through a sweep or withdrawal of any qualifying electronic deposit made into the consumer's account within 45 days of consummation or advance. A loan or advance described in this paragraph is substantially repayable within 45 days of consummation or advance even if no qualifying electronic deposit is actually made into or withdrawn by the lender from the consumer's account. This comment was added to address more explicitly a deposit advance product in which the lender can claim all the income coming in to the account, as it comes in, for the purpose of repaying the loan, regardless of whether income in fact comes in during the first 45 days after a particular advance. Proposed comment 3(b)(1)-4 thus has been renumbered as comment 3(b)(1)-5 of the final rule.

3(b)(2)

Proposed § 1041.3(b)(2) would have brought within the scope of proposed part 1041 several types of loans for which, in contrast to loans covered under proposed § 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 § 1041.3(b)(2) extended coverage to longer-term loans with a total cost of credit exceeding a rate of 36 percent per annum if the lender or service provider also obtains a leveraged payment mechanism as defined in proposed § 1041.3(c) or vehicle security as defined in proposed § 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 § 1041.2(a)(8), this type of covered loan would be defined as a covered longer-term loan.

As discussed above in connection with § 1041.2(a)(7), the Bureau defined a sub-category of covered longer-term loans that would be subject to certain tailored provisions in proposed §§ 1041.6, 1041.9, and 1041.10 because they involved balloon-payment structures that the Bureau believed posed particular risks to consumers. The Bureau proposed to cover such longer-term balloon-payment loans only if they exceeded the general rate threshold and involved leveraged payment mechanisms or vehicle security, but specifically sought comment on whether such products should be subject to the rule more generally in light of the particular concerns about balloon payment structures.

In light of the Bureau's decision to differentiate which parts of the rule apply to longer-term balloon-payment loans and more generally to longer-term Start Printed Page 54539loans, the Bureau has decided to make the two categories mutually exclusive and to describe them separately in § 1041.3(b)(2) and (3) of the final rule, respectively. Accordingly, the Bureau is finalizing § 1041.3(b)(2) to define longer-term balloon-payment loans, incorporating the language of proposed § 1041.2(a)(7) as further revised in various respects.

First, for purposes of greater clarity in ordering § 1041.3(b) of the final rule, the Bureau is separating out its treatment of covered longer-term balloon-payment loans (in § 1041.3(b)(2)) from its treatment of all other covered longer-term loans (in § 1041.3(b)(3)). As described in greater detail below in Market Concerns—Underwriting and in the section-by-section analysis of § 1041.4, the Bureau has decided to restructure these provisions in this way because it has decided in the final rule to subject covered longer-term balloon-payment loans both to the underwriting criteria and the payment requirements of the final rule, but to apply only the payment requirements to other types of covered longer-term loans.

This organization reflects in part the comments received from industry and trade groups who contended that the Bureau's concerns about re-borrowing for covered longer-term loans were most applicable to loans with balloon-payment structures. They therefore argued that any ability-to-repay restrictions and underwriting criteria should be limited to longer-term balloon-payment loans. These comments reinforced the Bureau's preliminary view that concerns about the re-borrowing of covered longer-term balloon-payment loans were most similar to the concerns it had about the re-borrowing of covered short-term loans. As described more fully below in the section on Market Concerns—Underwriting, the Bureau has observed longer-term loans involving balloon payments where the lender does not reasonably assess the borrower's ability to repay before making the loan, and has observed in these circumstances the same types of consumer harms that it has observed when lenders fail to make a reasonable assessment of the borrower's ability to repay before making covered short-term loans. Nonetheless, the Bureau also maintains its concerns about lender practices in the market for other covered longer-term loans, and emphasizes that it retains supervision and enforcement authority to oversee such lenders for unfair, deceptive, or abusive acts or practices.

As discussed further below, for a number of reasons the Bureau has decided not to address the underwriting of all covered longer-term loans at this time. Nonetheless, as discussed above in the section-by-section analysis of § 1041.2(a)(7) of the final rule, the Bureau is concerned that covered longer-term balloon-payment loans have a loan structure that poses many of the same risks and harms to consumers as with covered short-term loans, and could be adapted in some manner as a loan product intended to circumvent the underwriting criteria for covered short-term loans. Therefore, in § 1041.5 of the final rule, the specific underwriting criteria that apply to covered short-term loans are, with certain modifications, made applicable to covered longer-term balloon-payment loans also (without regard to interest rate or the taking of a leveraged payment mechanism). And along with other covered longer-term loans, these loans remain covered by the sections of the final rule on payment practices as well.

Given this resolution of the considerations raised by the comments and based on the Bureau's further consideration and analysis of the market, the Bureau is finalizing § 1041.3(b)(2) in parallel with § 1041.3(b)(1), since both types of loans—covered short-term loans and covered longer-term balloon loans—are subject to the same underwriting criteria and payment requirements as prescribed in the final rule.

As noted above in the discussion of § 1041.2(a)(7), in conjunction with making the definition of covered longer-term balloon-payment loan into a separate category in its own right rather than a subcategory of the general definition of covered longer-term loan, the Bureau has decided to subject such loans to an expansion in scope as compared to the proposal, since longer-term balloon-payment loans are now being covered by both the underwriting and payment provisions of the final rule without regard to whether the loans exceed a particular threshold for the cost of credit or involve the taking of a leveraged payment mechanism or vehicle security. The Bureau had specifically sought comment as to whether to cover longer-term balloon-payment loans regardless of these two conditions, and has concluded that it is appropriate to do so in light of concerns about the risks and harms that balloon-payment structures pose to consumers and of potential industry evolution to circumvent the rule, as set out more extensively below in Market Concerns—Underwriting.

The Bureau has also revised the definition of covered longer-term balloon-payment loan to address different types of loan structures in more detail. As discussed above in connection with § 1041.2(a)(7), the proposal would generally have defined the term to include loans that require repayment in a single payment or that require at least one payment that is more than twice as large as any other payment(s) under the loan. The Bureau based the twice-as-large threshold on the definition of balloon payment under Regulation Z, but with some modification in details. However, the Bureau did not expressly address whether covered longer-term balloon-payment loans could be both closed-end and open-end credit.

After further consideration of the policy concerns that prompted the Bureau to apply the underwriting requirements in subpart B to covered longer-term balloon-payment loans, the Bureau has concluded that it is appropriate to define that term to include both closed-end and open-end loans that involve the kinds of large irregular payments that were described in the proposed definition. In light of the fact that such loans could be structured a number of ways, the Bureau finds it helpful for purposes of implementation and compliance to build out the definition to more expressly address different types of structures. The Bureau has done this by structuring § 1041.3(b)(2) to be similar to the covered-short-term definition in § 1041.3(b)(1), but with longer time frames and descriptions of additional potential payment structures.

Specifically, the revised definition for covered longer-term balloon-payment loans separately addresses closed-end loans that do not provide for multiple advances from other loans (both closed-end and open-end) that do involve multiple advances. With regard to the former set of loans, § 1041.3(b)(2)(i) defines a covered longer-term balloon-payment loan to include those where the consumer is required to repay the entire balance of the loan more than 45 days after consummation in a single payment or to repay such loan through at least one payment that is more than twice as large as any other payment(s). With regard to multiple-advance loans, the revised definition focuses on either of two types of payment structures. Under the first structure, the consumer is required to repay substantially the entire amount of an advance more than 45 days after the advance is made or is required to make at least one payment on the advance that is more than twice as large as any other payment(s). Under the second structure, the consumer is paying the required minimum payments but may not fully amortize the outstanding balance by a specified date Start Printed Page 54540or time, and the amount of the final payment to repay the outstanding balance at such time could be more than twice the amount of other minimum payments under the plan.

The contours of this definition are thus very similar to those for covered short-term loans, which pose the same kinds of risks and harms for consumers, and its focus on payments that are more than twice as large as other payments is generally consistent with how balloon-payment loans are defined and treated under Regulation Z. The Bureau believes retaining that payment size threshold will promote consistency and reduce the risk of confusion among consumers, industry, and regulators.

Along with finalizing § 1041.3(b)(2) as just stated, the Bureau has also built out the related commentary to incorporate the original commentary to proposed § 1041.2(a)(7) and concepts that were already used in the definition of covered short-term loan, as well as to elaborate further on language that has been added to the final rule. As now adopted, comment 3(b)(2)-1 specifies that a closed-end loan is considered to be a covered longer-term balloon-payment loan if the consumer must repay the entire amount of the loan in a single payment which is due more than 45 days after the loan was consummated, or to repay substantially the entire amount of any advance in a single payment more than 45 days after the funds on the loan were advanced, or is required to pay at least one payment that is more than twice as large as any other payment(s). Comment 3(b)(2)-2 states that for purposes of § 1041.3(b)(2)(i) and (ii), all required payments of principal and any charges (or charges only, depending on the loan features) due under the loan are used to determine whether a particular payment is more than twice as large as another payment, regardless of whether the payments have changed during the loan term due to rate adjustments or other payment changes permitted or required under the loan. Comment 3(b)(2)-3 discusses charges for actual unanticipated late payments, for exceeding a credit limit, or for delinquency, default, or a similar occurrence that may be added to a payment, and notes that they are excluded from the determination of whether the loan is repayable in a single payment or a particular payment is more than twice as large as another payment. Likewise, sums that are accelerated and due upon default are excluded from the determination of whether the loan is repayable in a single payment or a particular payment is more than twice as large as another payment. These three comments are based on prior comments to proposed § 1041.2(a)(7), with certain revisions made for consistency and form.

Comment 3(b)(2)-4 is new and provides that open-end loans are considered to be covered longer-term balloon-payment loans under § 1041.3(b)(2)(ii) if: either the loan has a billing cycle with more than 45 days and the full balance is due in each billing period, or the credit plan is structured such that paying the required minimum payment may not fully amortize the outstanding balance by a specified date or time, and the amount of the final payment to repay the outstanding balance at such time could be more than twice the amount of other minimum payments under the plan. An example is provided to show how this works for an open-end loan, in light of particular credit limits, monthly billing cycles, minimum payments due, fees or interest, and payments made, to determine whether the credit plan is a covered loan and why.

3(b)(3)

As noted above, proposed § 1041.3(b)(2) encompassed both covered longer-term balloon-payment loans and certain other covered longer-term loans. Because the Bureau is finalizing a separate definition of covered longer-term balloon-payment loans in § 1041.3(b)(2), new § 1041.3(b)(3) of the final rule addresses covered loans that are neither covered short-term loans nor covered longer-term balloon-payment loans, but rather are covered longer-term loans that are only subject to provisions of the rule relating to payment practices.

Specifically, proposed § 1041.3(b)(2) would have extended coverage to longer-term loans with a total cost of credit exceeding a rate of 36 percent per annum if the lender or service provider also obtains a leveraged payment mechanism as defined in proposed § 1041.3(c) or vehicle security as defined in proposed § 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 § 1041.2(a)(8), this type of covered loan would have been defined as a covered longer-term loan.

The Bureau received extensive comments on covered longer-term loans, but key changes in the final rule mitigate most of the points made in those comments. As discussed above in connection with § 1041.2(a)(8), many commenters offered views on the prongs of the definition of covered longer-term loan as triggers for whether such loans should be subject not only to the payment requirements of part 1041 but also its underwriting requirements. As just discussed above and discussed more fully in part I and in Market Concerns—Underwriting, the Bureau has decided not to apply these underwriting requirements to longer-term loans unless they involve balloon payments as defined in §§ 1041.2(a)(7) and 1041.3(b)(2). However, the Bureau believes that such longer-term loans may still pose substantial risk to consumers with regard to certain lender payment practices, and therefore is finalizing subpart C of the rule to apply to covered longer-term loans. It thus remains relevant to describe the parameters of such loans in § 1041.3(b)(3) of the final rule, which continues to provide the substantive content for the parallel definition of covered longer-term loans in § 1041.2(a)(8) of the final rule.

In light of this decision about the policy interventions, the Bureau has also decided to narrow the definition of covered longer-term loans relative to the proposal both by relaxing the rate threshold and narrowing the focus to only loans involving the taking of a leveraged payment mechanism. Thus, § 1041.3(b)(3) of the final rule defines covered longer-term loans as loans that do not meet the definition of covered short-term loans under § 1041.3(b)(1) or of covered longer-term balloon-payment loans under § 1401.3(b)(2); for all remaining covered loans, two further limitations that were contained in the proposed rule apply, so that a loan only becomes a covered longer-term loan if both of the following conditions are also satisfied: The cost of credit for the loan exceeds a rate of 36 percent per annum, as measured in specified ways; and the lender or service provider obtains a leveraged payment mechanism as defined in § 1041.3(c) of the final rule.

As described above in connection with the definition of cost of credit in § 1041.2(a)(6), the Bureau has decided to relax the rate threshold in the final rule by basing the threshold on the annual percentage rate as defined in Regulation Z rather than the total cost of credit concept used in the Military Lending Act. The final rule retains the numeric threshold of 36 percent, however, since, as the proposal explained more fully, that annual rate is grounded in many established precedents of Federal and State law.

With regard to the taking of leveraged payment mechanisms or vehicle security as part of the definition of covered longer-term loan, as discussed in more detail below in connection with Start Printed Page 54541§ 1041.3(c), the Bureau has narrowed the definition to focus solely on loans that involve types of leveraged payment mechanisms that enable a lender to pull funds directly from a consumer's account. Accordingly, a loan that involves vehicle security may be a covered longer-term loan if it involves a leveraged payment mechanism under § 1041.3(c), but not because it involves vehicle security in its own right.

The final rule also modifies and clarifies certain details of timing about when status as a covered longer-term loan is determined, in light of the fact that such loans are only subject to the payment requirements under the final rule. With regard to the rate threshold, it is measured at the time of consummation for closed-end credit. For open-end credit, it is measured at consummation and, if the cost of credit at consummation is not more than 36 percent per annum, again at the end of each billing cycle for open-end credit. Once open-end credit meets the threshold, it is treated as doing so for the duration of the plan. The rule also provides a rule for calculating the cost of credit in any billing cycle in which a lender imposes a charge included in the cost of credit where the principal balance is $0. The definition of leveraged payment mechanisms is also truncated, as mechanisms based on access to employer payments or payroll deduction repayments are no longer germane to a policy intervention that is limited solely to the payment practices in § 1041.8 of the final rule. Also, vehicle security is no longer relevant to determining coverage of longer-term loans. The Bureau has also omitted language providing a 72-hour window for determining coverage as a longer-term loan from the final rule, as that was driven largely by the need for certainty on underwriting. In short, the two major modifications to this provision as it had been set forth in the proposal are further clarification of how the 36 percent rate is measured for open-end credit and the removal of any references to vehicle security and other employment-based sources of repayment.

The commentary to proposed § 1041.3(b)(2) has been extensively revised in light of the other restructuring that has occurred in § 1041.3(b) of the final rule. To summarize briefly, comments 3(b)(3)-1 to 3(b)(3)-3 and 3(b)(3)(ii)-1 to 3(b)(3)(ii)-2 largely recapitulate the provisions of § 1041.3(b)(3) of the final rule in greater detail, as well as clarifying their practical application through a series of examples. Two key points of clarification, however, concern timing. First, comment 3(b)(3)-3 makes clear that a loan may become a covered longer-term loan at any such time as both requirements of § 1041.3(b)(3)(i) and (ii) are met, even if they were not met when the loan was initially made. Second, comment 3(b)(3)(ii)-1 states that the condition in § 1041.3(b)(3)(ii) is satisfied if a lender or service provider obtains a leveraged payment mechanism before, at the same time as, or after the consumer receives the entire amount of funds that the consumer is entitled to receive under the loan, regardless of the means by which the lender or service provider obtains a leveraged payment mechanism.

For the reasons stated in view of the comments, the Bureau is finalizing § 1041.3(b)(3) and the commentary as described above.

3(c) Leveraged Payment Mechanism

Proposed § 1041.3(c) would have set forth three ways that a lender or a service provider could obtain a leveraged payment mechanism that, if other conditions were met under proposed § 1041.3(b)(2), would bring a longer-term loan within the proposed coverage of proposed part 1041. Specifically, the proposal would have treated a lender as having obtained a leveraged payment mechanism if the lender or service provider had the right to initiate a transfer of money from the consumer's account to repay the loan, the contractual right to obtain payment from the consumer's employer or other payor of expected income, or required the consumer to repay the loan through payroll deduction or deduction from another source of income. In all three cases, the consumer would be required, under the terms of an agreement with the lender or service provider, to cede autonomy over the consumer's account or income stream in a way that the Bureau believed, as stated in the proposal, would change incentives to determine the consumer's ability to repay the loan and can exacerbate the harms the consumer experiences if the consumer does not have the ability to repay the loan and still meet the consumer's basic living expenses and major financial obligations. As explained in the section-by-section analysis of proposed §§ 1041.8 and 1041.9, the Bureau preliminarily found that it is an unfair and abusive practice for a lender to make such a loan without determining that the consumer has the ability to repay.

Proposed § 1041.3(c)(1) generally would have provided that a lender or a service provider obtains a leveraged payment mechanism if it has the right to initiate a transfer of money, through any means, from a consumer's account (as defined in proposed § 1041.2(a)(1)) to satisfy an obligation on a loan. For example, this would occur with a post-dated check or preauthorization for recurring electronic fund transfers. However, the proposed regulation did not define leveraged payment mechanism to include situations in which the lender or service provider initiates a one-time electronic fund transfer immediately after the consumer authorizes such transfer.

In the proposal, the functionality of this determination was that it served as one of three preconditions to the underwriting of such covered longer-term loans, along with the provisions of proposed § 1041.3(c)(2) and (3). In light of other changes to the proposed rule, however, the final rule is no longer covering the underwriting of covered longer-term loans (other than balloon-payment loans), but simply determining whether they are subject to the intervention for payment practices in § 1041.8 of the final rule. As described above, as a result of the decision to apply only the rule's payment requirements to covered-longer term loans, the Bureau is not finalizing the provisions of proposed § 1041.3(c)(2) and (3), which covered payment directly from the employer and repayment through payroll deduction, respectively, as they are no longer germane to the purpose of this policy intervention. With the elimination of those two provisions, § 1041.3(c)(1) is being reorganized more simply as just part of § 1041.3(c) of the final rule to focus on forms of leveraged payment mechanism that involve direct access to consumers' transaction accounts.

Proposed § 1041.3(c)(1) generally would have provided that a lender or a service provider obtains a leveraged payment mechanism if it has the right to initiate a transfer of money, through any means, from a consumer's account (as defined in proposed § 1041.2(a)(1)) to satisfy an obligation on a loan. For example, this would occur with a post-dated check or preauthorization for recurring electronic fund transfers. However, the proposed regulation did not define leveraged payment mechanism to include situations in which the lender or service provider initiates a one-time electronic fund transfer immediately after the consumer authorizes such transfer.

As proposed comment 3(c)(1)-1 explained, the key principle that makes a payment mechanism leveraged is whether the lender has the ability to “pull” funds from a consumer's account without any intervening action or further assent by the consumer. In those cases, the lender's ability to pull Start Printed Page 54542payments from the consumer's account gives the lender the ability to time and initiate is to coincide with expected income flows into the consumer's account. This means that the lender may be able to continue to obtain payment (as long as the consumer receives income and maintains the account) even if the consumer does not have the ability to repay the loan while meeting his or her major financial obligations and basic living expenses. In contrast, the Bureau stated in the section-by-section analysis of proposed § 1041.3(c)(1) that a payment mechanism in which the consumer “pushes” funds from his or her account to the lender does not provide the lender leverage over the account in a way that changes the lender's incentives to determine the consumer's ability to repay the loan or exacerbates the harms the consumer experiences if the consumer does not have the ability to repay the loan.

Proposed comment 3(c)(1)-2 provided examples of the types of authorizations for lender-initiated transfers that constitute leveraged payment mechanisms. These include checks written by the consumer, authorizations for electronic fund transfers (other than immediate one-time transfers as discussed further below), authorizations to create or present remotely created checks, and authorizations for certain transfers by account-holding institutions (including a right of set-off). Proposed comment 3(c)(1)-4 explained that a lender does not obtain a leveraged payment mechanism if a consumer authorizes a third party to transfer money from the consumer's account to a lender as long as the transfer is not made pursuant to an incentive or instruction from, or duty to, a lender or service provider. Proposed comment 3(c)(1)-3 contained similar language.

As noted above, proposed § 1041.3(c)(1) provided that a lender or service provider does not obtain a leveraged payment mechanism by initiating a one-time electronic fund transfer immediately after the consumer authorizes the transfer. This provision is similar to what the Bureau proposed in § 1041.15(b), which exempts lenders from providing the payment notice when initiating a single immediate payment transfer at the consumer's request, as that term is defined in proposed § 1041.14(a)(2), and is also similar to what the Bureau proposed in § 1041.14(d), which permits lenders to initiate a single immediate payment transfer at the consumer's request even after the prohibition in proposed § 1041.14(b) on initiating further payment transfers has been triggered.

Accordingly, proposed comment 3(c)(1)-3 clarified that if the loan agreement between the parties does not otherwise provide for the lender or service provider to initiate a transfer without further consumer action, the consumer may authorize a one-time transfer without causing the loan to be a covered loan. Proposed comment 3(c)(1)-3 further clarified that the term “immediately” means that the lender initiates the transfer after the authorization with as little delay as possible, which in most circumstances will be within a few minutes. Proposed comment 3(c)(1)-4 took the opposite perspective, noting that a lender or service provider does not initiate a transfer of money from a consumer's account if the consumer authorizes a third party, such as a bank's automatic bill pay service, to initiate a transfer of money from the consumer's account to a lender or service provider as long as the third party does not transfer the money pursuant to an incentive or instruction from, or duty to, a lender or service provider.

In the proposal, the Bureau noted that it anticipated that scenarios involving authorizations for immediate one-time transfers would only arise in certain discrete situations. For closed-end loans, a lender would be permitted to obtain a leveraged payment mechanism more than 72 hours after the consumer has received the entirety of the loan proceeds without the loan becoming a covered loan. Thus, in the closed-end context, this exception would only be relevant if the consumer was required to make a payment within 72 hours of receiving the loan proceeds—a situation which is unlikely to occur. However, the Bureau acknowledged that the situation may be more likely to occur with open-end credit. According to the proposal, longer-term open-end loans could be covered loans if the lender obtained a leveraged payment mechanism within 72 hours of the consumer receiving the full amount of the funds which the consumer is entitled to receive under the loan. Thus, if a consumer only partially drew down the credit plan, but the consumer was required to make a payment, a one-time electronic fund transfer could trigger coverage without the one-time immediate transfer exception.

The Bureau received a few comments on § 1041.3(c)(1) of the proposed rule and the related commentary. One commenter contended that the definition of leveraged payment mechanism is overly broad as between different types of push and pull transactions. Another commenter claimed that the Bureau was improperly attributing motive to the practices of different types of lenders that were using the same leveraged payment mechanisms, that its treatment of leveraged payment mechanisms would have more than a minimal effect on lenders that were already engaged in substantial underwriting, and that the proposed rule and commentary were misaligned with respect to transactions that push or pull money from the consumer's account.

In response to these comments, the Bureau concludes that, in general, its definition is reasonably calibrated to address the core practice at issue here, which is a lender or service provider establishing a right to initiate payment directly from the consumer without any intervening action or further assent from the consumer, subject to certain narrow limitations. The definition of leveraged payment mechanism thus is not overbroad for the purposes served by the rule. As for the final set of comments, the Bureau did not undertake any inquiry or determine any of these issues based on speculation about the motivations of particular lenders; rather, it presumed that lenders that secure leveraged payment mechanisms do so for a mix of reasons. The Bureau also acknowledges at least some tension between the proposed rule and the related commentary in their treatment of push and pull transactions from a consumer's account. On further consideration, however, the Bureau has concluded that with the focus now solely on payment practices, push transactions are no longer germane to the analysis and thus has revised proposed comments 3(c)(1)-1 and 3(c)(1)-4 accordingly.

In light of these comments received and the responses, the Bureau is finalizing proposed § 1041.3(c)(1) as part of § 1041.3(c), and is revising the definition of leveraged payment mechanism to align more closely with the rule's payment provisions. Specifically, the Bureau is revising the proposed language that would have excluded a one-time immediate transfer from the definition. Under the definition as finalized, the exception applies if the lender initiates a single immediate payment transfer at the consumer's request, as defined in § 1041.8(a)(2). As discussed in the section-by-section analysis of §§ 1041.8 and 1041.9, transfers meeting the definition of a single immediate payment transfer at the consumer's request are excluded from the cap on failed payment attempts and the payment notice requirements. The Bureau has concluded that using the same definition for purposes of Start Printed Page 54543excluding certain transfers from the definition of leveraged payment mechanism is important for the consistency of the rule.

One practical result of this revision is that, whereas the proposed exclusion from the definition of leveraged payment mechanism would have applied only to a one-time electronic fund transfer, the exclusion as finalized permits the lender to initiate an electronic fund transfer or process a signature check without triggering coverage under § 1041.3(b)(3), provided that the lender initiates the transfer or processes the signature check in accordance with the timing and other conditions in § 1041.8(a)(2). The Bureau notes, however, that the definition of single immediate payment transfer at the consumer's request applies only to the first time that a lender initiates the electronic fund transfer or processes the signature check pursuant to the exception. It does not apply to the re-presentment or re-submission of a transfer or signature check that is returned for nonsufficient funds. If a transfer or signature check is returned, the lender could still work with the consumer to obtain payment in cash or to set up another transfer meeting the definition of single immediate payment transfer at the consumer's request.

The Bureau is finalizing the remainder of the commentary to this provision, which is reordered as comments 3(c)-1 to 3(c)-4 of the final rule, with revisions to the language consistent with the revisions made to the definition of leverage payment mechanism in § 1041.3(c).

3(d) Exclusions for Certain Credit Transactions

As discussed above, the Bureau decided to narrow how part 1041 applies to covered longer-term loans to focus only on payment practices. Accordingly, the detailed discussion of vehicle security that appeared in proposed § 1041.3(d) in connection with the definition of covered longer-term loan under proposed § 1041.3(b)(2) is no longer germane to the final rule. As noted in the section-by-section analysis of § 1041.2(a)(19) of the final rule, the Bureau has now moved certain language from proposed § 1041.3(d) describing vehicle security to § 1041.2(a)(19) of the final rule, since vehicle security is relevant to application to § 1041.6 of the final rule. Thus the remainder of § 1041.3 is being renumbered, and all references to the provisions of proposed § 1041.3(e) have now been finalized as § 1041.3(d), with further revisions and additions as described below.

Proposed § 1041.3(e) would have excluded specific types of credit from part 1041, specifically purchase money security interest loans extended solely for the purchase of a good, real estate secured loans, certain credit cards, student loans, non-recourse pawn loans in which the consumer does not possess the pledged collateral, and overdraft services and overdraft lines of credit. The Bureau found as a preliminary matter that notwithstanding the potential term, cost of credit, repayment structure, or security of these loans, they arise in distinct markets that may pose a somewhat different set of concerns for consumers. At the same time, the Bureau was concerned about the risk that these exclusions could create avenues for evasion of the proposed rule. In the Accompanying RFI, the Bureau also solicited information and additional evidence to support further assessment of whether other categories of loans may pose risks to consumers where lenders do not determine the consumer's ability to repay. The Bureau also emphasized that it may determine in a particular supervisory or enforcement matter or in a later rulemaking, in light of evidence available at the time, that the failure to assess ability to repay when making a loan excluded from coverage here may nonetheless be an unfair or abusive act or practice.

The Bureau did not receive any comments on the brief opening language in § 1041.3(e) of the proposed rule, and is finalizing the language which notes that the exclusions listed in § 1041.3(d) of the final rule apply to certain transactions, with slight modifications for clarity.

The Bureau did, however, receive some general comments about the topic of exclusions from the scope of coverage of the proposed rule. First, various consumer groups argued that there should be no exclusions or exemptions from coverage under the rule, which would weaken its effectiveness.

A “fintech” company urged the Bureau to develop a “sandbox” type of model to allow innovation and to encourage the development of alternative loan models. Another such company offered a more complicated and prescriptive regulatory scheme establishing a safe harbor, lifting income verification requirements for loans with low loss rates and loans with amortizing payment plans, and full relief from cooling-off periods if borrowers repay their loans on time with their own money. One commenter during the SBREFA process argued for a broad exemption from the rule for payday lenders in States that permit such loans pursuant to existing regulatory frameworks governing payday lending. Another sought an exemption for Tribal lenders, asserting that the Bureau lacked statutory authority to treat them as covered by the rule. Many finance companies, and others commenting on their behalf, offered reasons why the Bureau should omit traditional installment loans from coverage under the rule; they also presented different formulations of how this result could be achieved.

The Bureau does not agree that the exclusions listed in the proposal should be eliminated, for all the reasons set out in the discussion of those specific exclusions below (and notes that a further exclusion and two conditional exemptions have been added to or revised from the proposed rule). As for the notion of a “sandbox” approach to financial innovation, the Bureau has developed its own approach to these issues, having created and operated its Project Catalyst for several years now as a means of carrying out the Bureau's statutory objective to ensure that “markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation.” [435] The suggestion that a distinct and highly prescriptive regulatory approach should be adopted in preference to the framework actually set out in the proposal is not supported by any data or analysis of this market.

The arguments for an exemption of payday lender in those States where they are permitted to make such loans are directly contrary to all of the data and analysis contained in the extended discussions above in part II and below in Market Concerns—Underwriting. All of the risks and harms that the Bureau has identified from covered loans occur, by definition, in those States that authorize such lending, rather than in the 15 States and the District of Columbia that have effectively banned such lending under their State laws. The arguments raised on behalf of Tribal lenders have also been raised in Tribal consultations that the Bureau has held with federally recognized Indian tribes, as discussed in part III, and rest on what the Bureau believes is a misreading of the statutes and of governing Federal law and precedents governing the scope of Tribal immunity.[436]

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As for the points raised by finance companies and others about traditional installment loans, they are largely being addressed by various modifications to the proposed rule, including by not imposing underwriting requirements for covered longer-term loans (other than covered longer-term balloon-payment loans), by adopting the exclusions and conditional exemptions, and, as some commenters suggested, by adopting the definition of cost of credit under TILA in place of the definition of total cost of credit in the proposed rule.

3(d)(1) Certain Purchase Money Security Interest Loans

Proposed § 1041.3(e)(1) would have excluded from coverage under proposed part 1041 loans extended for the sole and express purpose of financing a consumer's initial purchase of a good when the good being purchased secures the loan. Accordingly, loans made solely to finance the purchase of, for example, motor vehicles, televisions, household appliances, or furniture would not be subject to the consumer protections imposed by proposed part 1041 to the extent the loans are secured by the good being purchased. Proposed comment 3(e)(1)-1 explained the test for determining whether a loan is made solely for the purpose of financing a consumer's initial purchase of a good. If the item financed is not a good or if the amount financed is greater than the cost of acquiring the good, the loan is not solely for the purpose of financing the initial purchase of the good. Proposed comment 3(e)(1)-1 further explained that refinances of credit extended for the purchase of a good do not fall within this exclusion and may be subject to the requirements of proposed part 1041.

Purchase money loans are typically treated differently than non-purchase money loans under the law. The FTC's Credit Practices Rule generally prohibits consumer credit in which a lender takes a nonpossessory security interest in household goods but makes an exception for purchase money security interests.[437] The Federal Bankruptcy Code, the UCC, and some other State laws also apply different standards to purchase money security interests. This differential treatment facilitates the financing of the initial purchase of relatively expensive goods, which many consumers would not be able to afford without a purchase money loan. In the proposal, the Bureau stated that it had not yet determined whether purchase money loans pose similar risks to consumers as the loans covered by proposed part 1041. Accordingly, the Bureau proposed not to cover such loans at this time.

A number of commenters expressed concern about the proposal's use of a sole purpose test for determining when a loan made to finance the consumer's initial purchase of a good gives rise to a purchase money security interest. Other alternatives were suggested, including a primary purpose test or perhaps the definition used in the UCC adopted in many States. Some commenters expressed concerns about motor vehicle purchases, in particular, noting that where the amount financed includes not simply the vehicle itself, but also the costs of ancillary products such as an extended service contract or a warranty, or other related costs such as taxes, tags, and title, it may be unclear whether the loan would lose its status as a purchase money security interest loan and become a covered loan instead. Others contended that covering the refinancing of credit that was extended for the purchase of a good could seem inconsistent with the terms of the exclusion itself, and could also bring back within the proposed rule's scope of coverage many motor vehicle loans where the total cost of credit would exceed a rate of 36 percent per annum. These commenters again were particularly concerned about motor vehicle loans, which they noted often exceed a 100 percent lien-to-value ratio because additional products, such as add-on products like extended warranties, are often financed along with the price of the vehicle.

In response to these comments, the Bureau streamlined and added language to proposed comment 3(e)(1)-1 to specify that a loan qualifies for this exclusion even if the amount financed under the loan includes Federal, State, or local taxes or amounts required to be paid under applicable State and Federal licensing and registration requirements. The Bureau recognized that these mandatory and largely unavoidable items should not cause a loan to lose its excluded status. Yet the same considerations do not apply to ancillary products that are being sold along with a vehicle or other household good, but are not themselves the good in which the lender takes a security interest as a condition of the credit. As to the concern about refinances of credit extended for the purchase of a good, and especially the concern that this provision could bring back within the proposed rule's scope of coverage many motor vehicle loans where the total cost of credit would exceed a rate of 36 percent per annum, the Bureau concluded that other changes made elsewhere in the final rule largely mitigate these concerns. In particular, the Bureau notes that the definition of total cost of credit in § 1041.2(a)(18) of the proposed rule has now been replaced with the definition of cost of credit in § 1041.2(a)(6) of the final rule, which aligns this term with Regulation Z. The Bureau also notes that these concerns about refinancing are most applicable to covered longer-term loans, which are no longer subject to underwriting criteria in the final rule (with the exception of covered longer-term balloon-payment loans). And though they are subject to the payment provisions, other changes in the coverage and the scope of the exceptions for certain payment transfers mitigate the effects for credit unions, in particular, that were the source of many of the comments on this issue.

For these reasons, the Bureau is finalizing the regulation text as proposed, and the revised commentary as explained above as § 1041.3(d)(1) in the final rule.

3(d)(2) Real Estate Secured Credit

Proposed § 1041.3(e)(2) would have excluded from coverage under proposed part 1041 loans that are secured by real property, or by personal property used as a dwelling, and in which the lender records or perfects the security interest. The Bureau stated that even without this exclusion, very few real estate secured loans would meet the coverage criteria set forth in proposed § 1041.3(b). Nonetheless, the Bureau preliminarily found that a categorical exclusion would be appropriate. For the most part, these loans are already subject to Federal consumer protection laws, including, for most closed-end loans, ability-to-repay requirements under Regulation Z § 1026.43. The proposed requirement that the security interest in the real estate be recorded or perfected also strongly discourages attempts to use this exclusion for sham or evasive purposes. Recording or perfecting a security interest in real estate is not a cursory exercise for a lender—recording fees are often charged and documentation is required. As proposed comment 3(e)(2)-1 explained, if the lender does not record or otherwise perfect the security interest in the property during the term of the loan, the loan does not fall under this exclusion and may be subject to the requirements of proposed part 1041. The Bureau did not receive any comments on this portion of the proposed rule, and is Start Printed Page 54545finalizing this exclusion and the commentary as proposed, with formatting changes only.

3(d)(3) Credit Cards

Proposed § 1041.3(e)(3) would have excluded from coverage under proposed part 1041 credit card accounts meeting the definition of credit card account under an open-end (not home-secured) consumer credit plan in Regulation Z § 1026.2(a)(15)(ii), rather than products meeting the more general definition of credit card accounts under Regulation Z § 1026.2(a)(15). By focusing on the narrower category, the exclusion would apply only to credit card accounts that are subject to the Credit CARD Act of 2009,[438] which provides various heightened safeguards for consumers. These protections include a limitation that card issuers cannot open a credit card account or increase a credit line on a card account unless the card issuer first considers the consumer's ability to repay the required payments under the terms of the account, as well as other protections such as limitations on fees during the first year after account opening, late fee restrictions, and a requirement that card issuers give consumers a reasonable amount of time to pay their bill.[439]

The Bureau preliminarily found that potential consumer harms related to credit card accounts are more appropriately addressed by the CARD Act, its implementing regulations, and other applicable law. At the same time, if the Bureau were to craft a broad exclusion for all credit cards as generally defined under Regulation Z, the Bureau would be concerned that a lender seeking to evade the requirements of the rule might seek to structure a product in a way that is designed to take advantage of this exclusion. The Bureau therefore proposed a narrower definition, focusing only on those credit card accounts that are subject to the full range of protections under the CARD Act and its implementing regulations. Among other requirements, the regulations imposing the CARD Act prescribe a different ability-to-repay standard that lenders must follow, and the Bureau found as a preliminary matter that the combined consumer protections governing credit card accounts subject to the CARD Act are sufficient for that type of credit.

One commenter stated that all credit cards should be excluded from coverage under the rule, not just those subject to the CARD Act. Another industry commenter found it noteworthy that credit cards are not covered under the rule even though they can result in a cycle of debt. Consumer groups argued that this exclusion should be narrowed to lower-cost mainstream credit cards in harmony with the provisions of the Military Lending Act and implementing regulations. Other narrowing categories were also suggested in that comment.

For all the reasons stated in the proposal, the Bureau does not find it sensible to expand coverage in this exclusion beyond those credit cards that are subject to the various heightened safeguards and protections for consumers in the CARD Act. At the same time, the reasons for drawing the boundaries of this exclusion around that particular universe of credit cards also militate against narrowing the scope of the exclusion further. Accordingly, the Bureau is finalizing this exclusion as proposed, with formatting changes only. The Bureau notes that “hybrid prepaid-credit card” products, which are treated as open-end (not home-secured) consumer credit plans under the final prepaid accounts rule, will be excluded from the scope of this final rule under § 1041.3(d)(3).[440]

3(d)(4) Student Loans

Proposed § 1041.3(e)(4) would have excluded from coverage under proposed part 1041 loans made, insured, or guaranteed pursuant to a Federal student loan program, and private education loans. The Bureau stated that even without this exclusion, very few student loans would meet the coverage criteria set forth in proposed § 1041.3(b). Nonetheless, the Bureau preliminarily determined that a categorical exclusion is appropriate. Federal student loans are provided to students or parents meeting eligibility criteria established by Federal law and regulations, such that the protections afforded by this proposed rule would be unnecessary. Private student loans are sometimes made to students based on their future potential ability to repay (as distinguished from their current ability), but they are typically co-signed by a party with financial capacity. These loans raise discrete issues that may warrant further attention in the future, but the Bureau found as a preliminary matter that they were not appropriately considered along with the types of loans at issue in this rulemaking. The Bureau stated in the proposal that it would continue to monitor the student loan servicing market for trends and developments; for unfair, deceptive, or abusive practices; and to evaluate possible policy responses, including potential rulemaking.

Consumer groups contended that student loans should not be excluded from coverage under the rule. They noted that the effect of deleting this exclusion would likely be limited to private education loans, since the total cost of credit for Federal student loans in the proposed rule would likely not exceed a rate of 36 percent per annum. The Bureau continues to judge that student loans are specialized in nature, are subject to certain other regulatory constraints more specifically contoured to the loan product, and are generally not appropriately considered among the types of loans at issue here. The Bureau did not receive any other comments on this portion of the proposed rule, and is finalizing this exclusion as proposed, with formatting changes only.

3(d)(5) Non-Recourse Pawn Loans

Proposed § 1041.3(e)(5) generally would have excluded from coverage, under proposed part 1041, loans secured by pawned property in which the lender has sole physical possession and use of the pawned property for the entire term of loan, and for which the lender's sole recourse if the consumer does not redeem the pawned property is the retention and disposal of the property. Proposed comment 3(e)(5)-1 explained that if any consumer, including a co-signor or guarantor, is personally liable for the difference between the outstanding loan balance and the value of the pawned property, then the loan does not fall under this exclusion and may be subject to the requirements of proposed part 1041.

The Bureau preliminarily found that bona fide, non-recourse pawn loans generally pose somewhat different risks to consumers than loans covered under proposed part 1041. As described in part II, non-recourse pawn loans involve the consumer physically relinquishing control of the item that secures the loan during the term of the loan. The Bureau stated that consumers may be more likely to understand and appreciate the risks associated with physically turning over an item to the lender when they are required to do so at consummation. Moreover, in most situations, the loss of a non-recourse pawned item over which the lender has sole physical possession during the term of the loan is less likely to affect the rest of the consumer's finances than is either a leveraged payment mechanism or vehicle security. For instance, a pawned item of this nature may be valuable to the consumer, but the consumer most likely does not rely on the pawned item for Start Printed Page 54546transportation to work or to pay basic living expenses or major financial obligations. Otherwise, the consumer likely would not have pawned the item under those terms. Finally, because the loans are non-recourse, in the event that a consumer is unable to repay the loan, the lender must accept the pawned item as fully satisfying the debt, without further collection activity on any remaining debt obligations. In all of these ways, the Bureau stated in the proposal that pawn transactions appear to differ significantly from the secured loans that would be covered under proposed part 1041.

One commenter claimed that the same reasons for excluding non-recourse pawn loans applies to vehicle title loans, and that vehicle title loans may even be preferred by consumers as the consumer retains the use of the vehicle and they can be less costly. Another similarly argued that the Bureau ignored the principle of a level playing field among different financial products by excluding high-cost alternatives like pawn loans, which can be even more costly at times than payday loans. Consumer groups suggested that the exclusion should be narrowed only to pawn loans where the loan does not exceed the fair market value of the good.

Another commenter representing pawnbrokers argued that the exclusion for pawn loans is justified because pawn transactions function as marketed, they are less likely than other loan products to affect the rest of the consumer's finances, consumers do not experience very high default rates or aggressive collection efforts, certain other harms identified in the proposal do not occur in the pawn market, State and local government regulation is working well, consumers are given clear disclosures on their pawn ticket, and loan terms are longer than the typical 14-day payday loan.

The Bureau does not find that these comments justify any modifications to this provision, and therefore finalizes the exclusion and the commentary as proposed, with formatting changes only. The first two comments do not provide any tangible support for eliminating the rationale for the exclusion of non-recourse pawn loans, and issues involving vehicle title loans are addressed elsewhere, as in Market Concerns—Underwriting, which describes the special risks and harms to consumers of repossession of their vehicle, which would potentially cause them to lose their basic transportation to work and to manage their everyday affairs. The suggestion that certain pawn loans should be covered loans depending on the relationship between the amount of the loan and the fair market value of the good would introduce needless complexity into the rule without discernible benefits. The Bureau notes that non-recourse pawn loans had previously been referenced in the definition of non-covered bridge loan in proposed § 1041.2(a)(13), which has now been omitted from the final rule. To the extent that provision would have restricted the making of such loans in connection with the underwriting criteria for covered longer-term loans, those provisions are not being included in the final rule. To the extent that provision would have restricted the making of such loans in connection with the requirements in the rule for making covered short-term or longer-term balloon-payment loans, the Bureau concludes that various other changes made in §§ 1041.5 and 1041.6 address the subject of those restrictions in ways that obviate the need for defining the term non-covered bridge loan. However, note that any type of loan, including pawn loans, if used to bridge between multiple covered short-term loans or covered longer-term balloon-payment loans, are factors which could indicate that a lender's ability-to-repay determinations are unreasonable. See comment 5(b)-2.

3(d)(6) Overdraft Services and Lines of Credit

Proposed § 1041.3(e)(6) would have excluded from coverage under proposed part 1041 overdraft services on deposit accounts as defined in 12 CFR 1005.17(a), as well as payments of overdrafts pursuant to a line of credit subject to Regulation Z, 12 CFR part 1026. Proposed comment 3(e)(6)-1 noted that institutions could rely on the commentary to 12 CFR 1005.17(a) in determining whether credit is an overdraft service or an overdraft line of credit that is excluded from the requirements of part 1041. Overdraft services generally operate on a consumer's deposit account as a negative balance, where the consumer's bank processes and pays certain payment transactions for which the consumer lacks sufficient funds in the account and imposes a fee for the service as an alternative to either refusing to authorize the payment (in the case of most debit and ATM transactions and ACH payments initiated from the consumer's account) or rejecting the payment and charging a non-sufficient funds fee (in the case of other ACH payments as well as paper checks). Overdraft services have been treated separately from the provisions of Regulation Z in certain circumstances, and are subject to specific rules under EFTA and the Truth in Savings Act (TISA) and their respective implementing regulations.[441] In contrast, overdraft lines of credit are separate open-end lines of credit under Regulation Z that have been linked to a consumer's deposit account to provide automatic credit draws to cover the processing of payments for which the funds in the deposit account are insufficient.

As discussed above in part II, the Bureau is engaged in research and other activity in anticipation of a separate rulemaking on overdraft products and practices.[442] Given that overdraft services and overdraft lines of credit involve complex overlays with rules about payment processing, deposit accounts, set-off rights, and other forms of depository account access, the Bureau preliminarily found that any discussion of whether additional regulatory protections are warranted for those two products should be reserved for that rulemaking. Accordingly, the Bureau proposed excluding both types of overdraft products from the scope of this rule, using definitional language from Regulation E to distinguish both overdraft services and overdraft lines of credit from other types of depository credit products.

One industry commenter argued that the Bureau ignored the principle of a level playing field among different financial products by excluding high-cost alternatives like overdraft, which can be even more costly at times than payday loans. Consumer groups argued that the Bureau should eliminate this exclusion or limit it in various ways. The Bureau maintains the analysis presented in the proposed rule to conclude that overdraft services and lines of credit are unique products with a distinct regulatory history and treatment, which should be excluded from this rule and addressed on their own as a matter of supervision, enforcement, and regulation. The Bureau also did not find persuasive the suggestion that overdraft services and lines of credit should be covered in some partial manner, which would introduce needless complexity into the rule without discernible benefits. Having received no other comments on this portion of the proposed rule, the Bureau is finalizing this exclusion and the commentary as proposed, with formatting changes only.Start Printed Page 54547

3(d)(7) Wage Advance Programs

Based on prior discussions with various stakeholders, the Bureau solicited and received comments in the proposal in connection with the definition of lender under proposed § 1041.2(a)(11) about some newly formed companies that are seeking to develop programs that provide innovative access to consumers' wages in ways that do not seem to pose the kinds of risks and harms presented by covered loans. Certain of these companies, but by no means all of them, are part of the “fintech” wave. Some are developing new products as an outgrowth of businesses focusing mainly on payroll processing, for example, whereas others are not associated with consumers' employers but rather are focused primarily on devising new means of advising consumers about how to improve their approach to cash management. The Bureau has consistently expressed interest in encouraging more experimentation in this space.

In particular, a number of these innovative financial products are seeking to assist consumers in finding ways to draw on the accrued cash value of wages they have earned but not yet been paid. Some of these products are doing so without imposing any fees or finance charges, other than a charge for participating in the program that is designed to cover processing costs. Others are developing different models that may involve fees or advances on wages not yet earned.

The Bureau notes that some efforts to give consumers access to accrued wages may not be credit at all. For instance, when an employer allows an employee to draw accrued wages ahead of a scheduled payday and then later reduces the employee's paycheck by the amount drawn, there is a quite plausible argument that the transaction does not involve “credit” because the employee may not be incurring a debt at all. This is especially likely where the employer does not reserve any recourse upon the payment made to the employee other than the corresponding reduction in the employee's paycheck.

Other initiatives are structured in more complicated ways that are more likely to constitute “credit” under the definition set forth in § 1041.2(a)(11) and Regulation Z. For example, if an employer cannot simply reduce the amount of an employee's paycheck because payroll processing has already begun, there may be a need for a mechanism for the consumer to repay the funds after they are deposited in the consumer's account.

The Bureau has decided in new § 1041.3(d)(7) to exclude such wage advance programs—to the extent they constitute credit—from coverage under the rule if they meet certain additional conditions. The Bureau notes that the payment of accrued wages on a periodic basis, such as bi-weekly or monthly, appears to be largely driven by efficiency concerns with payroll processing and employers' cash management. In addition, the Bureau believes that the kinds of risks and harms that the Bureau has identified with making covered loans, which are often unaffordable as a result of the identified unfair and abusive practice, may not be present where these types of innovative financial products are subject to appropriate safeguards. Accordingly, where advances of wages constitute credit, the Bureau is adopting § 1041.3(d)(7) to exclude them from part 1041 if the advances are made by an employer, as defined in the Fair Labor Standards Act, 29 U.S.C. 203(d), or by the employer's business partner, to the employer's employees, provided that the following conditions apply:

  • The employee is not required to pay any charges or fees in connection with such an advance from the employer or the employer's business partner, other than a charge for participating in the program; and
  • The entity advancing the funds warrants that it has no legal or contractual claim or remedy against the employee based on the employee's failure to repay in the event the amount advanced is not repaid in full; will not engage in any debt collection activities if the advance is not deducted directly from wages or otherwise repaid on the scheduled date; will not place the amount advanced as a debt with or sell the debt to a third party; and will not report the debt to a consumer reporting agency concerning the amount advanced.

The Bureau has considered the comments as well as its own analysis of this evolving marketplace and has concluded that new and innovative financial products that meet these conditions will tend not to produce the kinds of risks and harms that the Bureau's final rule is seeking to address with respect to covered loans. At the same time, nothing prevents the Bureau from reconsidering these assumptions in a future rulemaking if there is evidence that such products are harming consumers.

The Bureau has also adopted new commentary. Comment 3(d)(7)-1 notes that wage advance programs must be offered by the employee's employer or the employer's business partner, and examples are provided of such business partners, which could include companies that are involved in providing payroll processing, accounting services, or benefits programs to the employer. Comment 3(d)(7)(i)-1 specifies that the advance must be made only against accrued wages and must not exceed the amount of the employee's accrued wages, and provides further definition around the meaning of accrued wages. Comment 3(d)(7)(ii)(B)-1 clarifies that though the entity advancing the funds is required to warrant that it has no legal or contractual claim or remedy against the consumer based on the consumer's failure to repay in the event the amount advanced is not repaid in full, this provision does not prevent the entity from obtaining a one-time authorization to seek repayment from the consumer's transaction account.

For these reasons, the Bureau is adopting the exclusion for wage advance programs as described in § 1041.3(d)(7) of the final rule and the related commentary.

3(d)(8) No-Cost Advances

As discussed above in connection with § 1041.3(d)(7), the Bureau noted in the proposal, in connection with its discussion of the definition of lender in proposed § 1041.2(a)(11), that some newly formed companies are providing products or services that allow consumers to draw on wages they have earned but not yet been paid. Some of these companies are providing advances of funds and are doing so without charging any fees or finance charges, for instance by relying on voluntary tips. The proposal noted that others were seeking repayment and compensation through electronic transfers from the consumer's account. The Bureau sought comment on whether to exclude such entities and similar products from coverage under the rule.

The Bureau received limited comments on this issue, perhaps reflecting that it represents a fairly new business model in the marketplace, with some championing the potential benefits for consumers and others maintaining that no exclusions—or at least no additional exclusions—should be created to the rule as it was proposed. Some comments described in more detail how the evolution of these products was unfolding, how they operate, and how they may affect the marketplace and consumers. The Bureau has also had discussions with stakeholders in connection with its other functions, such as market monitoring, supervision, and general outreach, that have informed its views and understanding of these new products and methods of providing access to funds for more consumers. As discussed above in connection with Start Printed Page 54548§ 1041.3(d)(7), the Bureau is aware that some of these products provide access to the consumer's own funds in the form of earned wages already accrued but not yet paid out because of administrative and payroll processes historically developed by employers, whereas other products rely on estimates of wages likely to be accrued, or accrued on average, and may make advances against expected wages that are not already earned and accrued.

The Bureau has carefully considered the comments it has received on these issues, as well as other information about the market that it has gleaned from the course of its regular activities. The Bureau has addressed certain wage advance programs offered by employers or their business partners in § 1041.3(d)(7), as discussed above. In addition, after further weighing the potential benefits to consumers of this relatively new approach, the Bureau has decided to create a specific exclusion in § 1041.3(d)(8) of the final rule to apply to no-cost advances, regardless of whether they are offered by an employer or its business partner. The exclusion contains similar conditions to § 1041.3(d)(7), except that it applies to advances of funds where the consumer is not required to pay any charge or fee (even a fee for participating in the program), and it is not limited to the accrued cash value of the employee's wages. Like § 1041.3(d)(7), the exclusion is further limited to situations in which the entity advancing the funds warrants to the consumer as part of the contract between the parties (i) that it has no legal or contractual claim or remedy against the consumer based on the consumer's failure to repay in the event the amount advanced is not repaid in full; and (ii) that with respect to the amount advanced to the consumer, the entity advancing the funds will not engage in any debt collection activities, place the debt with or sell the debt to a third party, or report the debt to a consumer reporting agency if the advance is not repaid on the scheduled date.

The exclusion in § 1041.3(d)(8) is thus designed to apply to programs relying solely on a “tips” model or otherwise providing emergency assistance at no cost to consumers. The Bureau estimates, based on its experience with the marketplace for different types of small-dollar loans, that products meeting the conditions of § 1041.3(d)(8) are likely to benefit consumers and unlikely to lead to the risks and harms described below in Market Concerns—Underwriting. Unlike the proposal, the Bureau has decided not to confine such no-fee advances solely to the employer-employee context, as the very specific features of their product structure makes an exclusion from the rule for them likely to be beneficial for consumers across the spectrum. At the same time, nothing prevents the Bureau from reconsidering these assumptions in a future rulemaking if there is evidence that such products are harming consumers.

New comment 3(d)(8)-1 further provides that though an entity advancing the funds is required to warrant that it has no legal or contractual claim or remedy against the consumer based on the consumer's failure to repay in the event the amount advanced is not repaid in full, this provision does not prevent the entity from obtaining a one-time authorization to seek repayment from the consumer's transaction account.

For these reasons, the Bureau is adopting the exclusion for no-cost advances as described in § 1041.3(d)(8) of the final rule and the related commentary.

3(e) Conditional Exemption for Alternative Loans

In § 1041.11 of the proposed rule, the Bureau set forth a conditional exemption for loans with a term of between 46 days and 180 days, if they satisfied a set of conditions that generally followed those established by the NCUA under the Payday Alternative Loan (PAL) Program as described above in part II. The proposal did not, however, contain a comparable exemption for PAL loans with durations between 30 and 45 days, with 30 days being the minimum duration permitted for a PAL loan. Loans that met the conditions of the proposed conditional exemption would have been exempted from the proposed underwriting criteria applicable to covered longer-term loans, but still would have been subject to the requirements on payment practices and the notice requirements.

The Bureau received many general comments on the proposed exemption for PAL loans offered by credit unions and for comparable loan products if offered by other lenders. Some commenters argued that credit unions, as a class of entity, should be entirely exempted from all coverage under the rule. Others asked for more tailored exemptions for certain credit unions, such as for those with assets totaling less than $10 billion. Still others requested that credit unions be relieved of specific obligations under the rule, such as from compliance and record retention provisions (because their prudential regulators already address those matters); or from payment regulations for internal collections that do not incur fees; or from underwriting requirements for Community Development Financial Institutions (CDFIs) that provide beneficial credit and financial services to underserved markets and populations. By contrast, other commenters did not think the Bureau could or should create any special provisions for credit unions in particular. But some consumer and legal aid groups were supportive of the PAL program, which they viewed as beneficial to consumers and not easily subject to manipulation.

Some asserted that the PAL program was too constrained to support any broad provision of such loans, which were unlikely to yield a reasonable rate of return and thus not likely to generate a substantial volume of loans or to be sustainable for other lenders that are not depository institutions. Others argued that the proposed rule contained provisions that would go beyond the terms of the PAL program and increase complexity, and these additional provisions should be scaled back to mirror the PAL program more closely. Some commenters contended that the PAL program itself imposed a usury limit, which would be improper if adopted by the Bureau.

As discussed earlier, the Bureau has decided not to finalize the specific underwriting criteria with respect to covered longer-term loans (other than covered longer-term balloon-payment loans) at this time. However, the Bureau has decided, for the reasons explained below, to create a conditional exemption to the rule that applies to any alternative loan, which is a term that is defined more specifically below. In brief, an alternative loan is a covered loan that meets certain conditions and requirements that are generally consistent with the provisions of the PAL program as authorized and administered by the NCUA, including any such loan made by a Federal credit union that is in compliance with that program. The conditions and requirements of the exemption are modified in certain respects relative to the proposal to reflect that the conditional exemption now also encompasses loans of less than 45 days in duration to create a more comprehensive lending framework, unlike the coverage initially described in the proposed rule. In creating this exception, the Bureau agrees with the commenters that concluded, after observing the PAL program over time, that program is generally beneficial to consumers and not easily subject to manipulation in ways that would create risks and harms to consumers.Start Printed Page 54549

At the same time, the Bureau recognizes that one of the objectives set forth in the Dodd-Frank Act is for Federal consumer financial law to be enforced consistently without regard to the status of a person as a depository institution.[443] Consistent with that objective, the Bureau has set forth the elements of alternative loans in general form, so that lenders other than Federal credit unions—including both banks and other types of financial institutions—can offer comparable loans in accordance with essentially the same conditions and requirements. By doing so, the Bureau is making it possible for more lenders to offer this product, which will offer the opportunity to test the prediction made by some commenters that these loans would not scale if offered by lenders that are not depository institutions—a point on which the Bureau is not yet convinced either way.

The conditional exemption for alternative loans contained in § 1041.3(e) of the final rule is adopted pursuant to the Bureau's exemption authority in section 1022(b)(3) of the Dodd-Frank Act to “conditionally or unconditionally exempt any class of covered persons, service providers, or consumer financial products or services, from any . . . rule issued under this title.” [444] In this respect, Congress gave the Bureau broad latitude, simply stating that it should do so “as [it] deems necessary or appropriate to carry out the purposes and objectives of this title.” [445] The statutory language thus indicates that the Bureau should evaluate the case for creating such an exemption in light of its general purposes and objectives as Congress articulated them in section 1021 of the Dodd-Frank Act. In addition, when the Bureau exercises its exemption authority under section 1022(b)(3) of the Dodd-Frank Act, it is further required to take into consideration, as appropriate, three additional statutory factors: (i) The total assets of the class of covered persons; (ii) the volume of transactions involving consumer financial products or services in which the class of covered persons engages; and (iii) existing provisions of law which are applicable to the consumer financial product or service and the extent to which such provisions provide consumers with adequate protections.[446]

Here, the Bureau perceives tangible benefit for consumers and for lenders by preserving the framework of the PAL program, which as discussed in part II has had some success in generating approximately $134.7 million in originations in 2016—up 9.7 percent from the 2015 levels—with relatively low costs of credit and relatively low levels of charge-offs for this particular market. In particular, the Bureau agrees with those commenters that noted the distinct elements of the PAL program, including the specified product features, are not configured to give rise to the kinds of risks and harms that are more evident with covered short-term loans or covered longer-term balloon-payment loans. In short, the PAL product thus far seems to be beneficial for consumers, and a conditional exemption to make such loans more broadly available to the public appears consistent with the Bureau's purpose “of ensuring that all consumers have access to markets for consumer financial products and services.” [447] Likewise, it seems consistent also with the Bureau's objective of ensuring that “markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation,” and the competition that alternative loans could provide to other types of covered loans may be helpful in protecting consumers “from unfair . . . or abusive acts and practices.” [448]

Turning to the statutory factors set out in section 1022(b)(3), the assets of the expected class of lenders is likely to remain relatively small in light of the thousands of smaller credit unions, as also is the volume of transactions, which many commenters did not seem to expect would scale into much larger loan programs, though the Bureau is not yet convinced on this point either way. In addition, the PAL program itself is regulated and overseen by NCUA with respect to the credit unions who offer it, which means that “existing provisions of law . . . are applicable to [it]” and it is reasonable at this time to judge that “such provisions provide consumers with adequate protection” in using this loan product, as Congress indicated was germane to determining the justifications for an exemption.[449] Moreover, under the general terms of § 1041.3(e), which allows all lenders to make alternative loans regardless of whether they are credit unions, the Bureau and other regulators, including State regulators, stand well-positioned to monitor the development of this loan product over time, and to make adjustments if the current experience of these loans as generally beneficial for consumers were perceived to be changing in ways that created greater consumer risks and harms.

The Bureau decided to create this conditional exemption in order to recognize that the NCUA is currently operating and supervising this established loan program for credit unions and to avoid duplicative overlap of requirements that could foster confusion and create undue burdens for certain lenders, in light of the Bureau's conclusion that loans made on terms that are generally consistent with the PAL program do not pose the same kinds of risks and harms for consumers as the types of covered loans addressed by this rule.[450] It also judges this approach to be superior to the broader scope of exemptions urged by various commenters, such as a complete exemption from the rule for all loans of all types made by credit unions (rather than just PAL loans), or even a conditional exemption from certain portions of the rule for all loans of all types made by credit unions. As for the comment that these loans impose a usury cap, the Bureau has explained elsewhere that an actual usury cap would flatly prohibit certain loans from being made based directly on the interest rate being charged, whereas the exemption provided here would merely allow such loans to avoid triggering certain conditions of making such loans—most notably, the requirement that the lender reasonably assess the borrower's ability to repay the loan according to its terms but also the provisions concerning payment practices.

For all of these reasons, the Bureau is finalizing this provision and the related commentary with several modifications. First, in response to comments suggesting that various conditions for alternative loans as stated in the proposed rule would render this loan product too burdensome and complex, the Bureau has eliminated certain conditions for such loans in the final rule. In particular, among the conditions added in the proposal that now are dropped are: required monthly payments; rules on charging fees; required checking of affiliate records; certain additional requirements, such as prohibitions on prepayment penalties Start Printed Page 54550and sweeping of accounts in certain circumstances, as well as required information furnishing. Second, certain changes have been made to take account of the fact that proposed § 1041.11 had applied only to covered longer-term loans, whereas § 1041.3(e) of the final rule applies to covered loans more generally. The language of each prong of § 1041.3(e)(1) through (4) of the final rule is set out below, and immediately thereafter any changes made from the proposed language to the text of the final rule are specified and explained. Again, as a prefatory matter, an alternative loan is a covered loan that meets all four of these sets of conditions and requirements.

3(e)(1) Loan Term Conditions

  • Loan term conditions. An alternative loan must satisfy the following conditions:

○ The loan is not structured as open-end credit, as defined in § 1041.2(a)(16);

○ The loan has a term of not less than one month and not more than six months;

○ The principal of the loan is not less than $200 and not more than $1,000;

○ The loan is repayable in two or more payments, all of which payments are substantially equal in amount and fall due in substantially equal intervals, and the loan amortizes completely during the term of the loan; and

○ The loan carries a cost of credit (excluding any application fees) of not more than the interest rate permissible for Federal credit unions to charge under regulations issued by the National Credit Union Administration at 12 CFR 701.21(c)(7)(iii), and any application fees charged to the consumer reflect the actual costs associated with processing the application and do not exceed the application fees permissible for Federal credit unions to charge under regulations issued by the National Credit Union Administration at 12 CFR 701.21(c)(7)(iii).

The language of the final rule originated in § 1041.11(a) of the proposed rule. The name of the exemption has been revised from a conditional exemption for certain covered longer-term loans up to six months in duration to a conditional exemption for alternative loans. The term of the loan is modified from “not more than six months” to “not less than one month and no more than six months,” again to reflect the change made in this exemption to encompass the broader set of all covered loans, rather than just covered longer-term loans. The other conditions, including the $200 floor and the $1,000 cap, are maintained because they are consistent with the requirements of the PAL program. The prior condition that the loan be repayable in two or more payments “due no less frequently than monthly” is now changed to omit the quoted language because the term of these loans may now be shorter than was the case in the proposal. The amortization provision is broken out and simplified to provide more flexibility around the payment schedule and allocation, which again reflects the fact that many of these loans may now be covered short-term loans. Finally, the prior language around total cost of credit is now replaced with cost of credit, which is consistent with TILA and Regulation Z and is responsive to suggestions made by several commenters; the permissible interest rate on such products is that set by the NCUA for the PAL program; any application fees charged to the consumer must reflect the actual associated costs and comply with the provisions of any NCUA regulations; and the lender does not impose any charges other than the rate and application fees permitted by the NCUA for the PAL program.

3(e)(2) Borrowing History Condition

Section 1041.3(e)(2) provides that prior to making an alternative loan under § 1041.3(e), the lender must determine from its records that the loan would not result in the consumer being indebted on more than three outstanding loans made under this section from the lender within a period of 180 days. Section 1041.3(e)(2) also provides that the lender must also make no more than one alternative loan under § 1041.3(e) at a time to a consumer.

Aside from conforming language changes, the only substantive revision here is to excise references to affiliates of the lenders, consistent with the NCUA's practice in administering the PAL program.

3(e)(3) Income Documentation Condition

Section 1041.3(e)(3) provides that in making an alternative loan under § 1041.3(e), the lender must maintain and comply with policies and procedures for documenting proof of recurring income.

This prong contains minor conforming language changes only.

3(e)(4) Safe Harbor

Section 1041.3(e)(4) provides that loans made by Federal credit unions in compliance with the conditions set forth by the National Credit Union Administration at 12 CFR 701.21(c)(7)(iii) for a Payday Alternative Loan are deemed to be in compliance with the requirements and conditions of § 1041.3(e)(1), (2), and (3).

This prong contains entirely new language, replacing what had been “additional requirements” in § 1041.11(e) of the proposed rule. Those additional requirements tailored by the NCUA for credit unions and included in the original proposal would be cumbersome in various respects for all lenders to adopt, including provisions on additional information furnishing, restrictions on sweeps and set-offs as means of a depository institution collecting on the loan, and prepayment penalties. The safe harbor provided for Federal credit unions in compliance with NCUA's requirements for the PAL program, however, reflects the fact that to qualify for the safe harbor, a credit union would be obligated to comply with all of the additional requirements of the PAL program.

Having considered the comments received, the Bureau concludes that it is appropriate to finalize § 1041.3(e) for all the reasons discussed above. The Bureau also is finalizing proposed comment 3(d)(8)-1 as comment 3(e)-1 of the final rule, which notes that this provision does not confer on the lenders of such loans any exemption from the requirements of other applicable laws, including State laws. This comment also clarifies that all lenders, including Federal credit unions and persons that are not Federal credit unions, are permitted to make loans under the specific terms in § 1041.3(e), provided that such loans are permissible under other applicable laws, including State laws. The remainder of the commentary is being carried forward from the proposed rule with revisions, all made to align them with the modified language in § 1041.3(e) of the final rule. The proposed comments previously designated as 11(a)-1 to (11)(e)(1)(ii)-2 are now renumbered as comments 3(e)(1)-1 to 3(e)(3)-1 in the final rule.

3(f) Conditional Exemption for Accommodation Loans

In the proposal, in connection with the discussion of the proposed definition of lender in § 1041.2(a)(11), the Bureau noted that some stakeholders had suggested narrowing the definition of lender to avoid covering lenders that are primarily focused on other types of lending or other types of financial services, but on occasion make covered loans as a means of accommodating their existing customers. The stakeholders posited that such loans would be likely to operate differently from loans made as a primary line of business, for instance because the lenders who make them have information about consumers' financial situations from their primary lines of business and because their incentives in making the loans is to preserve their Start Printed Page 54551customer relationships, and thus may not pose the same risks and harms as other types of covered loans. The Bureau solicited comments on this suggestion.

The Bureau had also proposed a more detailed provision, in proposed § 1041.12, in order to provide a conditional exemption for certain covered longer-term loans that would be made through accommodation lending programs and would be underwritten to achieve an annual portfolio default rate of not more than five percent. The proposal would have allowed a lender to make such loans without meeting the specific underwriting criteria contained in the proposed rule, though proposed § 1041.12 laid out its own detailed provisions applicable to the making of such loans. Notably, the Bureau found that the feedback it received on this provision overlapped considerably with the comments submitted in response to the question the Bureau had asked with respect to the definition of lender about providing an exception based on de minimis lending.

Many commenters expressed their views favoring a de minimis exemption. Several of them urged that the Bureau should set parameters for the exemption based both on loan volume and the percentage of revenue derived from such loans. More specific suggestions ranged from caps of 100 to several thousand loans per year; one commenter suggested 2,000 loans per year that yield no more than five percent of revenue; others urged a cap of 2,500 loans per year that yield no more than 10 percent of revenue.

The Bureau also received a number of comments on proposed § 1041.12 and proposed comments 12(a)-1 to (12)(f)(1)(ii)-2. Banking organizations argued that the Bureau should exempt types of institutions rather than types of loans, and that because community banks are responsible providers of small loans, they should be conditionally exempted from coverage.

Many commenters were also critical of the provisions of proposed § 1041.12, which they viewed as so cumbersome as to discourage many institutions from engaging in this type of lending. These comments focused particularly on the back-end requirements and calculations included in the proposal. Some commenters noted the guidance already in place from other banking regulators that had suppressed such lending at the banks, and predicted that the proposal would exacerbate those difficulties. State bank regulators, in particular, advocated in favor of a de minimis threshold to preserve such lending by smaller community banks as beneficial to consumers, especially in rural areas and as a way to provide alternatives if the effect of the rule would be to cause consolidation in the small-dollar lending market. Consumer groups generally opposed exemptions to the rule but acknowledged that a properly structured de minimis provision would be unlikely to create much if any harm to consumers.

As stated earlier, the Bureau has decided not to finalize the ability-to-repay requirements with respect to covered longer-term loans (other than covered longer-term balloon-payment loans) at this time. However, as a result of reviewing and analyzing the public input on the issue of accommodation lending more generally, the Bureau has determined to create a conditional exemption that is applicable to accommodation loans that have been traditionally made primarily by community banks and credit unions. At the same time, in line with the Dodd-Frank Act's goal of enforcing Federal consumer financial law without regard to a financial company's status as a depository institution,[451] the Bureau has set forth the elements of accommodation loans in general form such that any lender whose covered loan originations fall below the thresholds set in final § 1041.3(f) can qualify for the conditional exemption. In part, the Bureau is reaching this conclusion based on its review of the comments received, which indicated that lenders would find the approach taken in proposed § 1041.12 to be cumbersome or even unworkable for lenders. Whether or not this was objectively demonstrable for most lenders, it was clear that the proposed approach would have been taken as a discouraging factor for those deciding whether or not to make such loans. Moreover, the Bureau concluded that loans made as an occasional accommodation to existing customers were not likely to pose the same risks and harms as other types of covered loans, because such loans would be likely to operate differently and carry different incentives for the lender as compared to loans made as a primary line of business.

As discussed in the preceding section on alternative loans, when the Bureau exercises its exemption authority under section 1022(b)(3) of the Dodd-Frank Act to create an exemption for “any class of covered persons, service providers, or consumer financial products or services, from any * * * rule issued under this title,” it has broad latitude that Congress conferred upon it to do so.[452] Again, Congress simply said that the Bureau should exercise this authority “as [it] deems necessary or appropriate to carry out the purposes and objectives of this title,” [453] and the Bureau's general purposes and objectives are stated in section 1021 of the Dodd-Frank Act. In addition, when the Bureau exercises its exemption authority under section 1022(b)(3) of the Dodd-Frank Act, it is further required, as appropriate, to take into consideration three statutory factors: The total assets of the class of covered persons; the volume of transactions involving consumer financial products or services in which the class of covered persons engages; and existing provisions of law which are applicable to the consumer financial product or service and the extent to which such provisions provide consumers with adequate protections.[454] Here, too, it appears that Congress intended the Bureau to do so in view of its purposes and objectives as set forth in the Dodd-Frank Act.

Here, the Bureau perceives tangible benefit for consumers and for lenders to be able to maintain access to individualized loans of the kind permitted by this provision and in line with the traditions and experience of community banks over many years, which have generally underwritten these loans as an accommodation on an individualized basis in light of their existing customer relationships. In this manner, the conditional exemption would help ensure “that all consumers have access to markets for consumer financial products and services,” [455] which is a principal purpose of the Dodd-Frank Act, and would not be restricted in their existing access to such traditional loan products. At the same time, this conditional exemption would enable the Bureau “to reduce unwarranted regulatory burdens” [456] on these longstanding loan products made to existing bank customers on an individualized basis in light of their existing customer relationships, without posing any of the kinds of risks and harms to consumers that exist with the types of covered loans addressed by this rule.

And though the provisions of § 1041.3(f) are written in general terms to be applicable to lenders that are not themselves depository institutions, it does not appear likely that these Start Printed Page 54552provisions would be open to wide-scale abuse, precisely because the loan and revenue restrictions are set at a de minimis level that would tend to limit the scope of any predatory behavior. Assessing the matter against the three additional statutory factors as well, then, the assets of these lenders availing themselves of this provision would likely be limited; the volume of transactions would be small, by definition and design; and Federal consumer financial law, as implemented through the Bureau's continuing supervisory and enforcement authorities and by other means as provided in the statute, would maintain consumer protections in the broader market despite this slight restriction on coverage under the rule.

Therefore, as stated in § 1041.3(f), this provision will conditionally exempt any accommodation loan from coverage under the final rule. That category is defined to apply to a covered loan made by any lender where the lender and its affiliates collectively have made 2,500 or fewer covered loans in the current calendar year and also made 2,500 or fewer covered loans in the preceding calendar year; and during the most recent completed tax year in which the lender was in operation, if applicable, the lender and any affiliates that were in operation and used the same tax year derived no more than 10 percent of their receipts from covered short-term and longer-term balloon-payment loans, or if the lender was not in operation in a prior tax year, the lender reasonably anticipates that the lender and any of its affiliates that use the same tax year will, during the current tax year, derive no more than 10 percent of their receipts from covered short-term loans and covered longer-term balloon-payment loans. Comment 3(f)-1 of the final rule provides an example of the application of this provision to a sample lender.

Although, in general, all covered loans and the receipts from those loans would count toward the thresholds in § 1041.3(f) for the number of loans per year and for receipts, § 1041.3(f) allows lenders not to count toward either threshold covered longer-term loans for which the conditional exclusion for transfers in § 1041.8(a)(1)(ii) applies to all transfers for payments made under the loan. As explained in the section-by-section discussion of § 1041.8(a)(1)(ii), when the lender is the account-holder, that provision excludes certain transfers from the definition of payment transfer if, pursuant to the terms of the loan agreement or account agreement, the lender (1) does not charge the consumer any fee, other than a late fee under the loan agreement, in the event that the lender initiates a transfer of funds from the consumer's account in connection with the covered loan for an amount that the account lacks sufficient funds to cover; and (2) does not close the consumer's account in response to a negative balance that results from a transfer of funds initiated in connection with the covered loan. These conditions provide substantial protection against the harms targeted by the provisions in §§ 1041.8 and 1041.9. As a result, loans for which all payment transfers are excluded under § 1041.8(a)(1)(ii) from the definition of payment transfer are not subject to either the prohibition in § 1041.8(b) on initiating more than two consecutive failed payment transfers or the requirement in § 1041.9(b) to provide payment notices prior to initiating certain payment withdrawals. Since those loans carry with them substantial protection against the harms targeted in subpart C and would not be subject to those provisions, the Bureau believes that it is simpler not to count them for purposes of § 1041.3(f) either.

The Bureau had sought comment about the appropriate parameters of this conditional exemption, which is designed to be a de minimis provision to allow only a certain amount of lending of this kind to accommodate customers as a distinct sidelight to the institution's main lines of business. Once again, the purpose of this provision is to accommodate existing customers through what traditionally have been loans that were underwritten on an individualized basis for existing customers. It was not proposed, and is not being adopted, to stimulate the development of a model for loans that are offered in high volumes. As for the parameters that the Bureau decided on, they closely reflect the submissions received in the comment process, with both the overall loan limit (2,500 per year) and the revenue limit (no more than 10 percent of receipts) intended to keep loans made pursuant to this exemption to a very limited part of the lender's overall business. Each of the two provisions operates together to achieve that joint objective, which would not necessarily be achieved by either component operating in isolation.

The Bureau decided to create this conditional exemption in order to respond to the persuasive points made by the commenters about the benefits that would flow from preserving this modest amount of latitude to be able to contour specialized loans as an accommodation to individual customers. That is especially so in view of the unlikelihood that this practice would pose the same kinds of risks and harms that the Bureau recognized with covered short-term loans and covered longer-term balloon-payment loans as described below in Market Concerns—Underwriting. The adoption of this conditional exemption also evinces the Bureau's recognition of the input it has heard from many stakeholders over the years, particularly from depository institutions, who have regularly supplied the Bureau with details about their perspective that smaller depository lenders such as community banks and credit unions have a long history and tradition of making loans to accommodate their existing customers for various personal reasons, such as minor expenses related to some type of family event. These loans are typically underwritten, customized, made for small amounts and at reasonable cost, and generate low levels of defaults. Although this type of accommodation lending is often quite specialized and individualized, it could be construed to overlap in certain ways with the covered loans encompassed by the rule. The conditional exemption that is now finalized in § 1041.3(f) provides an effective method of addressing legitimate concerns about the potentially detrimental consequences of that overlap for consumers.

3(g) Receipts

The Bureau has added a new definition of the term receipts, which § 1041.3(g) of the final rule defines to mean total income (or, in the case of a sole proprietorship, gross income) plus cost of goods sold as these terms are defined and reported on Internal Revenue Service (IRS) tax return forms (such as Form 1120 for corporations; Form 1120S and Schedule K for S corporations; Form 1120, Form 1065, or Form 1040 for LLCs; Form 1065 and Schedule K for partnerships; and Form 1040, Schedule C for sole proprietorships). Receipts do not include net capital gains or losses; taxes collected for and remitted to a taxing authority if included in gross or total income, such as sales or other taxes collected from customers but excluding taxes levied on the entity or its employees; or amounts collected for another (but fees earned in connection with such collections are receipts). Items such as subcontractor costs, reimbursements for purchases a contractor makes at a customer's request, and employee-based costs such as payroll taxes are included in receipts. This definition of receipts is modeled on the definitions of the same term in the Bureau's larger participant rulemakings for the consumer Start Printed Page 54553reporting [457] and debt collection markets,[458] which in turn were based in part on the Small Business Administration's definition of receipts at 13 CFR 121.104.

The Bureau is adding this definition to clarify how the term is used in § 1041.3(f) in the course of describing accommodation loans, and to reduce the risk of confusion among consumers, industry, and regulators.

3(h) Tax Year

The Bureau has added a new definition of the term tax year, which § 1041.3(h) of the final rule defines to have the same meaning attributed to this term by the IRS as set forth in IRS Publication 538, which provides that a tax year is an annual accounting period for keeping records and reporting income and expenses. The Bureau is adding this definition to clarify how the term is used in § 1041.3(f) in the course of describing accommodation loans, and to reduce the risk of confusion among consumers, industry, and regulators.

Subpart B—Underwriting

Overview of the Bureau's Approach in the Proposal and in the Final Rule

The Bureau proposed to identify an unfair and abusive practice with respect to the making of covered short-term loans pursuant to its authority to “prescribe rules * * * identifying as unlawful unfair, deceptive, or abusive acts or practices.” [459] The proposal explained the Bureau's preliminary view that it is both an unfair and abusive practice for a lender to make such a loan without reasonably determining that the consumer will have the ability to repay the loan. To avoid committing this unfair and abusive practice, the Bureau stated that a lender would have to make a reasonable assessment that the consumer has the ability to repay the loan. The proposal would have established a set of requirements to prevent the unlawful practice by requiring lenders to follow certain specified underwriting practices in assessing whether the consumer has the ability to repay the loan, as well as imposing certain limitations on rapid re-borrowing. The Bureau proposed the ability-to-repay requirements under its authority to prescribe rules for “the purpose of preventing unfair and abusive acts or practices.” [460]

The proposal would have further relied on section 1022(b)(3) of the Dodd-Frank Act [461] to exempt certain covered short-term loans from the ability-to-repay requirements if the loans satisfied a set of conditions designed to avoid the harms that can result from unaffordable loans, including the harms that can flow from extended sequences of multiple loans in rapid succession. Accordingly, lenders seeking to make covered short-term loans would have the choice, on a case-by-case basis, either to comply with the ability-to-repay requirements according to the specified underwriting criteria or to make loans that meet the conditions set forth in the proposed exemption—conditions that are specifically designed as an alternative means to protect consumers against the harms that can result from unaffordable loans.

As detailed further below, the Bureau has carefully considered its own research, analysis performed by others, and the public comments received with respect to this rulemaking and is now finalizing its finding that failing to reasonably determine whether consumers have the ability to repay covered short-term loans according to their terms is an unfair and abusive practice. These sources establish that unaffordable covered short-term loans generate severe harms for a substantial population of consumers. The Bureau has made the judgment that the harms and risks of such loans can be addressed most effectively by requiring lenders to underwrite such loans in accordance with specific criteria and thus not to make such a loan without reasonably determining that the consumer has the ability to repay the loan according to its terms. The Bureau has also retained the conditional exemption, while noting that the conditions on such loans, which are specifically designed as an alternative means to protect consumers against the harms that can result from unaffordable loans, will likely prompt lenders to consider more carefully their criteria for making such loans as well, given that defaults and delinquencies can no longer be offset by the revenues from repeated re-borrowing. The Bureau has modified various details of the proposed rule with respect to the underwriting criteria for the ability-to-repay requirement and the conditional exemption to strike a better balance among compliance burdens and other concerns, but has maintained the basic framework that was initially set forth in the proposed rule.

The Bureau also proposed to identify the same unfair and abusive practice with respect to the failure to assess consumers' ability to repay certain longer-term loans, including both installment and balloon-payment structures, as long as the loans exceeded certain price thresholds and involved the taking of either a leveraged payment mechanism or vehicle security. The Bureau proposed to subject these covered longer-term loans to underwriting requirements similar to those for covered short-term loans, as well as proposing two exemptions for loans that satisfied different sets of conditions designed to avoid the risks and harms that can result from unaffordable loans.

As detailed further below, the Bureau has carefully considered its own research, analysis performed by others, and the public comments received with respect to the proposed treatment of covered longer-term loans, and has decided to take a bifurcated approach at this time to concerns about unfair or abusive underwriting of longer-term loans. With regard to balloon payment structures, the Bureau finds that failing to reasonably assess whether consumers have the ability to repay covered longer-term balloon-payment loans according to specific underwriting criteria is an unfair and abusive practice. Because they require large lump-sum or irregular payments, these loans impose financial hardships and payment shocks on consumers that are similar to those posed by short-term loans over just one or two income cycles. Indeed, the Bureau's analysis of longer-term balloon-payment loans in the market for vehicle title loans found that borrowers experienced high default rates—notably higher than for similar loans with amortizing installment payments. The Bureau also has concluded that the outcomes between a single-payment loan with a term of 46 or more days is unlikely to be much different for consumers than an identical loan with a term of 45 days, and is concerned that failing to cover longer-term balloon-payment loans would induce lenders to slightly extend the terms of their existing short-term lump-sum loans in an effort to evade coverage under the final rule, as occurred in this market in response to regulations adopted under the Military Lending Act.

For these reasons, the Bureau is finalizing its finding that failing to reasonably assess whether consumers have the ability to repay covered longer-term balloon-payment loans is an unfair and abusive practice. The Bureau has made the judgment that these risks and harms can be addressed most effectively—as with covered short-term loans—by requiring lenders to Start Printed Page 54554underwrite such loans in accordance with specified criteria and thus not to make such a loan without reasonably determining that the consumer has the ability to repay the loan according to its terms. After having sought comment on the issue of whether longer-term balloon-payment loans should be covered regardless of price or the taking of a leveraged payment mechanism or vehicle security, the Bureau has decided, in light of the risks to consumers, to apply the rule to all such loans, aside from certain exclusions and exemptions described above in § 1041.3 of the final rule.

The Bureau has decided, however, not to move forward with its primary finding that it is an unfair and abusive practice to make certain higher-cost longer-term installment loans without making a reasonable determination that the consumer will have the ability to repay the loan, and, accordingly, its prescription of underwriting requirements designed to prevent that practice. The Bureau has decided to defer this aspect of the proposal for further consideration in a later rulemaking. After consideration of the research and the public comments, the Bureau has concluded that further analysis and outreach are warranted with respect to such loans, as well as other types of credit products on which the Bureau sought comment as part of the Request for Information. While such loans differ in certain ways from the loans covered in this final rule, the Bureau remains concerned that failing to underwrite such products may nonetheless pose substantial risk for consumers. The Bureau will continue to gather evidence about the risks and harms of such products for consideration as a general matter in a later rulemaking, and will continue in the meantime to scrutinize such lending for potential unfair, deceptive, or abusive acts or practices pursuant to its supervisory and enforcement authority.

And, as detailed in subpart C below, the Bureau has concluded that it is appropriate to apply certain limitations and disclosure requirements concerning payment practices (and related recordkeeping requirements) to longer-term installment loans with a cost of credit above 36 percent that involve the taking of a leveraged payment mechanism.

The predicate for the identification of an unfair and abusive practice in the Bureau's proposal—and thus for the preventive ability-to-repay requirements—was a set of preliminary findings about the consumers who use storefront and online payday loans, single-payment vehicle title loans, and other covered short-term loans, and the impact on those consumers of the practice of making such loans without assessing the consumers' ability to repay. The preliminary findings as set forth in the proposal, the comments that the Bureau received on them, and the Bureau's responses to those comments as the foundation of its final rule are all discussed below in the following section referred to as Market Concerns—Underwriting. Further in the discussion below, the Bureau also addresses the same issues with respect to covered longer-term balloon-payment loans.

Market Concerns—Underwriting

Short-Term Loans

In the proposal, the Bureau stated its concern that lending practices in the markets for storefront and online payday lending, single-payment vehicle title loans, and other covered short-term loans are causing harm to many consumers who use these products. Those harms include default, delinquency, and re-borrowing, as well as various collateral harms from making unaffordable payments. This section reviews the available evidence with respect to the consumers who use covered short-term loans, their reasons for doing so, and the outcomes they experience. It also reviews the lender practices that contribute to these outcomes. The discussion begins with the main points presented in this section of the proposal, stated in summary form, and provides a high-level overview of the general responses offered by the commenters. More specific issues and comments are then treated in more detail in the succeeding subsections. In the proposal, the Bureau's preliminary views were stated in summary form as follows:

  • Lower-income, lower-savings consumers. Consumers who use these products tend to come from lower- or moderate-income households. They generally do not have any savings to fall back on, and they have very limited access to other sources of credit; indeed, typically they have sought unsuccessfully to obtain other, lower cost, credit before turning to a short-term loan. The commenters generally validated these factual points, though many disputed the inferences and conclusions to be drawn from these points, whereas others agreed with them. Individual commenters generally validated the factual descriptions of these characteristics of borrowers as well.
  • Consumers in financial difficulty. Some consumers turn to these products because they have experienced a sudden drop in income (“income shock”) or a large unexpected expense (“expense shock”). Other borrowers are in circumstances in which their expenses consistently outstrip their income. A sizable percentage of users report that they would have taken a loan on almost any terms offered. Again, the commenters generally validated these points as a factual matter, but disputed the inferences and conclusions to be drawn therefrom.
  • Loans do not function as marketed. Lenders market single-payment products as short-term loans designed to provide a bridge to the consumer's next payday or other income receipt. In practice, however, the amounts due on these loans consume such a large portion of the consumer's paycheck or other periodic income source as to be unaffordable for most consumers seeking to recover from an income or expense shock, and even more so for consumers with a chronic income shortfall. Lenders actively encourage consumers either simply to pay the finance charges due and roll over the loan instead of repaying the loan in full (or effectively roll over the loan by engaging in back-to-back transactions or returning to re-borrow in no more than a few days after repaying the loan). Indeed, lenders are dependent upon such re-borrowing for a substantial portion of their revenue and would lose money if each borrower repaid the loan when it was due without re-borrowing. The commenters tended to recharacterize these points rather than disputing them as a factual matter, though many industry commenters disagreed that these loans should be considered “unaffordable” for “most” consumers if many consumers manage to repay them after borrowing once or twice. Others contended that these loans should not be considered “unaffordable” if they are repaid eventually, even after re-borrowing multiple times in extended loan sequences. The commenters on all sides generally did not dispute the nature of the underlying business model as resting on repeat re-borrowing that lenders actively encourage, though they sharply disputed whether this model benefited or harmed consumers.
  • Very high re-borrowing rates. Most borrowers find it necessary to re-borrow when their loan comes due or shortly after repaying their loan, as other expenses come due. This re-borrowing occurs both with payday loans and with single-payment vehicle title loans. The Bureau found that 56 percent of payday loans are borrowed on the same day and 85 percent of these loans are re-borrowed within a month. Fifty percent Start Printed Page 54555of all new storefront payday loans are followed by at least three more loans and 33 percent are followed by six more loans. While single-payment vehicle title loans are often for somewhat longer durations than payday loans, typically with terms of one month, re-borrowing tends to occur sooner and longer sequences of loans are more common. The Bureau found that 83 percent of single-payment vehicle title loans are re-borrowed on the same day and 85 percent of them are re-borrowed within a month. Over half (56 percent) of all new single-payment vehicle title loans are followed by at least three more loans, and more than a third (36 percent) are followed by six or more loans. Of the payday loans made to borrowers paid weekly, bi-weekly, or semi-monthly, over 20 percent are in loan sequences of 20 loans or more and over 40 percent of loans made to borrowers paid monthly are in loan sequences of comparable durations (i.e., 10 or more monthly loans). The commenters did not challenge the thrust of these points as demonstrating a high incidence of re-borrowing, which is a point that was reinforced by consumer groups and was illustrated by many individual commenters as well.
  • Consumers do not expect lengthy loan sequences. Many consumers who take out a payday loan do not expect to re-borrow to the extent that they do. This is especially true of those consumers who end up in extended cycles of indebtedness. Research shows that many consumers who take out loans are able to accurately predict how long it will take them to get out of debt, especially if they repay immediately or re-borrow only once, but a substantial population of consumers is not able to do so, and for those consumers who end up in extended loan sequences, there is little correlation between predictions and behavior. A study on this topic found that as many as 43 percent of borrowers may have underestimated the length of time to repayment by two weeks or more.[462] The study found that consumers who have borrowed heavily in the recent past are even more likely to underestimate how long it will take to repay the loan.[463] Consumers' difficulty in this regard may be exacerbated by the fact that such loans involve a basic mismatch between how they are marketed as short-term credit and appear designed to function as long sequences of re-borrowing, which regularly occurs for a number of consumers. This disparity can create difficulties for consumers in being able to estimate accurately how long they will remain in debt and how much they will ultimately pay for the initial extension of credit. Research into consumer decision-making also helps explain why consumers may re-borrow more than they expect. For example, people under stress, including consumers in financial crisis, tend to become very focused on their immediate problems and think less about the future. Consumers also tend to underestimate their future expenses, and may be overly optimistic about their ability to recover from the shock they have experienced or to bring their expenses in line with their incomes. These points were sharply disputed by the commenters, and will be discussed further below.
  • Very high default rates and collateral harms. Some consumers do succeed in repaying short-term loans without re-borrowing, and others eventually repay the loan after re-borrowing multiple times. But research shows that approximately 20 percent of payday loan sequences and 33 percent of single-payment vehicle title loan sequences end up with the consumer defaulting. Consumers who default can become subject to often aggressive and psychologically harmful debt collection efforts. While delinquent, they may also seek to avoid default in ways that lead to a loss of control over budgeting for their other needs and expenses. In addition, 20 percent of single-payment vehicle title loan sequences end with borrowers losing their cars or trucks to repossession. Even borrowers who have not yet defaulted may incur penalty fees, late fees, or overdraft fees along the way and may find themselves struggling to pay other bills or meet their basic living expenses. Commenters generally did not dispute that consumers may feel the effects of these negative collateral consequences of such loans and of delinquency and default, though industry commenters tended to downplay them and some argued that any such harms were outweighed by the economic benefits of such loans. Individual commenters validated this account of the negative collateral consequences of such loans as reflecting their own experiences. Many others countered that they had successful experiences with these loans and that they were benefited more than they were harmed by these experiences.
  • Harms occur despite existing regulation. The research indicates that in the States that have authorized payday and other short-term loans, these harms persist despite existing regulatory frameworks. Indeed, payday loans do not legally exist in many States, so by definition the harms identified by the Bureau's research flow from such loans in those States where they are offered pursuant to existing regulatory frameworks. Even in those States where such loans are offered pursuant to somewhat different conditions, these distinctions do not appear to eliminate the harms that flow from the structure of such loans. In particular, the Bureau is concerned that existing caps on the amount that a consumer can borrow, rollover limitations, and short cooling-off periods still appear to leave many consumers vulnerable to the specific harms discussed above relating to default, delinquency, re-borrowing, and other collateral harms from attempting to avoid the other injuries by making unaffordable payments. Industry commenters took issue with these concerns and disputed this characterization of the effects of such loans.

In the proposal, the Bureau also reviewed the available evidence underlying each of these preliminary views. The Bureau sought and received comments on its review of the evidence, and those comments are reviewed and addressed in the discussion below. Based on the reasons set forth in each of the segments in this part, which respond to the comments and present further analysis that the Bureau has engaged in to consider these matters further, the Bureau now adopts as its findings underlying the final rule its views as stated in this initial summary overview, with certain modifications as set forth below.

a. Borrower Characteristics and Circumstances of Borrowing

As the Bureau laid out in the proposal, borrowers who take out payday, single-payment vehicle title, and other covered short-term loans are typically low-to-moderate income consumers who are looking for quick access to cash, who have little to no savings, who often have poor credit histories, and who have limited access to other forms of credit. Comments received from industry participants, trade associations, and individual users of these loans noted that this description of the borrower population does not describe all of the people who use these loans. That is so, of course, but the Bureau's discussion in the proposal was not intended as an exhaustive account of the entire universe of borrowers. Instead, it merely represented many of the recurring borrower characteristics that the Bureau Start Printed Page 54556found based on its experience with such loans over the past several years and based on data from a number of studies as discussed further below.

In the proposal, the Bureau had found preliminarily that the desire borrowers have for immediate cash may be the result of an emergency expense or an unanticipated drop in income. The comments received from industry participants, trade associations, and individual users of these loans strongly reinforce the basis for this finding. Many comments describe the function that these loans perform as coping with income and expense shocks—that is, with unexpected, temporary expenses or shortfalls in income. These comments cited surveys and studies to bolster this point, including one survey that noted 86 percent of borrowers strongly or somewhat agreed that their use of a payday loan was to cope with an unexpected expense. Many other comments, including comments from individual users of these loans, offered anecdotal accounts of the personal reasons many borrowers have for taking out these loans, including a wide variety of circumstances that can create such income or expense shocks. Comments received from consumer groups were also in agreement on these points and further underscored a shared understanding that this impetus drives much of the demand for such loans.

The comments received from industry participants, trade associations, and individual users of these loans made a different point as well. One trade association, for example, noted that many consumers use such loans for “income smoothing” or to create a better match between income and expenses in the face of income and expense volatility—that is, where the consumer's income or expenses fluctuate over the course of the year, such that credit is needed during times of lower income or higher expenses to tide the consumer over until times of higher income or lower expenses. Many reasons were given by commenters, including a high volume of individual commenters, for such income and expense volatility, and the following examples are merely illustrative of the broader and more widespread phenomenon: People who work on commission; people scheduled to receive one-time or intermittent income supplements, such as holiday bonuses; people who work irregular hours, including many contractor or part-time workers; people who have seasonal opportunities to earn extra income by working additional hours; or circumstances that may arise that create the need or the opportunity to satisfy in full some other outstanding debt that is pressing. Comments from consumer groups echoed these accounts of how these economic situations drive a certain amount of the demand for such loans. The nature and weight of these comments thus lend further support to the preliminary findings that the Bureau had made on these issues.

In the proposal, the Bureau also noted that many borrowers who take out payday or single-payment vehicle title loans are consumers whose living expenses routinely exceed their income. This category of borrowers may consistently experience negative residual income, or to use a common phrase, find that they routinely have “too much month at the end of the money” and take out such loans in an effort to bolster their income—an effort that often proves to be unsuccessful when they are later unable to repay the loan according to its terms. Various commenters agreed with this account of some borrowers, and some of the individual commenters likewise described their own experiences in this vein.

In addition, some commenters noted that certain borrowers may use these kinds of loans to manage accumulated debt, preferring to use the proceeds of the loan to pay down other debt for which nonpayment or default would be more costly alternatives. This was not frequently cited as a reason why many borrowers decide to take out such loans, but it may explain occasional instances.

1. Borrower Characteristics

In the proposal, the Bureau noted that a number of studies have focused on the characteristics of payday borrowers. For instance, the FDIC and the U.S. Census Bureau have undertaken several special supplements to the Current Population Survey (CPS Supplement); the proposal cited the most recent available data from 2013, which found that 46 percent of payday borrowers (including storefront and online borrowers) have a family income of under $30,000.[464] The latest edition of the Survey has more recent data from 2015, which finds that the updated figure is 49 percent.[465] A study covering a mix of storefront and online payday borrowers similarly found that 49 percent had income of $25,000 or less.[466] Other analyses of administrative data that include the income borrowers reported to lenders show similar results.[467]

A 2012 survey administered by the Center for Financial Services Innovation (CFSI) to learn more about users of small-dollar credit products including payday loans, pawn loans, direct deposit advances, installment loans, and auto title loans found that 43 percent of small-dollar credit consumers had a household income between $0 and $25,000, compared to 26 percent of non-small-dollar credit consumers.[468] The mean annual household income for those making use of such products was $32,000, compared to $40,000 for those not using such products. Other studies and survey evidence presented by commenters were broadly consistent with the data and analysis contained in the studies that the Bureau had cited on this point.

Additionally, the Bureau found in its analysis of confidential supervisory data that 18 percent of storefront borrowers relied on Social Security or some other form of government benefits or public assistance.[469] The FDIC study further found that payday borrowers are disproportionately Hispanic or African-Start Printed Page 54557American (with borrowing rates two to three times higher respectively than for non-Hispanic whites) and that unmarried female-headed families are more than twice as likely as married couples to be payday borrowers.[470] The CFSI study discussed above upheld this general assessment with regard to race, with African-American and Hispanic borrowers over-represented among such borrowers.[471] The commenters did not take issue with these points, and various submissions across the broad spectrum of stakeholders, including both industry participants and consumer groups, consistently reinforced the point that these loans disproportionately go to minority borrowers.

The demographic profiles of single-payment vehicle title borrowers appear to be roughly comparable to the demographics of payday borrowers.[472] Calculations from the CPS Supplement indicate that 44 percent of title borrowers have annual family incomes under $30,000.[473] Another survey likewise found that 54 percent of title borrowers reported incomes below $30,000, compared with 60 percent for payday borrowers.[474] Commenters presented some data to suggest that various borrowers are more educated and that many are middle-aged, but these results did not alter the great weight of the overall survey data on this point.

And as with payday borrowers, data from the CPS Supplement show vehicle title borrowers to be disproportionately African-American or Hispanic, and more likely to live in unmarried female-headed families.[475] Similarly, a survey of borrowers in three States conducted by academic researchers found that title borrowers were disproportionately female and minority. Over 58 percent of title borrowers were female. African-Americans were over-represented among borrowers compared to their share of their States' population at large. Hispanic borrowers were over-represented in two of the three States; however, these borrowers were under-represented in Texas, the State with the highest proportion of Hispanic residents in the study.[476] Commenters generally did not take issue with these points, and various submissions from both industry participants and consumer groups support the view that they are an accurate reflection of the borrower population. One commenter contended that the data did not show vehicle title borrowers to be disproportionately minority consumers, though this view did not seem to take into account the composition of the total population in the States that were surveyed.

As noted in the proposal, studies of payday borrowers' credit histories show both poor credit histories and recent credit-seeking activity. One academic paper that matched administrative data from one storefront payday lender to credit bureau data found that the median credit score for a payday applicant was in the bottom 15 percent of credit scores overall.[477] The median applicant had one open credit card, but 80 percent of applicants had either no credit card or no credit available on a card. The average borrower had 5.2 credit inquiries on her credit report over the preceding 12 months before her initial application for a payday loan (three times the number for the general population), but obtained only 1.4 accounts on average. This suggests that borrowers made repeated but generally unsuccessful efforts to obtain additional other forms of credit prior to initiating a payday loan. While typical payday borrowers may have one or more credit cards, they are unlikely to have unused credit; in fact, they are often delinquent on one or more cards, and have often experienced multiple overdrafts and/or NSFs on their checking accounts.[478] A recent report analyzing credit scores of borrowers from five large storefront payday lenders provides corroborative support, finding that the average borrower had a VantageScore 3.0 [479] score of 532 and that over 85 percent of borrowers had a score below 600, indicating high credit risk.[480] By way of comparison, the national average VantageScore is 669 and only 30 percent of consumers have a VantageScore below 600.[481]

The proposal also cited reports using data from a specialty consumer reporting agency, which indicate that online borrowers have comparable credit scores to storefront borrowers (a mean VantageScore 3.0 score of 525 versus 532 for storefront).[482] Another study based on the data from the same specialty consumer reporting agency and an accompanying survey of online small-dollar credit borrowers reported that 79 percent of those surveyed had been denied traditional credit in the past year due to having a low or no credit score, 62 percent had already sought assistance from family and friends, and 24 percent reported having negotiated with a creditor to whom they owed money.[483] Moreover, heavy use of online payday loans seems to be correlated with more strenuous credit-seeking: compared to light (bottom quartile) users of online loans, heavy (top quartile) users were more likely to Start Printed Page 54558have been denied credit in the past year (87 percent of heavy users compared to 68 percent of light users).[484]

In the proposal, the Bureau also noted that other surveys of payday borrowers added to the picture of consumers in financial distress. For example, in a survey of payday borrowers published in 2009, fewer than half reported having any savings or reserve funds.[485] Almost a third of borrowers (31.8 percent) reported monthly debt-to-income payments of 30 percent or higher, and more than a third (36.4 percent) of borrowers reported that they regularly spend all the income they receive. Similarly, a 2010 survey found that over 80 percent of payday borrowers reported making at least one late payment on a bill in the preceding three months, and approximately one quarter reported frequently paying bills late. Approximately half reported bouncing at least one check in the previous three months, and 30 percent reported doing so more than once.[486] Furthermore, a 2012 survey found that 58 percent of payday borrowers report that they struggled to pay their bills on time. More than a third (37 percent) said they would have taken out a loan on almost any terms offered. This figure rises to 46 percent when the respondent rated his or her financial situation as particularly poor.[487]

A large number of comments received from industry participants, trade associations, consumer groups, academics, and individual users of these loans extensively reinforced this picture of the financial situation for many storefront and online borrowers. Industry participants and trade associations presented their understanding of the characteristics of the borrower population as being marked by poor credit histories, an acute need for credit, aggressive efforts to seek credit, and general unavailability of other means of credit for many of these borrowers. In many of the comments, these characteristics were described in particular detail and emphasized as making the case to show the need for the availability of such loans. Many individual users of these loans also related their own personal stories and situations, which were typically marked by these same features of their financial histories that demonstrated their need for credit products.

Despite these points of general agreement, many industry participants, trade associations, individual users of such loans, and some academics submitted comments that vigorously disagreed with what they regarded as assumptions the Bureau had made in the proposal about payday and vehicle title borrowers. In their view, the Bureau was wrongly portraying these consumers as financially unsophisticated and incapable of acting in their own best interests. On the contrary, many of these commenters stated, such borrowers are often very knowledgeable about the costs and terms of such loans. Their decision to take out a payday or vehicle title loan was represented, in many instances, as being based on a rational judgment that access to this form of credit is far more valuable than reducing the risks and costs associated with their indebtedness.

The Bureau recognizes that the characteristics of individual users of payday and single-payment vehicle title loans are differentiated in many and various ways. Much of the debate here represents different characterizations and opinions about potential conclusions drawn from the facts, rather than direct disagreements about the facts themselves. These issues are important and they are considered further in the discussions of unfairness and abusiveness under final § 1041.4.

2. Circumstances of Borrowing

The proposal discussed several surveys that have asked borrowers why they took out their loans or for what purpose they used the loan proceeds, and noted that these are challenging questions to study. Any survey that asks about past behavior or events runs some risk of recall errors.[488] In addition, the fact that money is fungible makes this question more complicated. For example, a consumer who has an unexpected expense may not feel the effect fully until weeks later, depending on the timing of the unexpected expense relative to other expenses and to the receipt of income. In that circumstance, a borrower may say either that she took out the loan because of the unexpected expense, or that she took out the loan to cover regular expenses. Perhaps because of this difficulty, results across surveys are somewhat inconsistent, with one finding high levels of unexpected expenses, while others find that payday loans are used primarily to pay for regular expenses.

In the first survey discussed in the proposal, a 2007 survey of payday borrowers, the most common reason cited for taking out a loan was “an unexpected expense that could not be postponed,” with 71 percent of respondents strongly agreeing with this reason and 16 percent somewhat agreeing.[489] A 2012 survey of payday loan borrowers, by contrast, found that 69 percent of respondents took their first payday loan to cover a recurring expense, such as utilities, rent, or credit card bills, and only 16 percent took their first loan for an unexpected expense.[490]

The 2012 CFSI survey of alternative small-dollar credit products, discussed earlier in this section asked separate questions about what borrowers used the loan proceeds for and what precipitated the loan.[491] Responses were reported for “very short term” and “short term” credit; “very short term” referred to payday, pawn, and deposit advance products. Respondents could report up to three reasons for what precipitated the loan; the most common reason given for very-short-term borrowing (approximately 37 percent of respondents) was “I had a bill or payment due before my paycheck arrived,” which the authors of the report on the survey results interpreted as a mismatch in the timing of income and expenses. Unexpected expenses were cited by 30 percent of very-short-term borrowers, and approximately 27 Start Printed Page 54559percent reported unexpected drops in income. Approximately 34 percent reported that their general living expenses were consistently more than their income. Respondents could also report up to three uses for the funds; the most common answers related to paying for routine expenses, with about 40 percent reporting the funds were used to “pay utility bills,” about 40 percent reporting the funds were used to pay “general living expenses,” and about 20 percent saying the funds were used to pay rent. Of all the reasons for borrowing, consistent shortfalls in income relative to expenses was the response most highly correlated with consumers who reported repeated usage or rollovers.

A survey of 768 online payday users conducted in 2015 and drawn from a large administrative database of payday borrowers looked at similar questions, and compared the answers of heavy and light users of online loans.[492] Based on consumers' self-reported borrowing history, they were segmented into heavy users (users with borrowing frequency in the top quartile of the dataset) and light users (bottom quartile). Heavy users were much more likely to report that they “[i]n past three months, often or always ran out of money before the end of the month” (60 percent versus 34 percent). In addition, heavy users were nearly twice as likely as light users to state their primary reason for seeking their most recent payday loan as being to pay for “regular expenses such as utilities, car payment, credit card bill, or prescriptions” (49 percent versus 28 percent). Heavy users were less than half as likely as light users to state their reason as being to pay for an “unexpected expense or emergency” (21 percent versus 43 percent). Notably, 18 percent of heavy users stated that their primary reason for seeking a payday loan online was that they “had a storefront loan, needed another [loan]” as compared to just over one percent of light users.

One industry commenter asserted that a significant share of vehicle title loan borrowers were small business owners who use these loans for business, rather than personal uses. The commenter pointed to one study that cited anonymous “industry sources” who claimed that 25-30 percent of title borrowers were small businesses [493] and another study that cited an unpublished lender survey which found that about 20 percent of borrowers were self-employed.[494] Evidence was not provided by the commenter to document the share of vehicle title loan borrowers who are either self-employed or small business owners; however, the Bureau notes that it is important to distinguish between borrowers who may be small business owners but may not necessarily use a title loan for a business purpose. For example, one survey of title loan borrowers found that while 16 percent of title loan borrowers were self-employed, only 6 percent of title loan borrowers state that they took the loan for a business expense.[495] The study's authors concluded that “. . . it seems like business credit is not a significant portion of the loans.” [496] Another survey found that 20 percent of title loan borrowers are self-employed, and an additional 3 percent were both self-employed and worked for an employer. In that survey, 3 percent of title loan borrowers reported the loan was for a business expense and 2 percent reported the loan was for a mix of personal and business use.[497]

Some commenters agreed with the Bureau that the results across surveys are somewhat inconsistent, perhaps because of methodological issues. Industry commenters predictably chose to place more emphasis on the results that accorded with their arguments that these loans help consumers cope with financial shocks or allow smoothing of income. By contrast, consumer groups predictably took the opposite perspective. They contended that these loans do present special risks and harms for consumers that outweigh the benefits of access to such loans without being subject to any underwriting, especially for those consumers who experience chronic shortfalls of income. Both groups of commenters chose to downplay the results that tended to undermine their arguments. On the whole, these comments do not call into question the Bureau's treatment of the factual issues here, but go more to the potential characterization of those facts or the inferences to be drawn from them. Those issues are discussed further in the section-by-section analysis for § 1041.4 below.

A number of comments from industry participants and trade associations faulted the Bureau for not undertaking to conduct its own surveys of borrowers to gauge the circumstances that lead them to use payday, title, or other covered short-term loans. Although the Bureau had reviewed and analyzed at least four different surveys of such borrowers conducted over the past decade, as discussed above, these commenters stated that the Bureau would have furthered its understanding by speaking with and hearing directly from such borrowers. Nonetheless, many of these commenters offered further non-survey information of this kind by referencing the consumer narratives in thousands of individual consumer complaints about payday, title, and other covered loans that have been filed with the Bureau (which also include a substantial number of debt collection complaints stemming from such loans). They also pointed to individual responses that have been filed about such loans on the Bureau's online “Tell Your Story” function, where some number of individual borrowers have explained how they use such loans, often describing the benefits and challenges they have experienced as a result.

In addition, a large volume of comments—totaling well over a million comments about the proposal, both pro and con—were filed with the Bureau by individual users of payday and vehicle title loans. Many of these commenters described their own personal experiences with these loans, and others offered their perspectives. The Bureau has reviewed these comments and has carefully considered the stories they told. These comments include a large number of positive accounts of how people successfully used such loans to address shortfalls or cope with emergencies and concerns about the possibility of access to such loans being removed. The comments included fewer but still a very sizable number of other accounts, much more negative in tone, of how consumers who took out such loans became trapped in long cycles of repeated re-borrowing that led to financial distress, marked by problems such as budgetary distortions, high collateral costs, the loss of depository accounts and other services, ultimate default on the loans, and the loss of other assets such as people's homes and their vehicles. Some of these comments Start Printed Page 54560came from the individual consumers themselves, while many came from friends, family members, clergy, legal aid attorneys, neighbors, or others who were concerned about the impact the loans had on consumers whom they knew, and in some cases whom they had helped to mitigate the negative experience through financial assistance, counseling, or legal assistance. The enormous volume of such individual comments itself helps to provide considerably more information about borrowers that helps to supplement the prior survey data discussed in the proposal. It appears that various parties on both sides of these issues went to great lengths to solicit such a large number of comment submissions by and about individual users of such loans.

The substantial volume and variation of individual comments have further added to the Bureau's understanding of the wide variety of circumstances in which such borrowing occurs. They underscore the Bureau's recognition that not only the personal characteristics, but also the particularized circumstances, of individual users of payday and single-payment vehicle title loans can be quite differentiated from one another across the market. Nonetheless, the focus of this rule is on how the identified lender practice of making such loans without reasonably assessing the borrower's ability to repay the loan according to its terms affects this broad and diverse universe of consumers.

b. Lender Practices

As described in the proposal, the business model of lenders who make payday and single-payment vehicle title loans is predicated on the lenders' ability to secure extensive re-borrowing. As recounted in the Background section, the typical storefront payday loan has a principal amount of $350, and the consumer pays a typical fee of 15 percent of the principal amount. For a consumer who takes out such a loan and repays it when it is due without re-borrowing, this means the typical loan would produce roughly $50 in revenue to the lender. Lenders would thus require a large number of “one-and-done” consumers to cover their overhead and acquisition costs and generate profits. However, because lenders are able to induce a large percentage of borrowers to repeatedly re-borrow, lenders have built a model in which the typical storefront lender, as discussed in part II above, has two or three employees serving around 500 customers per year. Online lenders do not have the same overhead costs, but they have been willing to pay substantial acquisition costs to lead generators and to incur substantial fraud losses, all of which can only be sufficiently offset by their ability to secure more than a single fee—and often many repeated fees—from their borrowers.

In the proposal, the Bureau used the term “re-borrow” to refer to situations in which consumers either roll over a loan (which means they pay a fee to defer payment of the principal for an additional period of time), or take out a new loan within a short period time following a previous loan. Re-borrowing can occur concurrently with repayment in back-to-back transactions or can occur shortly thereafter. In the proposal, the Bureau stated its reasons for concluding that re-borrowing often indicates that the previous loan was beyond the consumer's ability to repay while meeting the consumer's other major financial obligations and basic living expenses. As discussed in more detail in the section-by-section analysis of § 1041.6, the Bureau proposed and now concludes that it is appropriate to consider loans to be re-borrowings when the second loan is taken out within 30 days of the consumer being indebted on a previous loan. While the Bureau's 2014 Data Point used a 14-day period and the Small Business Review Panel Outline used a 60-day period, the Bureau used a 30-day period in its proposal to align the time frame with consumer expense cycles, which are typically a month in length. This duration was designed to account for the fact that where repaying a loan causes a shortfall, the effect is most likely to be experienced within a 30-day period in which monthly expenses for matters such as housing and other debts come due. The Bureau recognizes that some re-borrowing that occurs after a 30-day period may be attributable to the spillover effects of an unaffordable loan and that some re-borrowing that occurs within the 30-day period may be attributable to a new need that arises unrelated to the impact of repaying the short-term loan. Thus, while other periods could plausibly be used to determine when a follow-on loan constitutes re-borrowing, the Bureau believes that the 30-day period provides the most appropriate period for these purposes. In fact, the evidence presented below suggests that for any of these three potential time frames, though the percentage varies somewhat, the number of loans that occur as part of extended loan sequences of 10 loans or more is around half of all payday loans. Accordingly, this section, Market Concerns—Underwriting, uses a 30-day period to determine whether a loan is part of a loan sequence.

The proposal noted that the majority of lending revenue earned by storefront payday lenders and lenders that make single-payment vehicle title loans comes from borrowers who re-borrow multiple times and become enmeshed in long loan sequences. Based on the Bureau's data analysis, approximately half of all payday loans are in sequences that contain 10 loans or more, depending on the time frame that is used to define the sequence.[498] Looking just at loans made to borrowers who are paid weekly, bi-weekly, or semi-monthly, more than 20 percent of loans are in sequences that are 20 loans or longer. Similarly, the Bureau found that about half of all single-payment vehicle title loans are in sequences of 10 loans or more, and over two-thirds of them are in sequences of at least seven loans.[499] The commenters did not take serious issue with this data analysis, and the Bureau finds these particular facts to be of great significance in assessing the justifications for regulatory measures that would address the consequent harms experienced by consumers.

Commenters on all sides of the proposal did not seriously take issue with the account presented in the proposal of the basic business model in the marketplace for payday and single-payment vehicle title loans. They did have widely divergent views about whether they would characterize these facts as beneficial or pernicious, or what consequences they perceive as resulting from this business model. One credit union trade association stated its view that such lending takes advantage of consumers and exacerbates bad financial situations and thus it favored curbs on payday lending. Consumer groups and numerous individual borrowers echoed this view. Industry participants, other trade associations, and many other individual borrowers took the position, explicitly or implicitly, that the benefits experienced by successful users of these loans outweighed the costs incurred by those who engaged in repeat re-borrowing with consequent negative outcomes and collateral consequences.

As discussed below, the Bureau has considered the comments submitted on Start Printed Page 54561the proposal and continues to believe that both the short term and the single-payment structure of these loans contributes to the long loan sequences that borrowers take out. Various lender practices exacerbate the problem by marketing to borrowers who are particularly likely to wind up in long sequences of loans, by failing to screen out borrowers who are likely to wind up in long-term debt or to establish guardrails to avoid long-term indebtedness, and by actively encouraging borrowers to continue to re-borrow when their single-payment loans come due.

1. Loan Structure

The proposal described how the single-payment structure and short duration of these loans makes them difficult to repay. Within the space of a single income or expense cycle, a consumer with little to no savings cushion and who has borrowed to meet an unexpected expense or income shortfall, or who chronically runs short of funds, is unlikely to have the available cash needed to repay the full amount borrowed plus the finance charge on the loan when it is due and to cover other ongoing expenses. This is true for loans of a very short duration regardless of how the loan may be categorized. Loans of this type, as they exist in the market today, typically take the form of single-payment loans, including payday loans and vehicle title loans, though other types of credit products are possible.[500] Because the focus of the Bureau's research has been on payday and vehicle title loans, the discussion in Market Concerns—Underwriting centers on those types of products.

The size of single-payment loan repayment amounts (measured as loan principal plus finance charges owed) relative to the borrower's next paycheck gives some sense of how difficult repayment may be. The Bureau's storefront payday loan data shows that the average borrower being paid on a bi-weekly basis would need to devote 37 percent of her bi-weekly paycheck to repaying the loan. Single-payment vehicle title borrowers face an even greater challenge. In the data analyzed by the Bureau, the median borrower's payment on a 30-day loan is equal to 49 percent of monthly income,[501] and the Bureau finds it especially significant as indicating the severe challenges and potential for negative outcomes associated with these loans.

The commenters did not offer any data that disagreed with this analysis of how the loan structure works in practice. Industry commenters did assert, however, that the structure of these loans is not intended or designed as a means of exploiting consumers, but rather has evolved as needed to comply with the directives of State law and State regulation of this lending market. As a historical matter, this appears to be incorrect; indeed, another commenter is the founder of the company who helped to initiate the payday lending industry, W. Allan Jones. The comment notes that the “traditional `payday loan' product” was first developed by his company in 1993 in Tennessee and then became the basis for legislation and regulation that has spread to a majority of States, with various modifications and refinements. As noted above in part II.A, however, another large payday lender—QC Financial—began making payday loans in Kansas in 1992 under an existing provision of that state's existing consumer lending structure and that same year at least one State regulator formally held that deferred presentment activities constituted consumer lending subject to the State's consumer credit laws.[502] Other accounts of the history of payday lending generally tend to reinforce these historical accounts that modern payday lending began emerging in the early 1990s as a variant of check-cashing stores whereby the check casher would cash and hold consumers' personal checks for a fee for several days—until payday—before cashing them.[503] The laws of States, particularly those that had adopted the Uniform Consumer Credit Code (UCCC) including Kansas and Colorado, permitted lenders to retain a minimum finance charge on loans ranging in the 1990's from about $15 to $25 per loan regardless of State rate caps, and payday lenders used those provisions to make payday loans. In other States, and later in UCCC States, more specific statutes were enacted to authorize and regulate what had become payday lending. No doubt the structure of such loan products over time is affected by and tends to conform to State laws and regulations, but the point here is that the key features of the loan structure, which tend to make these loans difficult to repay for a significant population of borrowers, are core to this financial product and are fairly consistent across time and geography.

Regardless of the historical background, however, one implication of the suggestion put forward by these commenters appears to be that the intended consequence of this loan product is to produce cycles of re-borrowing or extended loan sequences for many consumers that exceed the permissible short-term loan periods adopted under State law. The explanation seems to be that the actual borrowing needs of consumers extend beyond the permissible loan periods permitted by State law. If that is so, then the inherent nature of this mismatched product imposes large forecasting risks on the consumer, which may often lead to unexpected harms. And even if the claim instead is that the loan structure manages to co-exist with the formal constraints imposed by State law, this justification does little to minimize the risks and harms to the substantial population of consumers who find themselves trapped in extended loan sequences.

2. Marketing

The proposal also noted that the general positioning of short-term products in marketing and advertising materials as a solution to an immediate liquidity challenge attracts consumers facing these problems, encouraging them to focus on short-term relief rather than the likelihood that they are taking on a new longer-term debt. Lenders position the purpose of the loan as being for use “until next payday” or to “tide over” the consumer until she receives her next paycheck.[504] These types of Start Printed Page 54562product characterizations can encourage consumers to think of these loans as easy to repay, a fast solution to a temporary cash shortfall, and a short-term obligation, all of which lessen the risk in the consumer's mind that the loan will become a long-term debt cycle. Indeed, one study reporting consumer focus group feedback noted that some participants reported that the marketing made it seem like payday loans were “a way to get a cash infusion without creating an additional bill.” [505]

As discussed in the proposal, in addition to presenting loans as short-term solutions, rather than potentially long-term obligations, lender advertising often focuses on how quickly and easily consumers can obtain a loan. An academic paper reviewing the advertisements of Texas storefront and online payday and vehicle title lenders found that the speed of getting a loan is the most frequently advertised feature in both online (100 percent) and storefront (50 percent) payday and title loans.[506] Advertising that is focused on immediacy and speed capitalizes on the sense of urgency borrowers feel when facing a cash shortfall. Indeed, the names of many payday and vehicle title lenders include the words (in different spellings) “speedy,” “cash,” “easy,” and “quick,” thus emphasizing their rapid and simple loan funding.

All of the commenters generally agreed as a factual matter that the marketing and offering of such loans is typically marked by ease, speed, and convenience, which are touted as positive attributes of such loans that make them desirable credit products from the standpoint of potential borrowers. Yet industry participants and trade associations broadly disputed what they viewed as the Bureau's perspective on the potential implications of this marketing analysis, as suggesting that many borrowers lack knowledge or awareness about the nature, costs, and overall effects of these loans. Consumer advocates, on the other hand, contended that the manner in which these loans are being marketed affects the likelihood that borrowers will tend to view them as short-term obligations that will not have long-term effects on their overall financial position, which often leads consumers to experience the negative outcomes associated with unexpectedly ending up in extended loan sequences.

3. Failure To Assess Ability To Repay

As discussed in the proposal, the typical loan process for storefront payday, online payday, and single-payment vehicle title lenders generally involves gathering some basic information about borrowers before making a loan. Lenders normally do collect income information, although the information they collect may just be self-reported or “stated” income. Payday lenders collect information to ensure the borrower has a checking account, and title lenders need information about the vehicle that will provide the security for the loan. Some lenders access consumer reports prepared by specialty consumer reporting agencies and engage in sophisticated screening of applicants, and at least some lenders turn down the majority of applicants to whom they have not previously made loans.

One of the primary purposes of this screening, however, is to avoid fraud and other “first payment defaults,” not to make any kind of determination that borrowers will be able to repay the loan without re-borrowing. These lenders generally do not obtain any information about the borrower's existing obligations or living expenses, which means that they cannot and do not prevent those with expenses chronically exceeding income, or those who have suffered from an income or expense shock from which they need substantially more time to recover than the term of the loan, from taking on additional obligations in the form of payday or similar loans. Thus, lenders' failure to assess the borrower's ability to repay the loan permits those consumers who are least able to repay the loans, and consequently are most likely to re-borrow, to obtain them.

Lending to borrowers who cannot repay their loans would generally not be profitable in a traditional lending market, but as described elsewhere in this section, the factors that funnel consumers into cycles of repeat re-borrowing turn the traditional model on its head by creating incentives for lenders to actually want to make loans to borrowers who cannot afford to repay them when due if instead the consequence is that these borrowers are likely to find themselves re-borrowing repeatedly. Although industry stakeholders have argued that lenders making short-term loans already take steps to assess “ability to repay” and will always do so out of economic self-interest, the Bureau believes that this refers narrowly to whether the consumer will default up front on the loan, rather than whether the consumer has the capacity to repay the loan without having to re-borrow and while meeting other financial obligations and basic living expenses. The fact that lenders often do not perform additional underwriting when borrowers are rolling over a loan, or are returning to borrow again soon after repaying a prior loan, further shows that lenders do not see re-borrowing as a sign of borrowers' financial distress or as an outcome to be avoided. Rather, repeated re-borrowing may be perceived as a preferred outcome for the lender or even as an outcome that is a crucial underpinning to the business model in this loan market.

For the most part, commenters did not take issue with the tenets of this factual description of the typical underwriting process for such loans, though some lenders contended that they do not intentionally seek out potential customers who are likely to have to re-borrow multiple times. As noted, however, this approach is consistent with the basic business model for such loans as described above. Industry Start Printed Page 54563participants and trade associations did dispute one perceived implication of this discussion by asserting that long loan sequences, at least standing alone, cannot simply be assumed to be harmful or to demonstrate a consumer's inability to repay these loans, as many factors may bear on those outcomes. This point is discussed further below.

4. Encouraging Long Loan Sequences

In the proposal, the Bureau recounted its assessment of the market by noting that lenders attract borrowers in financial crisis, encourage them to think of the loans as a short-term solution, and fail to screen out those for whom the loans are likely to become a long-term debt cycle. After that, lenders then actively encourage borrowers to re-borrow and continue to be indebted rather than pay down or pay off their loans. Although storefront payday lenders typically take a post-dated check, which could be presented in a manner timed to coincide with deposit of the borrower's paycheck or government benefits, lenders usually encourage or even require borrowers to come back to the store to redeem the check and pay in cash.[507] When the borrowers return, they are typically presented by lender employees with two salient options: Repay the loan in full, or simply pay a fee to roll over the loan (where permitted under State law). If the consumer does not return, some lenders may reach out to the customer but ultimately the lender will proceed to attempt to collect by cashing the check. On a $300 loan at a typical charge of $15 per $100 borrowed, the cost to defer the due date for another 14 days until the next payday is $45, while repaying in full would cost $345, which may leave the borrower with insufficient remaining income to cover expenses over the ensuing month and therefore tends to prompt re-borrowing. Requiring repayment in person gives staff at the stores the opportunity to frame for borrowers a choice between repaying in full or just paying the finance charge, which may be coupled with encouragement guiding them to choose the less immediately painful option of paying just the finance charge and rolling the loan over for another term. Based on its experience from supervising payday lenders over the past several years, the Bureau has observed that storefront employees are generally incentivized to maximize the store's loan volume and the data suggest that re-borrowing is a crucial means of achieving this goal.[508]

As laid out in the proposal, the Bureau's research shows that payday borrowers rarely re-borrow a smaller amount than the initial loan. Doing so would effectively amortize their loans by reducing the principal amount owed over time, thereby reducing their costs and the expected length of their loan sequences. Rather than encouraging borrowers to make amortizing payments that would reduce their financial exposure over time, lenders encourage borrowers to pay the minimum amount and re-borrow the full amount of the earlier loan, thereby contributing to this outcome. In fact, as discussed in the proposal, some online payday loans automatically roll the loan over at the end of its term unless the consumer takes affirmative action in advance of the due date, such as notifying the lender in writing at least three days before the due date. As some industry commenters noted, single-payment vehicle title borrowers who take out multiple loans in a sequence are more likely than payday borrowers who taken out multiple loans in a sequence to reduce the loan amount from the beginning to end of that sequence. After excluding for single loan sequences for which this analysis is not applicable, 37 percent of single-payment vehicle title loan sequences have declining loan amounts compared to just 15 percent of payday loan sequences. This greater likelihood of declining loan amounts for single-payment vehicle title loans compared to payday loans may also be influenced by the larger median size of title loans, which is $694, as compared to the median size of payday loans, which is $350. However, this still indicates that a large majority of single payment vehicle title loan borrowers have constant or increasing loan amounts over the course of a sequence. In addition, the Bureau's analysis shows that those single payment vehicle title loan borrowers who do reduce their loan amounts during a sequence only do so for a median of about $200, which is less than a third of the median loan amount of about $700.[509] This may reflect the effects of certain State laws regulating vehicle title loans that require some reduction in loan size across a loan sequence.

Lenders also actively encourage borrowers who they know are struggling to repay their loans to roll over and continue to borrow. In the Bureau's work over the past several years to monitor the operations and compliance of such lenders, including supervisory examinations and enforcement actions, the Bureau has found evidence that lenders maintain training materials that promote borrowing by struggling borrowers.[510] In one enforcement action, the Bureau found that if a borrower did not repay in full or pay to roll over the loan on time, personnel would initiate collections. Store personnel or collectors would then offer new loans as a source of relief from the collections activities. This approach, which was understood to create a “cycle of debt,” was depicted graphically as part of the standard “loan process” in the company's new hire training manual. The Bureau is aware of similar practices in the single-payment vehicle title lending market, where store employees offer borrowers additional cash during courtesy calls and when calling about past-due accounts, and company training materials instruct employees to “turn collections calls into sales calls” and encourage delinquent borrowers to refinance to avoid default and repossession of their vehicles.

It also appears that lenders do little to affirmatively promote the use of “off ramps” or other alternative repayment options, even when those are required by law to be made available to borrowers. Such alternative repayment plans could help at least some borrowers avoid lengthy cycles of re-borrowing. Lenders that belong to one of the two national trade associations for storefront payday lenders have agreed to offer an extended payment plan to borrowers, but only if the borrower makes a request at least one day prior to the date on which the loan is due.[511] Start Printed Page 54564(The second national trade association reports that its members provide an extended payment plan option, but details on that option are not available.) In addition, about 18 States require payday lenders to offer repayment plans to borrowers who encounter difficulty in repaying payday loans. The usage rate of these repayment plans varies widely, but in all cases it is relatively low.[512] One explanation for the low take-up rate on these repayment plans may be that certain lenders disparage the plans or fail to promote their availability.[513] By discouraging the use of repayment plans, lenders make it more likely that such consumers will instead re-borrow. The Bureau's supervisory examinations uncovered evidence that one or more payday lenders train their employees not to mention repayment plans until after the employees have offered renewals, and then only to mention repayment plans if borrowers specifically ask about them.

In general, most of the commenters did not take issue with this factual account of the mechanics or incentives that lead to a high incidence of rolling over such loans, and much of what they said tended to confirm it. In particular, industry commenters acknowledged that incentive programs for their employees based on net revenue are widespread in the industry. Such programs are not illegal, of course, but given the structure of these loans as described above, this suggests that employees are being incentivized to encourage re-borrowing and extended loan sequences by having borrowers roll their loans over repeatedly.

Industry participants, trade associations, and some individual users of such loans did argue, however, about the implications of this analysis. One of their claims is that many consumers have an actual borrowing need that extends beyond the loan period permitted under State law, and thus repeated re-borrowing may be a means of synchronizing the consumer's borrowing needs to the specific contours of the loan product. In particular, they contended that re-borrowing may be beneficial to consumers as part of longer-term strategies around income smoothing or debt management, a point that is discussed further below.

5. Payment Mechanisms and Vehicle Title

The proposal noted that where lenders can collect payments through post-dated checks or ACH authorizations, or obtain security interests in borrowers' vehicles, these mechanisms also can be used to encourage borrowers to re-borrow, as a way to avoid what otherwise could be negative consequences if the lender were to cash the check or repossess the vehicle. For example, consumers may feel significantly increased pressure to return to a storefront to roll over a payday or vehicle title loan that includes such features. They may do so rather than risk incurring new fees in connection with an attempt to deposit the consumer's post-dated check, such as an overdraft or NSF fee from the bank and a returned-item fee from the lender if the check were to bounce or risk suffering the repossession of their vehicle. The pressure can be especially acute when the lender obtains security in the borrower's vehicle.

The proposal also noted that in cases where consumers do ultimately default on their loans, and these mechanisms are at last effectuated, they often magnify the total harm that consumers suffer from losing their access to essential transportation. Consumers often will have additional account and lender fees assessed against them, and some will end up having their bank accounts closed. When this occurs, they will have to bear the many attendant costs of becoming stranded outside the banking system, which include greater inconvenience, higher costs, reduced safety of their funds, and the loss of the other advantages of a standard banking relationship.

These harms are very real for many consumers. For example, as discussed in more detail below in Market Concerns—Payments, the Bureau's research has found that 36 percent of borrowers who took out online payday or payday installment loans and had at least one failed payment during an eighteen-month period had their checking accounts closed by the bank by the end of that period, a rate that is four times greater than the closure rate for accounts that only had NSFs from non-payday transactions.[514] For accounts with failed online payday loan transactions, account closures typically occur within 90 days of the last observed online payday loan transaction; in fact, 74 percent of account closures in these situations occur within 90 days of the first NSF return triggered by an online payday or payday installment lender.[515] This suggests that the online loan played a role in the closure of the account, or that payment attempts failed because the account was already headed towards closure, or both.[516]

Start Printed Page 54565

In general, the commenters did not challenge the Bureau's factual account of how these payment mechanisms can lead to these collateral consequences that harm consumers. Industry commenters did disagree, however, with the premise that these harms were caused by the use of covered short-term loans. Some disagreed about the overall magnitude of these harms, stating that there is no evidence that covered short-term loans actually cause account closures or NSF fees, as stated in the proposal, and arguing that the Bureau overstated the extent to which consumers who default are subjected to NSF fees or fees resulting from bounced checks. But they did not present any convincing data to refute what the Bureau had observed from its own research and experience, and the assertion that online loans may have performed more poorly than storefront loans in these respects was not persuasive. Although the Bureau did not purport to find that the evidence in its data was determinative as to causation, the relationship between the consumer experience on such loans and the borrower outcomes was strongly reinforced by the data and logical as to the connection between them.

c. Patterns of Lending and Extended Loan Sequences

The Bureau's proposal described how borrower characteristics, the circumstances of borrowing, the structure of the short-term loans, and the practices of the lenders together lead to dramatic negative outcomes for many payday and single-payment vehicle title borrowers. There is strong evidence that a meaningful share of borrowers who take out payday and single-payment vehicle title loans end up with very long sequences of loans, and the loans made to borrowers with these negative outcomes make up a majority of all the loans made by these lenders.[517]

Long loan sequences lead to very high total costs of borrowing. Each single-payment loan carries the same cost as the initial loan that the borrower took out. For a storefront borrower who takes out the average-sized payday loan of $350 with a typical fee of $15 per $100, each re-borrowing by rolling over the loan means paying additional fees of $52.50. After just three re-borrowings, the borrower will have paid more than $150 simply to defer payment of the original principal amount by an additional period ranging from six weeks to three months.

As noted in the proposal, the cost of re-borrowing for title borrowers is even more dramatic, given the higher price and larger size of those loans. The Bureau's data indicates that the median loan size for single-payment vehicle title loans is $694. One study found that the most common rate charged on the typical 30-day title loan is $25 per $100 borrowed, which is a common State limit and equates to an APR of 300 percent.[518] A typical instance of re-borrowing thus means that the consumer pays a fee of around $175. After just three re-borrowings, a consumer will typically have paid about $525 simply to defer payment of the original principal amount by three months.

The proposal cited evidence for the prevalence of long sequences of payday and title loans, which comes from the Bureau's own work, from analysis by independent researchers and analysts commissioned by industry, and from statements by industry stakeholders. The Bureau has published several analyses of storefront payday loan borrowing.[519] Two of these have focused on the length of loan sequences that borrowers take out. In these publications, the Bureau defined a loan sequence as a series of loans where each loan was taken out either on the day the prior loan was repaid or within some number of days from when the loan was repaid. The Bureau's 2014 Data Point used a 14-day window to define a sequence of loans. Those data have been further refined in the CFPB Report on Supplemental Findings and shows that when a borrower who is not currently in a loan sequence takes out a payday loan, borrowers wind up taking out at least four loans in a row before repaying 43 percent of the time, take out at least seven loans in a row before repaying 27 percent of the time, and take out at least 10 loans in a row before repaying 19 percent of the time.[520] In the CFPB Report on Supplemental Findings, the Bureau re-analyzed the data using 30-day and 60-day definitions of sequences. The results are similar, although using longer windows leads to longer sequences of more loans. Using the 30-day definition of a sequence, 50 percent of new loan sequences contain at least four loans, 33 percent of sequences contain at least seven loans, and 24 percent of sequences contain at least 10 loans.[521] Borrowers who take out a fourth loan in a sequence have a 66 percent likelihood of taking out at least three more loans, for a total sequence length of seven loans. And such borrowers have a 48 percent likelihood of taking out at least six more loans, for a total sequence length of 10 loans.[522]

These findings are mirrored in other analyses. During the SBREFA process, one participant submitted an analysis prepared by Charles River Associates (CRA) of loan data from several small storefront payday lenders.[523] Using a 60-day sequence as its definition, CRA found patterns of borrowing very similar to those that the Bureau had found. Compared to the Bureau's results using a 60-day sequence definition, in the Start Printed Page 54566CRA analysis there were more loans where the borrower defaulted on the first loan or repaid without re-borrowing (roughly 44 percent versus 25 percent), and fewer loans that had 11 or more loans in the sequence, but otherwise the patterns were nearly identical.[524]

Similarly, in an analysis funded by an industry research organization, researchers found a mean sequence length, using a 30-day sequence definition, of nearly seven loans.[525] This is slightly higher than the mean 30-day sequence length in the Bureau's analysis (5.9 loans).

Analysis of a multi-lender, multi-year dataset by a research group affiliated with a specialty consumer reporting agency found that over a period of approximately four years the average borrower had at least one sequence of nine loans; that 25 percent of borrowers had at least one loan sequence of 11 loans; and that 10 percent of borrowers had at least one loan sequence of 22 loans.[526] Looking at these same borrowers for a period of 11 months—one month longer than the duration analyzed by the Bureau—the researchers found that on average the longest sequence these borrowers experienced over the 11 months was 5.3 loans, that 25 percent of borrowers had a sequence of at least seven loans, and that 10 percent of borrowers had a sequence of at least 12 loans.[527] This research group also identified a core of users with extremely persistent borrowing, and found that 30 percent of borrowers who took out a loan in the first month of the four-year period also took out a loan in the last month.[528] The median time in debt for this group of extremely persistent borrowers was over 1,000 days, which is more than half of the four-year period. The median borrower in this group of extremely persistent borrowers had at least one loan sequence of 23 loans long or longer (which was nearly two years for borrowers who were paid monthly). Perhaps most notable, almost one out of ten members of this research group (nine percent) borrowed continuously for the entire four-year period.[529]

In the proposal, the Bureau also presented its analysis of single-payment vehicle title loans according to the same basic methodology.[530] Using a 30-day definition of loan sequences, the Bureau found that short-term single-payment vehicle title loans had loan sequences that were similar to payday loans. More than half (56 percent) of these sequences contained at least four loans; 36 percent contained seven or more loans; and 23 percent had 10 or more loans. The Bureau's analysis found that title borrowers were less likely than those using payday loans to repay a loan without re-borrowing or defaulting. Only 12 percent of single-payment vehicle title loan sequences consisted of a single loan that was repaid without subsequent re-borrowing, compared to 22 percent of payday loan sequences.[531] Other sources on title lending are more limited than for payday lending, but are generally consistent. For instance, the Tennessee Department of Financial Institutions publishes a biennial report on 30-day single-payment vehicle title loans. The most recent report shows very similar results to those the Bureau found in its research, with 66 percent of borrowers taking out four or more loans in row, 40 percent taking out more than seven loans in a row, and 24 percent taking out more than 10 loans in a row.[532]

Some commenters noted data showing that vehicle title borrowers use re-borrowing to self-amortize their principal balance to a greater extent than payday borrowers do, which they suggested is evidence that title re-borrowing is not injurious. As noted previously, while it is true that more title borrowers in multi-loan sequences have declining loan balances than do payday borrowers in multi-loan sequences, this is likely the result of title loans starting out at much larger amounts. More salient is the fact that 63 percent of multi-loan sequences of title loans are for principal amounts that either remain unchanged or actually increase during the sequence, and that even those title loan sequences that do have a decline in loan amount over time only have a median decline of about $200 from beginning to end of the sequence, which is less than one-third of the average total amount of these loans. And the default rate remains high even for amortizing multi-loan sequences of title loans, at 22 percent, which is slightly higher than the default rate for payday loans (20 percent), even though the latter amortize less often. All of this suggests that even if title borrowers can somewhat reduce the larger principal amount of their loans over time, it remains difficult to succeed in digging themselves out of the debts they have incurred with these loans.

In addition to direct measures of the length of loan sequences, the cumulative number of loans that borrowers take out provides ample indirect evidence that they are often getting stuck in a long-term debt cycle. The Bureau has measured total borrowing by payday borrowers in two ways. In one study, the Bureau took a snapshot of borrowers in lenders' portfolios at a point in time (measured as borrowing in a particular month) and tracked them for an additional 11 months (for a total of 12 months) to assess overall loan use. This study Start Printed Page 54567found that the median borrowing level was 10 loans over the course of a year, and more than half of the borrowers had loans outstanding for more than half of the year.[533] In another study, the Bureau measured the total number of loans taken out by borrowers beginning new loan sequences. It found that these borrowers had lower total borrowing than borrowers who may have been mid-sequence at the beginning of the period, but the median number of loans for the new borrowers was six loans over a slightly shorter (11-month) period.[534] Research by others finds similar results, with average or median borrowing, using various data sources and various samples, of six to 13 loans per year.[535]

One commenter provided further data on the length of time consumers use payday loans, which gave more particulars about multi-year indebtedness in States with payday lending, such as South Carolina and Florida. The Florida data showed that over 40 percent of all consumers who took out one or more payday loans in 2012 continued to use the product three years later, and about a third of all consumers who took one or more payday loans in 2012 continued to use the product five years later. The South Carolina data provided similar information, but reported findings for consumers by borrowing intensity. It tended to show that those with the greatest intensity of borrowing were the least likely to end the borrowing relationship over a three-year period. Separately, a report on payday lending market trends by a specialty consumer reporting agency finds that over half of all loans are made to existing customers rather than consumers who have not used payday loans before.[536] This report concludes that “even though new customers are critical, existing customers are the most productive.” [537]

The proposal also noted that, given differences in the regulatory context and the overall nature of the market, less information is available about online lending than storefront lending. Borrowers who take out payday loans online are likely to change lenders more frequently than storefront borrowers, so that absent comprehensive data that allows borrowing patterns to be tracked across all lenders, measuring the duration of loan sequences becomes much more challenging. The limited information that is available suggests that online borrowers take out fewer loans than storefront borrowers, but that borrowing is highly likely to be under-counted. A report commissioned by an online lender trade association, using data from three online lenders making single-payment payday loans, reported an average loan length of 20 days and an average of 73 days in debt per year.[538] The report averages the medians of the three lenders' data, which makes interpretation of these values difficult; still, these findings indicate that borrowers take out three to four loans per year at these lenders.

Additional analysis is available based on the records of a specialty consumer reporting agency. The records show similar loans per borrower, 2.9, but over a multi-year period.[539] These loans, however, are not primarily single-payment payday loans. A small number are installment loans, while most are “hybrid” loans with a typical duration of roughly four pay cycles. In addition, this statistic likely understates usage because online lenders may not report all of the loans they make, and some may only report the first loan they make to a borrower. Borrowers may also be more likely to change lenders online and, as many lenders do not report to the specialty consumer reporting agency that provided the data for the analysis, when borrowers change lenders their subsequent loans often may not be in the data analyzed.

Although many industry commenters disputed the significance of these findings, they offered little evidence that was inconsistent with the data presented by the Bureau. One commenter disputed the accuracy of the Bureau's statement that 69 percent of payday loan sequences which end in default are multi-loan sequences and offered its own analysis based on its own customer data, which presented somewhat lower numbers but was largely consistent with the data presented by the Bureau. Still other commenters cited a petition that purported to show data errors relating to the Bureau's White Paper on payday loans and deposit advance products that was used to draw conclusions about the prevalence of re-borrowing, which they argued was based on an unrepresentative sample weighted heavily toward repeat users. The Bureau has addressed this criticism previously, and explained that the methodology used in the White Paper, which took a snapshot of borrowers at the beginning of a twelve-month observation period and followed those borrowers over the ensuing eleven months, is an appropriate method of assessing borrowing intensity even though it is true that any such snapshot will be disproportionately composed of repeat borrowers because they comprise the bulk of payday lenders' business. At the same time, the Bureau has conducted an alternative analysis which tracks the borrowing experience of fresh borrowers and it is that analysis on which the Bureau is principally relying here for covered short-term loans.

Another study was cited to suggest that cost does not drive the cycle of debt because it found that borrowers who were given no-fee loans had re-borrowing rates that were comparable to those who were given loans with normal fees.[540] The upshot of this study, however, tended to show that the single-payment loan structure was instead a sufficient driver of the debt cycle, even without regard to the size of the fees that were charged. In fact, this study actually tends to refute the claim made elsewhere by industry commenters that the Bureau is trying to evade the statutory prohibition on imposing a usury cap by addressing price, since price alone does not seem to drive the cycle of debt that is a primary source of the harms resulting from these loans—Start Printed Page 54568rather, it is the single-payment loan structure that does so.

Many industry participants and trade associations contended that, standing alone, multiple loan sequences cannot be presumed to be harmful to consumers. In particular, one trade association stated that where an income or expense shock cannot be resolved at once, re-borrowing in extended loan sequences can be an effective longer-term strategy of income smoothing or debt management until the consumer's financial situation improves. Thus re-borrowing cannot be presumed to be necessarily irrational or harmful, depending on the circumstances. This commenter also cited studies that examined the credit scores of payday borrowers and reported finding better outcomes for longer-term borrowers than for those who are limited to shorter loan durations, and also that reported finding better outcomes for consumers in States with less restrictive payday lending laws than for those in States with more restrictive laws. These issues are important and they are discussed further in § 1041.4 below.

A coalition of consumer groups was in agreement as a factual matter that many consumers of payday and single-payment vehicle title loans end up in extended loan sequences, and many individual commenters described their own personal experiences and perspectives on this point. They observed that borrowers in these situations do in fact suffer many if not all of the harmful collateral consequences described in the proposal, which merely compound their existing financial difficulties and leave them worse off than they were before they took out such loans. Once again, however, putting aside the starkly different conclusions that commenters were drawing from the data, the basic accuracy of the data presented in the proposal on the patterns of lending and extended loan sequences was generally acknowledged. The arguments for and against the validity of their respective conclusions are considered further in the section-by-section analysis for § 1041.4 below.

d. Consumer Expectations and Understanding of Loan Sequences

As discussed in the proposal, extended sequences of loans raise tangible concerns about the market for short-term loans. These concerns are exacerbated by the empirical evidence on consumer understanding of such loans. The available evidence indicates that many of the borrowers who take out long sequences of payday loans and single-payment vehicle title loans do not anticipate at the outset that they will end up experiencing those long sequences.

Measuring consumers' expectations about re-borrowing is inherently challenging. When answering survey questions about loan repayment, there is the risk that borrowers may conflate repaying an individual loan with completing an extended sequence of borrowing. Asking borrowers retrospective questions about their expectations at the time they started borrowing is likely to suffer from recall problems, as people have difficulty remembering what they expected at some time in the past. The recall problem is likely to be compounded by respondents tending to want to avoid admitting that they have made a mistake. Asking about expectations for future borrowing may also be imperfect, as some consumers may not be thinking explicitly about how many times they will roll a loan over when taking out their first loan. Merely asking the question may cause people to think about it and focus on it more than they otherwise would have.

Two studies discussed in the proposal have asked payday and vehicle title borrowers at the time they took out their loans about their expectations about re-borrowing, either the behavior of the average borrower or their own borrowing, and compared their responses with actual repayment behavior of the overall borrower population.[541] One 2009 survey of payday borrowers found that over 40 percent of borrowers thought that the average borrower would have a loan outstanding for only two weeks, and another 25 percent said four weeks. Translating weeks into loans, the four-week response likely reflects borrowers who believe the average number of loans that a borrower will take out before repaying is either one loan or two loans, depending on how many respondents were paid bi-weekly as opposed to monthly. The report did not provide data on actual re-borrowing, but based on analysis performed by the Bureau and others, these results suggest that respondents were, on average, somewhat optimistic about re-borrowing behavior.[542] However, it is difficult to be certain that some survey respondents did not conflate the time during which the loans are outstanding with the contract term of individual loans. This may be so because the researchers asked borrowers, “What's your best guess of how long it takes the average person to pay back in full a $300 payday loan?” Some borrowers may have interpreted this question to refer to the specific loan being taken out, rather than subsequent rollovers. People's beliefs about their own re-borrowing behavior could also vary from their beliefs about average borrowing behavior by others. This study also did not specifically distinguish other borrowers from the subset of borrowers who end up in extended loan sequences.

Another study discussed in the proposal was a study of single-payment vehicle title borrowers, where researchers surveyed borrowers about their expectations about how long it would take to repay the loan.[543] The report did not have data on borrowing, but compared the responses with the distribution of repayment times reported by the Tennessee Department of Financial Institutions. The report found that the entire population of borrowers was slightly optimistic, on average, in their predictions.[544]

The two studies just described compared borrowers' predictions of average borrowing with overall average borrowing levels, which is only informative about how accurate borrowers' predictions are about the average. By contrast, a 2014 study by Professor Ronald Mann,[545] which was discussed in the proposal, did attempt to survey borrowers at the point at which they were borrowing. This survey asked them about their expectations for repaying their loans and compared their responses with their subsequent actual borrowing behavior, using loan records to measure how accurate their predictions were. The results described Start Printed Page 54569in the report, combined with subsequent analysis that Professor Mann shared with Bureau staff, show the following: [546]

First, and most significant, many fewer borrowers expected to experience long sequences of loans than actually did experience long sequences. Focusing on the borrowers who ended up borrowing for more than 150 days, it is notable that none predicted they would be in debt for even 100 days.[547] And of those who ended up borrowing for more than 100 days, only a very small fraction predicted that outcome.[548] Indeed, the vast majority of those who borrowed for more than 100 days actually expected to borrow for less than 50 days.[549] Borrowers who experienced long sequences of loans do not appear to have expected those long sequences when they made their initial borrowing decision; in fact they had not predicted that their sequences would be longer than the average predicted by borrowers overall. And while some borrowers did expect long sequences, those borrowers were more likely to err in their predictions; as Mann noted, “both the likelihood of unexpectedly late payment and the proportionate size of the error increase substantially with the length of the borrower's prediction.” [550]

Second, Mann's analysis suggests that past borrowing experience is not indicative of increased understanding of product use. In fact, those who had borrowed the most in the past did not do a better job of predicting their future use; they were actually more likely to underestimate how long it would take them to repay fully. As Mann noted in his paper, “heavy users of the product tend to be those that understand least what is likely to happen to them.” [551]

Finally, Mann's research also indicated that about as many consumers underestimated how long they would need to re-borrow as those who overestimated it, which suggested they have difficulty predicting the extent to which they will need to re-borrow. In particular, the Bureau's analysis of the data underlying Mann's paper determined that there was not a correlation between borrowers' predicted length of re-borrowing and their actual length of re-borrowing.[552] Professor Mann, in an email to the Bureau, confirmed that his data showed no significant relationship between the predicted number of days and the days to clearance.[553] This point was reinforced in his survey results by the fact that fully 20 percent of the borrowers who responded were not even able to offer any prediction at all about their expected duration of indebtedness.[554]

Professor Mann submitted a comment about his paper, which took issue with the Bureau's analysis of its findings. He contended his research shows instead that most payday borrowers expected some repeated sequences of loans, most of them accurately predicted the length of the sequence that they would borrow, and they did not systematically err on the optimistic side. The Bureau acknowledges these findings, and does not believe they are inconsistent with the interpretation provided here. Mann also noted that the Bureau placed its main emphasis not on the entire universe of borrowers, but on the group of borrowers who continued borrowing over the period for which he had access to the loan data, where his research showed that many of those borrowers did not anticipate that they would end up in such extended loan sequences. He further acknowledged that “the absolute size of the errors is largest for those with the longest sequences.” [555] He went on to state that this finding suggests “that the borrowers who have borrowed the most are those who are in the most dire financial distress, and consequently least able to predict their future liquidity.” [556] He also noted that the errors of estimation these borrowers tend to make are unsystematic and do not consist either of regular underestimation or regular overestimation of their subsequent duration of borrowing.[557]

The discussion of these survey findings thus seems to reflect more of a difference in emphasis than a disagreement over the facts. Professor Mann's interpretation appears most applicable to those borrowers who remain in debt for a relatively short period, who constitute a majority of all borrowers, and who do not appear to systematically fail to appreciate what will happen to them when they re-borrow. The Bureau does not disagree with this point. Instead, it emphasizes the subset of borrowers who are its principal concern, which consists of those longer-term borrowers who find themselves in extended loan sequences and thereby experience the various harms that are associated with a longer cycle of indebtedness. For those borrowers, the picture is quite different, and their ability to estimate accurately what will happen to them when they take out a payday loan is more limited, as Mann noted in his paper and in the comment he submitted.[558] For example, of the borrowers who remained in debt at least 140 days (10 biweekly loans), it appears that all (100 percent) underestimated their times in debt, with the average borrower in this group spending 119 more days in debt than anticipated (equivalent to 8.5 unanticipated rollovers). Of those borrowers who spent 90 or more days in debt (i.e., those most directly affected by the rule's limits on re-borrowing under the § 1041.6), it appears that more than Start Printed Page 5457095 percent underestimated their time in debt, spending an average of 92 more days in debt than anticipated (equivalent to 6.5 unanticipated rollovers). Additionally, a line of “best fit” provided by Professor Mann describing the relationship between a borrower's expected time in debt and the actual time in debt experienced by that borrower shows effectively zero slope (indicating no correlation between a borrower's expectations and outcomes). In other words, while many individuals appear to have anticipated short durations of use with reasonable accuracy (highlighted by Mann's interpretation), virtually none properly anticipated long durations (which is the market failure described here).[559] For further discussion on the Mann data, see the Section 1022(b)(2) Analysis in part VII below.

Professor Mann's comment also referred to two other surveys of payday borrowers that the Bureau discussed in its proposal. A trade association commissioned the two surveys, which suggest that consumers are able to predict their borrowing patterns.[560] Both studies, as the Bureau had noted and as Professor Mann acknowledged, are less reliable in their design than the original Mann study because they focus only on borrowers who had successfully repaid a recent loan, which clearly would have biased the results of those surveys, because that approach would tend to under-sample borrowers who are in extended loan sequences. In addition, by entirely omitting borrowers whose loan sequences ended in default, these studies would have skewed the sample in other respects as well. At a minimum, the majority of borrowers who are light users of payday loans are likely to experience such loans very differently from the significant subset of borrowers (who are a minority of all borrowers, though the loans made to them constitute an overall majority of these loans) who find that they end up in extended loan sequences and suffer the various negative consequences of that predicament.

These surveys, which were very similar to each other, were conducted in 2013 and 2016 of storefront payday borrowers who had recently repaid a loan and had not taken another loan within a specified period of time. Of these borrowers, 94 to 96 percent reported that when they took out the loan they understood well or very well “how long it would take to completely repay the loan” and a similar percentage reported that they, in fact, were able to repay their loan in the amount of time they expected. These surveys suffer from the challenge of asking people to describe their expectations about borrowing at some time in the past, which may lead to recall problems, as described earlier. In light of the sampling bias discussed above and the challenge inherent in the survey design, the Bureau concludes that these studies do not undermine the evidence above indicating that especially those consumers who engage in long-term re-borrowing through extended loan sequences are generally not able to predict accurately the number of times that they will need to re-borrow.

As discussed in the proposal, several factors may contribute to consumers' lack of understanding of the risk of re-borrowing that will result from loans that prove unaffordable. As explained above in the section on lender practices, there is a mismatch between how these products are marketed and described by industry and how they actually operate in practice. Although lenders present the loans as a temporary bridge option, only a minority of payday loans are repaid without any re-borrowing. These loans often produce lengthy cycles of rollovers or new loans taken out shortly after the prior loans are repaid. Not surprisingly, many borrowers (especially those who end up in extended loan sequences) are not able to tell when they take out the first loan how long their cycles will last and how much they will ultimately pay for the initial disbursement of cash. Even borrowers who believe they will be unable to repay the loan immediately—and therefore expect some amount of re-borrowing—are generally unable to predict accurately how many times they will re-borrow and at what cost, unless they manage to repay the loan fairly quickly. And, as noted above, borrowers who end up re-borrowing many times are especially susceptible to inaccurate predictions.

Moreover, as noted in the proposal, research suggests that financial distress can be one of the factors in borrowers' decision-making. As discussed above, payday and single-payment vehicle title loan borrowers are often in financial distress at the time they take out the loans. Their long-term financial condition is typically very poor. For example, as described above, studies find that both storefront and online payday borrowers have little to no savings and very low credit scores, which is a sign of overall distressed financial condition. They may have credit cards but likely do not have unused credit, are often delinquent on one or more cards, and have often experienced multiple overdrafts and/or NSFs on their checking accounts.[561] They typically have tried and failed to obtain other forms of credit before turning to a payday lender, or they otherwise may perceive that such other options would not be available to them and there is no time to comparison shop when facing an imminent liquidity crisis.

Research has shown that when people are under pressure they tend to focus on the immediate problem they are confronting and discount other considerations, including the longer- term implications of their actions. Researchers sometimes refer to this phenomenon as “tunneling,” evoking the tunnel-vision decision-making that people may tend to engage in as they confront such situations. Consumers experiencing a financial crisis, as they often are when they are deciding whether or not to take out these kinds of loans, can be prime examples of this behavior.[562] Even when consumers are not facing a crisis, research shows that they tend to underestimate their near-term expenditures [563] and, when Start Printed Page 54571estimating how much financial “slack” they will have in the future, tend to discount even the expenditures they do expect to incur.[564] Finally, regardless of their financial situation, research suggests that consumers may generally have unrealistic expectations about their future earnings, their future expenses, and their ability to save money to repay future obligations. Much research has documented that consumers in many contexts demonstrate optimism bias about future events and their own future performance. Without attempting to specify how frequently these considerations may affect individual borrower behavior, it is enough here to note that they are supported in the academic literature and are consistent with the observed behavior of those who use covered short-term loans.[565]

As discussed in the proposal, each of these behavioral biases is exacerbated when facing a financial crisis, and taken together they can contribute to affecting the decision-making of consumers who are considering taking out a payday loan, a single-payment vehicle title loan, or some other covered short-term loan. The effect of these behavioral biases may cause consumers to fail to make an accurate assessment of the likely duration of indebtedness, and, consequently, the total costs they will pay as a result of taking out the loan. Tunneling also may cause consumers not to focus sufficiently on the future implications of taking out a loan. To the extent consumers do comprehend what will happen when the loan comes due—or when future loans come due in extended loan sequences—underestimation of future expenditures and optimism bias can cause them to misunderstand the likelihood of repeated re-borrowing. These effects could be attributable to their belief that they are more likely to be able to repay the loan without defaulting or re-borrowing than they actually are. And consumers who recognize at origination that they will have difficulty paying back the loan and that they may need to roll the loan over or re-borrow once or twice may still underestimate the likelihood that they will wind up rolling over or re-borrowing multiple times and the increasingly high costs of doing so.

Regardless of the underlying explanation, the empirical evidence indicates that many borrowers who find themselves ending up in extended loan sequences did not expect that outcome—with their predictive abilities diminishing as the loan sequences become more extended. In this regard, it is notable that one survey found that payday and vehicle title borrowers were more likely to underestimate the cost and amount of time in debt than borrowers of other products examined in the survey, including pawn loans, deposit advance products, and installment loans.[566]

The commenters on this discussion in the proposal expressed sharply divergent views. Some industry commenters stated their belief that consumers make rational decisions and many of them do expect to re-borrow when they take out covered short-term loans. Others noted that this argument fails to come to grips with the key problem that the Bureau has focused on in its analysis—known to economists as a “right tail” problem—which rests on the fact that a subset constituting a substantial population of payday borrowers are the ones who do not seem to expect but yet experience the most extreme negative outcomes with these loans.

Other industry participants and trade associations criticized the Bureau for not conducting its own surveys of payday and title borrowers, and contended that such surveys would have shown that borrowers are generally well informed about their decisions to obtain such loans. And a large number of comments from individual users of these loans were in accord with these views, presenting their own experiences with such loans as positive and as having benefited their financial situations.

Other industry commenters pointed out what they regarded as a low volume of consumer complaints about this product, which they viewed as inconsistent with the notion that many borrowers are surprised by experiencing unexpected negative outcomes with these loans. Yet it is equally plausible that those borrowers who find themselves in extended loan sequences may be embarrassed and therefore may be less likely to submit complaints about their situation. This is consistent with survey results that show many confirmed borrowers nonetheless deny having taken out a payday loan.[567] Borrowers may also blame themselves for having gotten themselves caught up in a cycle of debt authorized by State law, which may also explain why they would be unlikely to file a complaint with a government agency or a government official.

In addition, the Bureau has noted previously that a relatively high proportion of debt collection complaints it receives are about payday loans—a much higher proportion, for example, than for mortgages or auto loans or student loans.[568] From its consumer complaint data, the Bureau observed that from November 2013 through December 2016 more than 31,000 debt collection complaints cited payday loans as the underlying debt. More than 11 percent of the complaints that the Bureau has handled about debt collection stem directly from payday loans.[569] And in any event, it is not at all clear that the Bureau receives a low number of consumer complaints about payday loans once they are normalized in comparison to other credit products. For example, in 2016, the Bureau received approximately 4,400 complaints in which consumers reported “payday loan” as the complaint product and about 26,600 complaints about credit cards.[570] Yet there are only about 12 million payday loan borrowers annually, and approximately 156 million consumers Start Printed Page 54572have one or more credit cards.[571] Therefore, by way of comparison, for every 10,000 payday loan borrowers, the Bureau received about 3.7 complaints, while for every 10,000 credit cardholders, the Bureau received about 1.7 complaints.

In addition, some faith leaders and faith groups of many denominations from around the country collected and submitted comments, which underscored the point that many borrowers may direct their personal complaints or dissatisfactions with their experiences elsewhere than to government officials. Indeed, some of the faith leaders who commented on the proposal mentioned their intentions or efforts to develop their own safer loan products in response to the crises related to them by such borrowers.

Various commenters, including some academics such as Professor Mann whose views are discussed above, also cited research that they viewed as showing that such borrowers understand the nature of the product, including the fact that they may remain indebted beyond the initial term of the loan, with many able to predict accurately (within two weeks) how long it will take to repay their loan or loans. They cited various studies to make the point that consumers are in a better position to understand and act in their own interests than are policymakers who are more removed from the conditions of their daily lives. Some of these commenters were particularly critical of what they viewed as the erroneous assumptions and, even more broadly, the misguided general approach taken by behavioral economists. They argued that any such approach to policymaking is not well grounded and runs counter to their preferred view that consumer behavior instead is marked by rational expectations and clear insight into decision-making about financial choices.

By contrast, many consumer groups and some researchers took a very different view. They tended to agree with the points presented in the proposal about how behavioral characteristics can undermine decision-making for borrowers of these loans, especially for those in financial distress. In their view, these factors can and often do lead to misjudgments by many consumers of the likelihood that they may find themselves caught up in extended loan sequences and experiencing many of the harmful collateral consequences that were described in the proposal. They suggested that both the research and the personal experiences of many borrowers suggest that this picture of a substantial number of consumers is generally accurate, especially for those consumers who find that they have ended up in extended loan sequences.

As the Bureau had noted in the proposal, the patterns of behavior and outcomes in this market are broadly consistent with a number of cognitive biases that are described and documented in the academic literature on behavioral economics. Yet it is important to note that the Bureau's intervention is motivated by the observed pattern of outcomes in the market, and not by any settled viewpoint on the varying theories about the underlying rationality of the decisions that may lead to them. That is, the Bureau does not and need not take a position here on the types of behavioral motivations that may drive the observed outcomes, for it is the outcomes themselves that are problematic, regardless of how economists may attempt to explain them. In fact, both the rational agent models generally favored by industry comments and the more behavioral models favored by consumer groups and some researchers could very well lead to these same observed outcomes.

The Bureau has weighed these conflicting comments and concludes that the discussion of these issues in the proposal remains generally accurate and is supported by considerable research and data on how payday and title loans operate in actual practice and how these loans are experienced by consumers. The data do seem to indicate that a significant group of consumers do not accurately predict the duration of their borrowing. This is particularly true, notably, for the subset of consumers who do in fact end up in extended loan sequences. These findings, and not any definitive judgment about the validity of behavioral economics or other theories of consumer behavior, provide the foundation on which this rule is based. Finally, though certain commenters have expressed concern that the Bureau had not heard sufficiently from individual users of these loans, the Bureau has now received and reviewed a high volume of individual comments that were submitted as part of this rulemaking process.

e. Delinquency and Default

The proposal also addressed the specific topics of delinquency and default on payday and single-payment vehicle title loans. In addition to the various harms caused by unanticipated loan sequences, the Bureau was concerned that many borrowers suffer other harms from unaffordable loans in the form of the collateral costs that come from being delinquent or defaulting on the loans. Many borrowers, when faced with unaffordable payments, will be late in making loan payments, and may ultimately cease making payments altogether and default on their loans.[572] They may take out multiple loans before defaulting, either because they are simply delaying the inevitable or because their financial situation deteriorates over time to the point where they become delinquent and eventually default rather than continuing to pay additional re-borrowing fees. For example, the evidence from the CFPB Report on Supplemental Findings shows that approximately two-thirds of payday loan sequences ending in default are multi-loan sequences in which the borrower has rolled over or re-borrowed at least once before defaulting. And nearly half of the consumers who experienced either a default or a 30-day delinquency already had monthly fees exceeding $60 before their first default or 30-day delinquency occurred.

While the Bureau noted in the proposal that it is not aware of any data directly measuring the number of late payments across the industry, studies of what happens when payments are so late that the lenders deposit the consumers' original post-dated checks Start Printed Page 54573suggest that late payment rates are relatively high. For example, one study of payday borrowers in Texas found that in 10 percent of all loans, the post-dated checks were deposited and bounced.[573] Looking at the borrower level, the study found that half of all borrowers had a check that was deposited and bounced over the course of the year following their first payday loan.[574] An analysis of data collected in North Dakota showed a lower, but still high, rate of lenders depositing checks that later bounced or trying to collect loan payment via an ACH payment request that failed. It showed that 39 percent of new borrowers experienced a failed loan payment of this type within a year after their first payday loan, and 44 percent did so within the first two years after their first payday loan.[575] In a public filing, one large storefront payday lender reported a lower rate (6.5 percent) of depositing checks, of which nearly two-thirds were returned for insufficient funds.[576] In the Bureau's analysis of ACH payments initiated by online payday and payday installment lenders, half of online borrowers had at least one overdraft or NSF transaction related to their loans over 18 months. These borrowers' depository accounts incurred an average total of $185 in fees.[577]

As the Bureau noted in the proposal, bounced checks and failed ACH payments can be quite costly for borrowers. The median bank fee for an NSF transaction is $34.00, which is equivalent to the cost of a rollover on a $300 storefront loan.[578] If the lender makes repeated attempts to collect using these methods, this leads to repeated fees being incurred by the borrower. The Bureau's research indicates that when one attempt fails, online payday lenders make a second attempt to collect 75 percent of the time but are unsuccessful in 70 percent of those cases. The failure rate increases with each subsequent attempt.[579]

In addition to incurring NSF fees from a bank, in many cases when a check bounces the consumer can be charged a returned check fee by the lender. This means the borrower would be incurring duplicative and additional fees for the same failed transaction. In this connection, it should be noted that lender-imposed late fees are subject to certain restrictions in some but not all States.[580]

The proposal also noted that default can also be quite costly for borrowers. These costs vary with the type of loan and the channel through which the borrower took out the loan. As discussed above, default may come after a lender has already made repeated and expensive attempts to collect from the borrower's deposit account, such that a borrower may ultimately find it necessary to close the account. In other instances, the borrower's bank or credit union may close the account if the balance is driven negative and the borrower is unable for an extended period of time to return the balance to positive. And borrowers of single-payment vehicle title loans stand to suffer even greater harms from default, as it may lead to the repossession of their vehicle. In addition to the direct costs of the loss of an asset, the deprivation of their vehicle can seriously disrupt people's lives and put at risk their ability to remain employed or to manage their ordinary affairs as a practical matter. Yet another consequence of these setbacks could be personal bankruptcy in some cases.

Default rates on individual payday loans appear at first glance to be fairly low. This figure is three percent in the data the Bureau has analyzed, and the commenters are in accord about this figure.[581] But because so many borrowers respond to the unaffordability of these loans by re-borrowing in sequences of loans rather than by defaulting immediately, a more meaningful measure of default is the share of loan sequences that end in default. The Bureau's data show that, using a 30-day definition of a loan sequence, fully 20 percent of loan sequences end in default. A recent report based on a multi-lender dataset showed similar results, with a three percent loan-level default rate and a 16 percent sequence-level default rate.[582]

Other researchers have found similarly high levels of default. One study of Texas borrowers found that 4.7 percent of loans were charged off, while 30 percent of borrowers had a loan charged off in their first year of borrowing.[583] Default rates on single-payment vehicle title loans are higher than those on storefront payday loans; in addition, initial single-payment vehicle title loans are more likely than storefront payday loans to result in a default. In the data analyzed by the Bureau, the default rate on all title loans is six percent, and the sequence-level default rate is 33 percent.[584] Over half of all defaults occur in single-payment vehicle title loan sequences that consist of three or fewer loans. Nine percent of single-payment vehicle title loan sequences consist of single loans that end in default, compared to six percent of payday loan sequences.[585] The Bureau's research suggests that title lenders repossess a vehicle slightly more than half the time when a borrower defaults on a loan. In the data the Bureau has analyzed, three percent of all single-payment vehicle title loans lead to repossession, which represents approximately 50 percent of loans on which the borrower defaulted. At the sequence level, 20 percent of sequences end up with the borrower's vehicle Start Printed Page 54574being repossessed. In other words, one in five borrowers is unable to escape their debt on these loans without losing their car or truck.

Some industry and trade association commenters posited that the Bureau had overstated the default and repossession rates on vehicle title loans. Companies argued that the Bureau had erroneously stated a higher repossession rate than their own data showed, with one commenter estimating its own short-term title loan sequence repossession rate at 8.4 percent. Others contended that the Bureau's repossession rates were much higher than those reported through other sources, such as regulator reports in States like Idaho and Texas. In arguing that the Bureau had overstated the default and repossession rates, one trade group also cited a study which had concluded that the rates were lower. The study relied on a handful of State regulator reports in addition to “industry sources.” Yet the difference seems to trace to the fact that default and repossession rates are typically reported at the loan level rather than the sequence level. The Bureau's loan-level data is actually fairly similar to the figures cited by these commenters. But the Bureau believes that sequence level is a more appropriate indicator, since it captures experience at the level of the borrower. Put differently, sequence level more appropriately indicates outcomes for particular consumers, rather than for particular lenders; from this standpoint, a loan that is rolled over three times before defaulting should not be miscounted as three “successfully” repaid loans and one default. As noted previously, over 80 percent of single-payment vehicle title loans were re-borrowed on the same day as a previous loan was repaid. Regardless, to the extent any one company has lower repossession rates than the average, that fact does not put in question the averages that the Bureau used, because inevitably there will be companies that are both above and below the average. The Bureau also notes that the study discussed above cited by a trade group, which relies on undefined “industry sources” and a handful of State regulator reports to criticize the Bureau's data on default and repossession rates, relied on far less robust loan level data than the Bureau used to arrive at the figures it cited in the Bureau's supplemental research report and in the proposal.

One commenter noted that because the vehicles put up for collateral on these loans are usually old and heavily used, lenders often do not repossess the vehicle because it is not worth the trouble. This commenter also argued that the impact of repossession is not significant, based on a study indicating that less than 15 percent of consumers whose vehicles are repossessed would not find alternative means of transportation, which again is at odds with the information presented in other studies that have been cited.[586] Another commenter asserted that the stress created by the threat of vehicle repossession is no worse than other stresses felt by consumers in financial difficulties, though it is difficult to know how much to credit this claim.

The proposal further noted that borrowers of all types of covered loans are also likely to be subject to collection efforts, which can take aggressive forms. From its consumer complaint data, the Bureau observed that from November 2013 through December 2016 more than 31,000 debt collection complaints cited payday loans as the underlying debt. More than 11 percent of the complaints that the Bureau has handled about debt collection stem directly from payday loans.[587] These collections efforts can include harmful and harassing conduct, such as repeated phone calls from collectors to the borrower's home or place of work, the harassment of family and friends, and in-person visits to consumers' homes and worksites. Some of this conduct, depending on the facts and circumstances, may be illegal. Aggressive calling to the borrower's workplace can put at risk the borrower's employment and jeopardize future earnings. Many of these practices can cause psychological distress and anxiety for borrowers who are already under the strain of financial pressure.

In fact, the Bureau's enforcement and supervisory examination processes have uncovered evidence of numerous illegal collection practices by payday lenders, including practices of the kinds just described. These have included: Illegal third-party calls, illegal home visits for collection purposes, false threats to add new fees, false threats of legal action or referral to a non-existent in-house “collections department,” and deceptive messages regarding non-existent “special promotions” to induce borrowers to return calls.[588]

In addition, lenders and trade associations contended that the Bureau had overstated the extent of harm, noting that they do not typically report nonpayment of these kinds of loans to consumer reporting agencies, which can interfere with the consumer's access to credit, and that this lack of reporting would obviate any harm that the borrower would suffer on that front. Nonetheless, debt collectors can and do report unpaid debts to the consumer reporting companies even when the original creditors do not, and the aggressive collection tactics that the Bureau has identified with respect to unpaid payday loans through its investigations and numerous enforcement actions suggest that this may be a common collateral consequence of default on these loans as well.[589]

The potential consequences of the loss of a vehicle depend on the transportation needs of the borrower's household and the available transportation alternatives. According to two surveys of title loan borrowers, 15 percent of all borrowers report that they would have no way to get to work or school if they lost their vehicle to repossession.[590] Using an 8 percent repossession rate, one industry commenter asserted that only about one percent of title loan borrowers would thus lose critical transportation, by multiplying 15 percent times 8 percent. However, the survey author specifically warns against doing this, noting that “a borrower whose car is repossessed probably has lower wealth and income than a borrower whose car is not repossessed, and is therefore probably more likely to lack another way of getting to work.” [591] More than one-third (35 percent) of borrowers pledge the title to the only working vehicle in the household.[592] Even those with a Start Printed Page 54575second vehicle or the ability to get rides from friends or take public transportation would presumably experience significant inconvenience or even hardship from the loss of a vehicle. This hardship goes beyond simply getting to work or school, and would as a practical matter also adversely affect the borrower's ability to conduct their ordinary household affairs, such as obtaining food or medicine or other necessary services.

In the proposal, the Bureau noted that it analyzed online payday and payday installment lenders' attempts to withdraw payments from borrowers' deposit accounts, and found that six percent of payment attempts that were not preceded by a failed payment attempt themselves fail, incurring NSF fees.[593] Another six percent avoid failure, despite a lack of sufficient available funds in the borrower's account, but only because the borrower's depository institution makes the payment as an overdraft, in which case the borrower was likely to be charged a fee that is generally similar in magnitude to an NSF fee. The Bureau could not determine default rates from these data.

As noted in the proposal, when borrowers obtain a payday or title loan, they may fail to appreciate the extent of the risk that they will default and the costs associated with default. Although consumers may well understand the concept and possibility of default, in general, they are unlikely, when they are deciding whether to take out a loan, to be fully aware of the extent of the risk and severity of the harms that would occur if they were to default or what it would take to avoid default. They may be overly focused on their immediate needs relative to the longer-term picture. The lender's marketing materials may have succeeded in convincing the consumer of the value of a loan to bridge financial shortfalls until their next paycheck. Some of the remedies a lender might invoke to address situations of nonpayment, such as repeatedly attempting to collect from a borrower's checking account or using remotely created checks, may be unknown or quite unfamiliar to many borrowers. Realizing that these measures are even a possibility would depend on the borrower investigating what would happen in the case of an event they typically do not expect to occur, such as a default.

Industry commenters contended that consumers tend to be highly knowledgeable about the nature, costs, and overall effects of payday and single-payment vehicle title loans. Yet they generally did not address the points raised here about the level of awareness and familiarity that these consumers would tend to have about the risks and costs of these other, more collateral consequences of delinquency and default. Consumer groups, by contrast, supported the view that these collateral consequences are part of the true overall cost of payday and title loans and that they are largely unforeseen by most consumers.

f. Collateral Harms From Making Unaffordable Payments

The proposal further elucidated other harms associated with payday and title loans, in addition to the harms associated with delinquency and default, by describing how borrowers who take out these loans may experience other financial hardships as a result of making payments on unaffordable loans. These harms may occur whether or not the borrower also experiences delinquency or default somewhere along the way, which means they could in many cases be experienced in addition to the harms otherwise experienced from these situations.

These further harms can arise where the borrower feels compelled to prioritize payment on the loan and does not wish to re-borrow. This course of action may result in defaulting on other obligations or forgoing basic living expenses. If a lender has taken a security interest in the borrower's vehicle, for example, and the borrower does not wish to re-borrow, then the borrower is likely to feel compelled to prioritize payments on the title loan over other bills or crucial expenditures, because of the substantial leverage that the threat of repossession gives to the lender.

The repayment mechanisms for other short-term loans can also cause borrowers to lose control over their own finances. If a lender has the ability to withdraw payment directly from a borrower's checking account, the borrower may lose control over the order in which she would prefer her payments to be made and thus may be unable to choose to make essential expenditures before repaying the covered loan. This is especially likely to happen when the lender is able to time the withdrawal to align with the borrower's payday or with the specific day when the borrower is scheduled to receive periodic income. Moreover, even if a title borrower does not have her vehicle repossessed, the threat of repossession in itself may cause tangible harm to borrowers. It may cause them to forgo other essential expenditures in order to make a payment they cannot afford in order to avoid repossession.[594] And there may be psychological harm in addition to the stress associated with the possible loss of a vehicle. Lenders recognize that consumers often have a “pride of ownership” in their vehicle and, as discussed above, one or more lenders are willing to exceed their maximum loan amount guidelines by considering the vehicle's sentimental or use value to the consumer when they are assessing the amount of funds they will lend.

The Bureau noted in the proposal that it is not able to directly observe the harms that borrowers suffer from making unaffordable payments. But it stands to reason that when loans are made without regard to the consumer's ability to repay and the lender secures the ability to debit a consumer's account or repossess a vehicle, many borrowers are suffering harms from making unaffordable payments at certain times, and perhaps frequently.

The commenters had vigorous reactions to this discussion in the proposal. On the effects that vehicle title borrowers feel based on their concern about losing their transportation, industry commenters argued that the Bureau had overstated its points. They emphasized that these loans are typically non-recourse loans in many States, which puts some specific limits on the harm experienced by borrowers. In the proposal, the Bureau had observed that this result would still expose the borrower to consider threat of harm if they end up losing their primary (and in many instances their sole) means of transportation to work and to manage their everyday affairs. Moreover, the Bureau notes these comments omit the issue of what harms exist in States where vehicle title loans Start Printed Page 54576are recourse. The Bureau notes the receipt of a comment letter from two consumer advocacy groups that discussed in detail the laws and lender practices in Arizona, where a robust vehicle title loan market exists. They wrote that in Arizona lenders are permitted to sue for deficiency balances after repossession; lenders can collect a “reasonable amount” for the cost of collection and court and attorneys' fees related to repossession; and that as of 2015, nine of out of 10 largest title lenders still required borrowers to provide bank account access to get loans secured by vehicles.[595] Furthermore, these commenters countered that borrowers often can find other means of transportation, citing what they present as a supportive survey. Their interpretation of the data is not convincing, however, as even the authors of the survey cautioned against making simplistic calculations about factors and probabilities that are intertwined in the analysis, and which thus may considerably understate the incidence of hardship. One industry commenter pointed to a survey which showed that though a majority of title loan borrowers would prioritize their title loan payment over that of a credit card, very few of these borrowers would prioritize a title loan payment over rent, utilities, groceries, or other expenses. However, the author of this survey clearly states that because of an extremely small sample size, his findings are anecdotal and are not representative of borrowers either in the local area surveyed or nationally.[596]

The industry commenters further noted that as many as half of the title borrowers who default do so on their first payment, and they construed this occurrence as a strategic default which demonstrates that these borrowers did not confront any particular hardship by facing unaffordable payments that could cause them to lose their vehicle. Yet the notion that a borrower would make the conscious decision to employ this approach as a means of “selling” their vehicle, where they likely will receive a sharply reduced price for it and expose themselves to the other related risks discussed here, seems strained and implausible. That is especially the case insofar as doing so would needlessly incur the risks and costs of various potential penalty fees, late fees, towing fees, and the like that could occur (depending on the provisions of State law) when lenders carry out a repossession of the vehicle.

Industry and trade association commenters also suggested that the proposal is improperly paternalistic by attempting to substitute the judgment of the Bureau for the judgments made by individual consumers about how best to address the risks of collateral harms from making unaffordable payments. Difficult choices that consumers have to make about how to meet their obligations may be temporarily eased by the ability to access these loans and utilize the proceeds, at least for those consumers who do not end up experiencing the kinds of negative collateral consequences described above from delinquencies and defaults, and perhaps for some other borrowers as well. It also can substitute a new creditor with more limited recourse for an existing creditor with greater leverage, such as a landlord or a utility company. Although the addition of a payday or title loan obligation to the already-constrained mix of obligations can lead to the kind of budgeting distortions described by the proposal, it might instead lead to more immediate financial latitude to navigate those choices and avoid the impending harms of delinquency or default on other pre-existing obligations. This narrative was echoed by comments from a large number of individual users of such loans, who described the benefits they experienced by having access to the loan proceeds for immediate use while finding various ways to avert the negative collateral consequences described in the proposal.

Consumer groups, on the other hand, strongly urged the view that payday and title loans often lead to harms similar to those described in the proposal for a significant set of borrowers. This position was buttressed by submissions from and about a sizeable number of individual borrowers as well, which included narratives describing extreme financial dislocations flowing directly from harms cause by unaffordable payments. Although the proceeds of such loans do offer a temporary infusion of flexibility into the borrower's financial situation, that brief breathing spell is generally followed almost immediately thereafter by having to confront similar financial conditions as before but now with the looming or actual threat of these harmful collateral consequences being felt as well. Again, in contrast to the viewpoint that repeated re-borrowing may be consciously intended as a means of addressing financial shortfalls over a longer period of time, the consumer groups contended that extended loan sequences often reflect the inherent pressures of the initial financial need, now exacerbated by having to confront unaffordable payments on the new loan. And many individual users of such loans described their own negative experiences in ways that were consistent with the difficult situations and outcomes that can result from having to deal with unaffordable payments.

Once again, the factual observations presented in the proposal on the kinds of collateral harms that can arise for payday and title borrowers who struggle to pursue potential alternatives to making unaffordable payments, as opposed to defaulting on these loans, were not seriously contested. The disagreement among the commenters was instead over the inferences to be drawn from these facts in context of other facts and potential benefits that they presented as bearing on their views of overall consumer welfare, and thus the broader conclusions to be drawn for purposes of deciding whether or not to support the proposed rule. Those contextual matters are important and will be discussed further in § 1041.4 below.

g. Harms Remain Under Existing Regulatory Approaches

As stated in the proposal, based on the Bureau's analysis and outreach, the harms that it has observed from payday loans, single-payment vehicle title loans, and other covered short-term loans persist in these markets despite existing regulatory frameworks. This formulation, of course, is something of a tautology, since if the harms the Bureau perceives to exist do in fact exist, they clearly do so despite the impact of existing regulatory frameworks that fail to prevent or mitigate them. Nonetheless, in the proposal the Bureau stated that existing regulatory frameworks in those States that have authorized payday and/or title lending still leave many consumers vulnerable to the specific harms discussed above relating to default, delinquency, re-borrowing, and the collateral harms that result from attempting to avoid these other injuries by making unaffordable payments.

Several different factors have complicated State efforts to effectively apply their regulatory frameworks to payday and title loans. For example, lenders may adjust their product offerings or their licensing status to Start Printed Page 54577avoid State law restrictions, such as by shifting from payday loans to vehicle title or installment loans or open-end credit or by obtaining licenses under State mortgage lending laws.[597] As noted earlier, the State regulatory frameworks grew up around the pre-existing models of single-payment payday loans, but have evolved in certain respects over the past two decades. States also have faced challenges in applying their laws to certain online lenders, including lenders claiming Tribal affiliation or offshore lenders.[598]

As discussed above in part II, States have adopted a variety of different approaches for regulating short-term loans. For example, 15 States and the District of Columbia have interest rate caps or other restrictions that, in effect, prohibit payday lending and thereby limit access to this form of credit. Although consumers in these States may still be exposed to potential harms from short-term lending, such as online loans made by lenders that claim immunity from these State laws or from loans obtained in neighboring States, these provisions provide strong protections for consumers by substantially reducing their exposure to the harms they can incur from these loans. Again, as discussed above, these harms flow from the term and the single-payment structure of these loans, which along with certain lender practices expose a substantial population of consumers to the risks and harms they experience, such as ending up in extended loan sequences.

As explained in greater detail in part II above and in the section-by-section analysis for § 1041.5, the 35 States that permit payday loans in some form have taken a variety of different approaches to regulating such loans. Some States have restrictions on rollovers or other re-borrowing. Among other things, these restrictions may include caps on the total number of permissible loans in a given period, or cooling-off periods between loans. Some States prohibit a lender from making a payday loan to a borrower who already has an outstanding payday loan.

Some States have adopted provisions with minimum income requirements. For example, some States provide that a payday loan cannot exceed a percentage (most commonly 25 percent) of a consumer's gross monthly income. Some State payday or title lending statutes require that the lender consider a consumer's ability to repay the loan before making a loan, though none of them specifies what steps lenders must take to determine whether the consumer has the ability to repay a loan. Some States require that consumers have the opportunity to repay a short-term loan through an extended payment plan over the course of a longer period of time. And some jurisdictions require lenders to provide specific disclosures in order to alert borrowers of potential risks.

While the proposal noted that these provisions may have been designed to target some of the same or similar potential harms identified above, these provisions do not appear to have had a significant impact on reducing the incidences of re-borrowing and other harms that confront consumers of these loans. In particular, as discussed above, the Bureau's primary concern about payday and title loans is that many consumers end up re-borrowing over and over again, turning what was ostensibly a short-term loan into a long-term cycle of debt with many negative collateral consequences. The Bureau's analysis of borrowing patterns in different States that permit payday loans indicates that most States have very similar rates of re-borrowing, with about 80 percent of loans followed by another loan within 30 days, regardless of the terms of the specific restrictions that are in place.[599]

In particular, laws that prevent direct rollovers of payday loans, as well as laws that impose very short cooling-off periods between loans, such as Florida's prohibition on same-day re-borrowing, have had very little impact on re-borrowing rates measured over periods longer than one day. The 30-day re-borrowing rate in all States that prohibit rollovers is 80 percent, and in Florida the rate is 89 p