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

American Government Special Collections Reference Desk

American Government

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

Richard Cordray
Bureau of Consumer Financial Protection
22 July 2016


[Federal Register Volume 81, Number 141 (Friday, July 22, 2016)]
[Proposed Rules]
[Pages 47863-48218]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-13490]



[[Page 47863]]

Vol. 81

Friday,

No. 141

July 22, 2016

Part II





Bureau of Consumer Financial Protection





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12 CFR Part 1041





Payday, Vehicle Title, and Certain High-Cost Installment Loans; 
Proposed Rule

Federal Register / Vol. 81, No. 141 / Friday, July 22, 2016 / 
Proposed Rules

[[Page 47864]]


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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1041

[Docket No. CFPB-2016-0025]
RIN 3170-AA40


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

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Proposed rule with request for public comment.

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SUMMARY: The Bureau of Consumer Financial Protection (Bureau or CFPB) 
is proposing to establish 12 CFR 1041, which would contain regulations 
creating consumer protections for certain consumer credit products. The 
proposed regulations would cover payday, vehicle title, and certain 
high-cost installment loans.

DATES: Comments must be received on or before October 7, 2016.

ADDRESSES: You may submit comments, identified by Docket No. CFPB-2016-
0025 or RIN 3170-AA40, by any of the following methods:
     Email: FederalRegisterComments@cfpb.gov. Include Docket 
No. CFPB-2016-0025 or RIN 3170-AA40 in the subject line of the email.
     Electronic: http://www.regulations.gov. Follow the 
instructions for submitting comments.
     Mail: Monica Jackson, Office of the Executive Secretary, 
Consumer Financial Protection Bureau, 1700 G Street NW., Washington, DC 
20552.
     Hand Delivery/Courier: Monica Jackson, Office of the 
Executive Secretary, Consumer Financial Protection Bureau, 1275 First 
Street NE., Washington, DC 20002.
    Instructions: All submissions should include the agency name and 
docket number or Regulatory Information Number (RIN) for this 
rulemaking. Because paper mail in the Washington, DC area and at the 
Bureau is subject to delay, commenters are encouraged to submit 
comments electronically. In general, all comments received will be 
posted without change to http://www.regulations.gov. In addition, 
comments will be available for public inspection and copying at 1275 
First Street NE., Washington, DC 20002, on official business days 
between the hours of 10 a.m. and 5 p.m. eastern time. You can make an 
appointment to inspect the documents by telephoning (202) 435-7275.
    All comments, including attachments and other supporting materials, 
will become part of the public record and subject to public disclosure. 
Sensitive personal information, such as account numbers or Social 
Security numbers, should not be included. Comments will not be edited 
to remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT: Eleanor Blume, Sarita Frattaroli, 
Casey Jennings, Sandeep Vaheesan, Steve Wrone, Counsels; Daniel C. 
Brown, Mark Morelli, Michael G. Silver, Laura B. Stack, Senior 
Counsels, Office of Regulations, at 202-435-7700.

SUPPLEMENTARY INFORMATION: 

I. Summary of the Proposed Rule

    The Bureau is issuing this notice to propose consumer protections 
for payday loans, vehicle title loans, and certain high-cost 
installment loans (collectively ``covered loans''). Covered loans are 
typically used by consumers who are living paycheck to paycheck, have 
little to no access to other credit products, and seek funds to meet 
recurring or one-time expenses. The Bureau has conducted extensive 
research on these products, in addition to several years of outreach 
and review of the available literature. The Bureau is proposing to 
issue regulations primarily pursuant to authority under section 1031 of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act) to identify and prevent unfair, deceptive, and abusive acts 
and practices.\1\ The Bureau is also using authorities under section 
1022 of the Dodd-Frank Act to prescribe rules and make exemptions from 
such rules as is necessary or appropriate to carry out the purposes and 
objectives of the consumer Federal consumer financial laws,\2\ section 
1024 of the Dodd-Frank Act to facilitate supervision of certain non-
bank financial service providers,\3\ and section 1032 of the Dodd-Frank 
Act to require disclosures to convey the costs, benefits, and risks of 
particular consumer financial products or services.\4\
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    \1\ Public Law 111-203, section 1031(b), 124 Stat. 1376 (2010) 
(hereinafter Dodd-Frank Act).
    \2\ Dodd-Frank Act section 1022(b).
    \3\ Dodd-Frank Act section 1024(b)(7).
    \4\ Dodd-Frank Act section 1032(a).
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    The Bureau is concerned that lenders that make covered loans have 
developed business models that deviate substantially from the practices 
in other credit markets by failing to assess consumers' ability to 
repay their loans and by engaging in harmful practices in the course of 
seeking to withdraw payments from consumers' accounts. The Bureau 
believes that there may be a high likelihood of consumer harm in 
connection with these covered loans because many consumers struggle to 
repay their loans. In particular, many consumers who take out covered 
loans appear to lack the ability to repay them and face one of three 
options when an unaffordable loan payment is due: take out additional 
covered loans, default on the covered loan, or make the payment on the 
covered loan and fail to meet other major financial obligations or 
basic living expenses. Many lenders may seek to obtain repayment of 
covered loans directly from consumers' accounts. The Bureau is 
concerned that consumers may be subject to multiple fees and other 
harms when lenders make repeated unsuccessful attempts to withdraw 
funds from consumers' accounts.

A. Scope of the Proposed Rule

    The Bureau's proposal would apply to two types of covered loans. 
First, it would apply to short-term loans that have terms of 45 days or 
less, including typical 14-day and 30-day payday loans, as well as 
short-term vehicle title loans that are usually made for 30-day terms. 
Second, the proposal would apply to longer-term loans with terms of 
more than 45 days that have (1) a total cost of credit that exceeds 36 
percent; and (2) either a lien or other security interest in the 
consumer's vehicle or a form of ``leveraged payment mechanism'' that 
gives the lender a right to initiate transfers from the consumer's 
account or to obtain payment through a payroll deduction or other 
direct access to the consumer's paycheck. Included among covered 
longer-term loans is a subcategory loans with a balloon payment, which 
require the consumer to pay all of the principal in a single payment or 
make at least one payment that is more than twice as large as any other 
payment.
    The Bureau is proposing to exclude several types of consumer credit 
from the scope of the proposal, including: (1) Loans extended solely to 
finance the purchase of a car or other consumer good in which the good 
secures the loan; (2) home mortgages and other loans secured by real 
property or a dwelling if recorded or perfected; (3) credit cards; (4) 
student loans; (5) non-recourse pawn loans; and (6) overdraft services 
and lines of credit.

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

    The proposed rule would identify it as an abusive and unfair 
practice for a lender to make a covered short-term loan without 
reasonably determining that the consumer will have the ability

[[Page 47865]]

to repay the loan.\5\ The proposed rule would prescribe requirements to 
prevent the practice. A lender, before making a covered short-term 
loan, would have to make a reasonable determination that the consumer 
would be able to make the payments on the loan and be able to meet the 
consumer's other major financial obligations and basic living expenses 
without needing to reborrow over the ensuing 30 days. Specifically, a 
lender would have to:
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    \5\ This is a notice of proposed rulemaking, so the Bureau's 
statements herein regarding this and other proposed identifications 
of unfair and abusive practices, including the necessary elements of 
such identifications, are provisional only. The Bureau is not herein 
finding that such elements have been satisfied and identifying 
unfair and abusive practices.
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     Verify the consumer's net income;
     verify the consumer's debt obligations using a national 
consumer report and a consumer report from a ``registered information 
system'' as described below;
     verify the consumer's housing costs or use a reliable 
method of estimating a consumer's housing expense based on the housing 
expenses of similarly situated consumers;
     forecast a reasonable amount of basic living expenses for 
the consumer--expenditures (other than debt obligations and housing 
costs) necessary for a consumer to maintain the consumer's health, 
welfare, and ability to produce income;
     project the consumer's net income, debt obligations, and 
housing costs for a period of time based on the term of the loan; and
     determine the consumer's ability to repay the loan based 
on the lender's projections of the consumer's income, debt obligations, 
and housing costs and forecast of basic living expenses for the 
consumer.
    A lender would also have to make, under certain circumstances, 
additional assumptions or presumptions when evaluating a consumer's 
ability to repay a covered short-term loan. The proposal would specify 
certain assumptions for determining the consumer's ability to repay a 
line of credit that is a covered short-term loan. In addition, if a 
consumer seeks a covered short-term loan within 30 days of a covered 
short-term loan or a covered longer-term loan with a balloon payment, a 
lender generally would be required to presume that the consumer is not 
able to afford the new loan. A lender would be able to overcome the 
presumption of unaffordability for a new covered short-term loan only 
if it could document a sufficient improvement in the consumer's 
financial capacity. Furthermore, a lender would be prohibited from 
making a covered short-term loan to a consumer who has already taken 
out three covered short-term loans within 30 days of each other.
    A lender would also be allowed to make a covered short-term loan, 
without making an ability-to-repay determination, so long as the loan 
satisfies certain prescribed terms and the lender confirms that the 
consumer met specified borrowing history conditions and provides 
required disclosures to the consumer. Among other conditions, a lender 
would be allowed to make up to three covered short-term loans in short 
succession, provided that the first loan has a principal amount no 
larger than $500, the second loan has a principal amount at least one-
third smaller than the principal amount on the first loan, and the 
third loan has a principal amount at least two-thirds smaller than the 
principal amount on the first loan. In addition, a lender would not be 
allowed to make a covered short-term loan under the alternative 
requirements if it would result in the consumer having more than six 
covered short-term loans during a consecutive 12-month period or being 
in debt for more than 90 days on covered short-term loans during a 
consecutive 12-month period. A lender would not be permitted to take 
vehicle security in connection with these loans.

C. Proposed Ability-to-Repay Requirements and Alternative Requirements 
for Covered Longer-Term Loans

    The proposed rule would identify it as an abusive and unfair 
practice for a lender to make a covered longer-term loan without 
reasonably determining that the consumer will have the ability to repay 
the loan. The proposed rule would prescribe requirements to prevent the 
practice. A lender, before making a covered longer-term loan, would 
have to make a reasonable determination that the consumer has the 
ability to make all required payments as scheduled. The proposed 
ability-to-repay requirements for covered longer-term loans closely 
track the proposed requirements for covered short-term loans with an 
added requirement that the lender, in assessing the consumer's ability 
to repay a longer term loan, reasonably account for the possibility of 
volatility in the consumer's income, obligations, or basic living 
expenses during the term of the loan.
    A lender would also have to make, under certain circumstances, 
additional assumptions or presumptions when evaluating a consumer's 
ability to repay a covered longer-term loan. The proposal would specify 
certain assumptions for determining the consumer's ability to repay a 
line of credit that is a covered longer-term loan. In addition, if a 
consumer seeks a covered longer-term loan within 30 days of a covered 
short-term loan or a covered longer-term balloon-payment loan, the 
lender would, under certain circumstances, be required to presume that 
the consumer is not able to afford a new loan. A presumption of 
unaffordability also generally would apply if the consumer has shown or 
expressed difficulty in repaying other outstanding covered or non-
covered loans made by the same lender or its affiliate. A lender would 
be able to overcome the presumption of unaffordability for a new 
covered longer-term loan only if it could document a sufficient 
improvement in the consumer's financial capacity.
    A lender would also be permitted to make a covered longer-term loan 
without having to satisfy the ability-to-repay requirements by making 
loans under a conditional exemption modeled on the National Credit 
Union Administration's (NCUA) Payday Alternative Loan (PAL) program. 
Among other conditions, a covered longer-term loan under this exemption 
would be required to have a principal amount of not less than $200 and 
not more than $1,000, fully amortizing payments, and a term of at least 
46 days but not longer than six months. In addition, loans made under 
this exemption could not have an interest rate more that is more than 
the interest rate that is permitted for Federal credit unions to charge 
under the PAL regulations and an application fee of more than $20.
    A lender would also be permitted to make a covered longer-term 
loan, without having to satisfy the ability-to-repay requirements, so 
long as the covered longer-term loan meets certain structural 
conditions. Among other conditions, a covered longer-term loan under 
this exemption would be required to have fully amortizing payments and 
a term of at least 46 days but not longer than 24 months. In addition, 
to qualify for this conditional exemption, a loan must carry a modified 
total cost of credit of less than or equal to an annual rate of 36 
percent, from which the lender could exclude a single origination fee 
that is no more than $50 or that is reasonably proportionate to the 
lender's costs of underwriting. The projected annual default rate on 
all loans made pursuant to this conditional exemption must not exceed 5 
percent. The lender would have to refund all of the origination fees 
paid by all borrowers in

[[Page 47866]]

any year in which the annual default rate of 5 percent is exceeded.

D. Proposed Payments Practices Rules

    The proposed rule would identify it as an abusive and unfair 
practice for a lender to attempt to withdraw payment from a consumer's 
account in connection with a covered loan after the lender's second 
consecutive attempt to withdraw payment from the account has failed due 
to a lack of sufficient funds, unless the lender obtains from the 
consumer a new and specific authorization to make further withdrawals 
from the account. This prohibition on further withdrawal attempts would 
apply whether the two failed attempts are initiated through a single 
payment channel or different channels, such as the automated 
clearinghouse system and the check network. The proposed rule would 
require that lenders provide notice to consumers when the prohibition 
has been triggered and follow certain procedures in obtaining new 
authorizations.
    In addition to the requirements related to the prohibition on 
further payment withdrawal attempts, a lender would be required to 
provide a written notice at least three business days before each 
attempt to withdraw payment for a covered loan from a consumer's 
checking, savings, or prepaid account. The notice would contain key 
information about the upcoming payment attempt, and, if applicable, 
alert the consumer to unusual payment attempts. A lender would be 
permitted to provide electronic notices so long as the consumer 
consents to electronic communications.

E. Additional Requirements

    The Bureau is proposing to require lenders to furnish to registered 
information systems basic information for most covered loans at 
origination, any updates to that information over the life of the loan, 
and certain information when the loan ceases to be outstanding. The 
registered information systems would have to meet certain eligibility 
criteria prescribed in the proposed rule. The Bureau is proposing a 
sequential process that it believes would ensure that information 
systems would be registered and lenders ready to furnish at the time 
the furnishing obligation in the proposed rule would take effect. For 
most covered loans, registered information systems would provide a 
reasonably comprehensive record of a consumer's recent and current 
borrowing. Before making most covered loans, a lender would be required 
to obtain and review a consumer report from a registered information 
system.
    A lender would be required to establish and follow a compliance 
program and retain certain records. A lender would be required to 
develop and follow written policies and procedures that are reasonably 
designed to ensure compliance with the requirements in this proposal. 
Furthermore, a lender would be required to retain the loan agreement 
and documentation obtained for a covered loan, and electronic records 
in tabular format regarding origination calculations and determinations 
for a covered loan, for a consumer who qualifies for an exception to or 
overcomes a presumption of unaffordability for a covered loan, and 
regarding loan type and terms. The proposed rule also would include an 
anti-evasion clause.

F. Effective Date

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

II. Background

A. Introduction

    For most consumers, credit provides a means of purchasing goods or 
services and spreading the cost of repayment over time. This is true of 
the three largest consumer credit markets: The market for mortgages 
($9.99 trillion in outstanding balances), for student loans ($1.3 
trillion), and for auto loans ($1 trillion). This is also one way in 
which certain types of open-end credit--including home equity loans 
($0.14 trillion) and lines of credit ($0.51 trillion)--and at least 
some credit cards and revolving credit ($0.9 trillion)--can be used.\6\
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    \6\ For mortgages (one- to four-family) see Bd. of Governors of 
the Fed. Reserve Sys., Mortgage Debt Outstanding (1.54) (Release 
Date Mar. 2016), available at http://www.federalreserve.gov/econresdata/releases/mortoutstand/current.htm; for student loans, 
auto loans, and revolving credit, see Bd. of Governors of the Fed. 
Reserve Sys., Consumer Credit-G.19 February 2016 (Release Date Apr. 
2016), available at http://www.federalreserve.gov/releases/g19/current/default.htm#fn11b. Home equity loans and lines of credit 
outstanding estimate derived from Experian & Oliver Wyman, 2015 Q4 
Market Intelligence Report: Home Equity Loans Report, at 16 fig. 21 
(2016), available at http://www.marketintelligencereports.com and 
Experian & Oliver Wyman, 2015 Q4 Market Intelligence Report Market 
Intelligence Report: Home Equity Lines Report, at 21 fig. 30 (2016), 
available at http://www.marketintelligencereports.com.
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    Consumers living paycheck to paycheck and with little to no savings 
have also used credit as a means of coping with shortfalls. These 
shortfalls can arise from mismatched timing between income and 
expenses, misaligned cash flows, income volatility, unexpected expenses 
or income shocks, or expenses that simply exceed income.\7\ Whatever 
the cause of the shortfall, consumers in these situations sometimes 
seek what may broadly be termed a ``liquidity loan.'' \8\ There are a 
variety of loans and products that consumers use for these purposes 
including credit cards, deposit account overdraft, pawn loans, payday 
loans, vehicle title loans, and installment loans.
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    \7\ For a general discussion, see Rob Levy & Joshua Sledge, Ctr. 
for Fin. Servs. Innovation, A Complex Portrait: An Examination of 
Small-Dollar Credit Consumers (2012), available at https://www.fdic.gov/news/conferences/consumersymposium/2012/A%20Complex%20Portrait.pdf.
    \8\ If a consumer's expenses consistently exceed income, a 
liquidity loan is not likely to be an appropriate solution to the 
consumer's needs.
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    Credit cards and deposit account overdraft services are each 
already subject to specific Federal consumer protection regulations and 
requirements. The Bureau generally considers these markets to be 
outside the scope of this rulemaking as discussed further below. The 
Bureau is also separately engaged in research and evaluation of 
potential rulemaking actions on deposit account overdraft.\9\

[[Page 47867]]

Another liquidity option--pawn--generally involves non-recourse loans 
made against the value of whatever item a consumer chooses to give the 
lender in return for the funds.\10\ The consumer has the option to 
either repay the loan or permit the pawnbroker to retain and sell the 
pawned property at the end of the loan term, relieving the borrower 
from any additional financial obligation. This feature distinguishes 
pawn loans from most other types of liquidity loans. The Bureau is 
proposing to exclude non-recourse possessory pawn loans, as described 
in proposed Sec.  1041.3(e)(5), from the scope of this rulemaking.
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    \9\ Credit cards and deposit overdraft services would be 
excluded from the proposed rule under proposed Sec.  1041.3(e)(3) 
and (6) as discussed further below. The Bureau is engaged in a 
separate rulemaking concerning credit offered in connection with 
prepaid accounts and has proposed to treat such products generally 
as credit cards. See 79 FR 77102 (Dec. 23, 2014). The Bureau has 
issued a Notice and Request for Information on the Impacts of 
Overdraft Programs on Consumers and has indicated that it is 
preparing for a separate rulemaking that will address possible 
consumer protection concerns from overdraft services. See 77 FR 
12031-12034 (Feb. 28, 2012); Kelly Cochran, Spring 2016 Rulemaking 
Agenda, CFPB Blog (May 18, 2016), http://www.consumerfinance.gov/about-us/blog/spring-2016-rulemaking-agenda/. In 2015, banks with 
over $1 billion in assets reported overdraft and NSF (nonsufficient 
funds) fee revenue of $11.16 billion. See Gary Stein, New Insights 
on Bank Overdraft Fees and 4 Ways to Avoid Them, CFPB Blog (Feb. 25, 
2016), http://www.consumerfinance.gov/blog/new-insights-on-bank-overdraft-fees-and-4-ways-to-avoid-them/. The $11.16 billion total 
does not include credit union fee revenue and does not separate out 
overdraft from NSF amounts but overall, overdraft fee revenue 
accounts for about 72 percent of that amount. Bureau of Consumer 
Fin. Prot., Data Point: Checking Account Overdraft, at 10 (2014) 
[hereinafter CFPB Data Point: Checking Account Overdraft], available 
at http://files.consumerfinance.gov/f/201407_cfpb_report_ data-
point_overdrafts.pdf. The Federal Reserve Board adopted a set of 
regulations of overdraft services and the Bureau has published two 
overdraft research reports on overdraft. See Regulation E, 75 FR 
31665 (Jun. 4, 2010), available at https://www.gpo.gov/fdsys/pkg/FR-2010-06-04/pdf/2010-13280.pdf; Bureau of Consumer Fin. Prot., CFPB 
Study of Overdraft Programs: A White Paper of Initial Data Findings, 
(2013), [hereinafter CFPB Study of Overdraft Programs White Paper], 
available at http://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf; CFPB Data Point: 
Checking Account Overdraft.
    \10\ Pawn lending, also known as pledge lending, has existed for 
centuries, with references to it in the Old Testament; pawn lending 
in the U.S. began in the 17th century. See Susan Payne Carter, 
Payday Loan and Pawnshop Usage: The Impact of Allowing Payday Loan 
Rollovers, at 5 (2012), available at https://my.vanderbilt.edu/susancarter/files/2011/07/Carter_Susan_JMP_Website2.pdf. Pawn 
revenue for 2014 was estimated at $6.3 billion. EZCORP, EZCORP 2014 
Institutional Investor Day, at 31 (Dec. 11, 2014), available at 
http://investors.ezcorp.com/index.php?s=65&item=87. The three 
largest pawn firms, Cash America, EZCorp, and First Cash Financial 
Services, accounted for about one-third of total industry revenue 
but only 13 percent of the over 11,000 storefronts, that are 
operated by over 5,000 firms. Id.; First Cash Financial Services 
Inc., 2015 Annual Report (Form 10-K), at 1, 33 (Feb. 17, 2016), 
available at https://www.sec.gov/Archives/edgar/data/840489/000084048916000076/fcfs1231201510-k.htm; EZCORP, Inc., 2015 Annual 
Report (Form 10-K), at 4, 21 (Dec. 23, 2015), available at (https://www.sec.gov/Archives/edgar/data/876523/000087652315000120/a201510-k.htm), and Cash America International, Inc., 2015 Annual Report 
(Form 10-K), at 2, 36 (Feb. 25, 2016), available at https://www.sec.gov/Archives/edgar/data/807884/000080788416000055/0000807884-16-000055-index.htm. On April 28, 2016, First Cash 
Financial Services and Cash America announced they had entered into 
a merger agreement. The resulting company, FirstCash will operate in 
26 States. Press Release, ``First Cash Financial Services and Cash 
America International to Combine in Merger of Equals to Create 
Leading Operator of Retail Pawn Stores in the United States and 
Latin America'' (Apr. 28, 2016), available at http://ww2.firstcash.com/sites/default/files/20160428_PR_M.pdf. Revenue 
calculations for each firm were made by taking the percentage of 
total revenue associated with pawn lending activity. For more about 
pawn lending in general, see John P. Caskey, Fringe Banking: Cash-
Checking Outlets, Pawnshops, and the Poor, at ch. 2 (1994).
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    This rulemaking is focused on two general categories of liquidity 
loan products: Short-term loans and certain higher-cost longer-term 
loans. The largest category of short-term loans are ``payday loans,'' 
which are generally required to be repaid in a lump-sum single-payment 
on receipt of the borrower's next income payment, and short-term 
vehicle title loans, which are also almost always due in a lump-sum 
single-payment, typically within 30 days after the loan is made. The 
second general category consists of certain higher-cost longer-term 
loans. It includes both what are often referred to as ``payday 
installment loans''--that is, loans that are repaid in multiple 
installments with each installment typically due on the borrower's 
payday or regularly-scheduled income payment and with the lender 
generally having the ability to automatically collect payments from an 
account into which the income payment is deposited--and vehicle title 
installment loans. In addition, the latter category includes higher 
cost, longer-term loans in which the principal is not amortized but is 
scheduled to be paid off in a large lump sum payment after a series of 
smaller, often interest-only, payments. Some of these loans are 
available at storefront locations, others are available on the 
internet, and some loans are available through multiple delivery 
channels. This rulemaking is not limited to closed-end loans but 
includes open-end lines of credit as well.\11\ It also includes short-
term products and some more traditional installment loans made by some 
depository institutions and by traditional finance companies.
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    \11\ The Dodd-Frank Act does not define ``payday loans,'' and 
the Bureau is not proposing to do so in this rulemaking. The Bureau 
may do so in a subsequent rulemaking or in another context. In 
addition, the Bureau notes that various State, local, and tribal 
jurisdictions may define ``payday loans'' in ways that may be more 
or less coextensive with the coverage of the Bureau's proposal.
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    As described in more detail in part III, the Bureau has been 
studying these markets for liquidity loans for over four years, gaining 
insights from a variety of sources. During this time the Bureau has 
conducted supervisory examinations of a number of payday lenders and 
enforcement investigations of a number of different types of liquidity 
lenders, which have given the Bureau insights into the business models 
and practices of such lenders. Through these processes, and through 
market monitoring activities, the Bureau also has obtained extensive 
loan-level data that the Bureau has studied to better understand risks 
to consumers.\12\ The Bureau has published four reports based upon 
these data, and, concurrently with the issuance of this Notice of 
Proposed Rulemaking, the Bureau is releasing a fifth report.\13\ The 
Bureau has also carefully reviewed the published literature with 
respect to small-dollar liquidity loans and a number of outside 
researchers have presented their research at seminars for Bureau staff. 
In addition, over the course of the past four years the Bureau has 
engaged in extensive outreach with a variety of stakeholders in both 
formal and informal settings, including several Bureau field hearings 
across the country specifically focused on the subject of small-dollar 
lending, meetings with the Bureau's standing advisory groups, meetings 
with State and Federal regulators, meetings with consumer advocates, 
religious groups, and industry trade associations, consultations with 
Indian tribes, and through a Small Business Review Panel process as 
described further below.
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    \12\ Information underlying this proposed rule is derived from a 
variety of sources, including from market monitoring and outreach, 
third-party studies and data, consumer complaints, the Bureau's 
enforcement and supervisory work, and the Bureau's expertise 
generally. In publicly discussing information, the Bureau has taken 
steps not to disclose confidential information inappropriately and 
to otherwise comply with applicable law and its own rules regarding 
disclosure of records and information. See 12 CFR 1070.41(c).
    \13\ Bureau of Consumer Fin. Prot., Payday Loans and Deposit 
Advance Products: A White Paper of Initial Data Findings, (2013) 
[hereinafter CFPB Payday Loans and Deposit Advance Products White 
Paper], available at http://files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf; Bureau of Consumer Fin. 
Prot., CFPB Data Point: Payday Lending, (2014) [hereinafter CFPB 
Data Point: Payday Lending], available at http://files.consumerfinance.gov/f/201403_cfpb_report_payday-lending.pdf; 
Bureau of Consumer Fin. Prot., Online Payday Loan Payments (2016) 
[hereinafter CFPB Online Payday Loan Payments], available at http://files.consumerfinance.gov/f/201604_cfpb_online-payday-loan-payments.pdf; Bureau of Consumer Fin. Prot., Single-Payment Vehicle 
Title Lending (2016) [hereinafter CFPB Single-Payment Vehicle Title 
Lending], available at http://files.consumerfinance.gov/f/documents/201605_cfpb_single-payment-vehicle-title-lending.pdf; Bureau of 
Consumer Fin. Prot., Supplemental Findings on Payday, Payday 
Installment, and Vehicle Title Loans, and Deposit Advance Products 
(2016) [hereinafter CFPB Report on Supplemental Findings].
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    This Background section provides a brief description of the major 
components of the markets for both short-term loans and certain higher-
cost longer-term loans, describing the product parameters, industry 
size and structure, lending practices, and business models of each 
component. It then goes on to describe recent State and Federal 
regulatory activity in connection with these product markets. Market 
Concerns--Short-Term Loans and Market Concerns--Longer-Term Loans 
below, provide a more detailed description of consumer experiences with 
short-term loans and certain higher-cost longer-term loans, describing 
research about which consumers use the products, why they

[[Page 47868]]

use the products, and the outcomes they experience as a result of the 
product structures and industry practices.

B. Single-payment and Other Short-Term Loans

    At around the beginning of the twentieth century, concern arose 
with respect to companies that were responding to liquidity needs by 
offering to ``purchase'' a consumer's paycheck in advance of it being 
paid. These companies charged fees that, if calculated as an annualized 
interest rate, were as high as 400 percent.\14\ To address these 
concerns, between 1914 and 1943, 34 States enacted a form of the 
Uniform Small Loan Law, which was a model law developed by the Russell 
Sage Foundation. That law provided for lender licensing and permitted 
interest rates of between 2 and 4 percent per month, or 24 to 48 
percent per year. Those rates were substantially higher than pre-
existing usury limits (which generally capped interest rates at between 
6 and 8 percent per year) but were viewed by proponents as ``equitable 
to both borrower and lender.'' \15\
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    \14\ Salary advances were structured as wage assignments rather 
than loans to evade much lower State usury caps of about 8 percent 
per annum or less. See John P. Caskey, Fringe Banking and the Rise 
of Payday Lending, in Credit Markets for the Poor 17, 23 (Patrick 
Bolton & Howard Rosenthal eds., 2005).
    \15\ Elisabeth Anderson, Experts, Ideas, and Policy Change: The 
Russell Sage Foundation and Small Loan Reform, 1909-1941, 37 Theory 
& Soc'y 271, 276, 283, 285 (2008), available at http://www.jstor.org/stable/40211037 (quoting Arthur Ham, Russell Sage 
Foundation, Feb. 1911, Quarterly Report, Library of Congress Russell 
Sage Foundation Archive, Box 55).
---------------------------------------------------------------------------

    New forms of short-term small-dollar lending appeared in several 
States in the 1990s,\16\ starting with check cashing outlets that would 
hold a customer's personal check for a period of time for a fee before 
cashing it (``check holding'' or ``deferred presentment'').\17\ Several 
market factors had converged around the same time. Consumers were using 
credit cards more frequently for short-term liquidity lending needs, a 
trend that continues today.\18\ Storefront finance companies, described 
below in part II.C that had provided small loans changed their focus to 
larger, collateralized products, including vehicle financing and real 
estate secured loans. At the same time there was substantial 
consolidation in the storefront installment lending industry. 
Depository institutions similarly moved away from short-term small-
dollar loans.
---------------------------------------------------------------------------

    \16\ A Short History of Payday Lending Law, The Pew Charitable 
Trusts (July 18, 2012), http://www.pewtrusts.org/en/research-and-analysis/analysis/2012/07/a-short-history-of-payday-lending-law.
    \17\ See, e.g., Adm'r of the Colo. Unif. Consumer Credit Code, 
Colo. Dep't of Law, Administrative Interpretation No. 3.104-9201, 
Check Cashing Entities Which Provide Funds In Return For A Post-
Dated Check Or Similar Deferred Payment Arrangement And Which Impose 
A Check Cashing Charge Or Fee May Be Consumer Lenders Subject To The 
Colorado Uniform Consumer Credit Code (June 23, 1992) (on file).
    \18\ Robert D. Manning, Credit Card Nation: The Consequences of 
America's Addiction to Credit (Basic Books 2000); Amy Traub, Demos, 
Debt Disparity: What Drives Credit Card Debt in America, (2014), 
available at http://www.demos.org/sites/default/files/publications/DebtDisparity_1.pdf)
---------------------------------------------------------------------------

    Around the same time, a number of State legislatures amended their 
usury laws to allow lending by a broader group of both depository and 
non-depository lenders by increasing maximum allowable State interest 
rates or eliminating State usury laws, while other States created usury 
carve-outs or special rules for short-term loans.\19\ The confluence of 
these trends has led to the development of markets offering what are 
commonly referred to as payday loans (also known as cash advance loans, 
deferred deposit, and deferred presentment loans depending on lender 
and State law terminology), and short-term vehicle title loans that are 
much shorter in duration than vehicle-secured loans that have 
traditionally been offered by storefront installment lenders and 
depository institutions. Although payday loans initially were 
distributed through storefront retail outlets, they are now also widely 
available on the internet. Vehicle title loans are typically offered 
exclusively at storefront retail outlets.
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    \19\ Pew Charitable Trusts, A Short History of Payday Lending 
Law. This piece notes that State legislative changes were in part a 
response to the ability of federally- and State-chartered banks to 
lend without being subject to the usury laws of the borrower's 
State.
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    These markets as they have evolved over the last two decades are 
not strictly segmented. There is substantial overlap between market 
products and the borrowers who use them. For example, in a 2013 survey, 
almost 18 percent of U.S. households that had used a payday loan in the 
prior year had also used a vehicle title loan.\20\ There is also an 
established trend away from ``monoline'' or single-product lending 
companies. Thus, for example, a number of large payday lenders also 
offer vehicle title and installment loans.\21\ The following discussion 
nonetheless provides a description of major product types.
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    \20\ Data derived from Appendix D--Alternative Financial 
Services: National Tables. Fed. Deposit Ins. Corp., 2013 FDIC 
National Survey of Unbanked and Underbanked Households: Appendices, 
at 57-93 (2014), available at https://www.fdic.gov/householdsurvey/2013appendix.pdf.
    \21\ See for example, Advance America; Cash America Pawn; Check 
Into Cash; Community Choice Financial/CheckSmart; Speedy Cash; PLS 
Financial Services and Money Tree Inc. Title Loans, Advance America, 
https://www.advanceamerica.net/services/title-loans; Auto Title 
Loans (last visited Mar. 3, 2016); Auto Title Loans, Cash America 
Pawn, http://www.cashamerica.com/LoanOptions/AutoTitleLoans.aspx) 
(last visited Mar. 3, 2016); Our Process & Information, Check Into 
Cash, https://checkintocash.com/title-loans/ (last visited Mar. 3, 
2016); Title Loans, Community Choice Financial/CheckSmart, http://www.checksmartstores.com/utah/title-loans/ (last visited Mar. 3, 
2016); Title Loans, Speedy Cash, https://www.speedycash.com/title-loans/ (last visited Mar. 3, 2016); Auto Title Loans, PLS Financial 
Services, http://www.pls247.com/ms/loans/auto-title-loans.html (last 
visited Mar. 3, 2016). Moneytree offers vehicle title and 
installment loans in Idaho and Nevada. Idaho Products, Money Tree 
Inc., https://www.moneytreeinc.com/loans/idaho (last visited Mar. 3, 
2016); Nevada Products, Money Tree Inc., https://www.moneytreeinc.com/loans/nevada (last visited Mar. 3, 2016).
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Storefront Payday Loans
    The market that has received the greatest attention among policy 
makers, advocates, and researchers is the market for single-payment 
payday loans. These payday loans are short-term small-dollar loans 
generally repayable in a single payment due when the consumer is 
scheduled to receive a paycheck or other inflow of income (e.g., 
government benefits).\22\ For most borrowers, the loan is due in a 
single payment on their payday, although State laws with minimum loan 
terms--seven days for example--or lender practices may affect the loan 
duration in individual cases. The Bureau refers to these short-term 
payday loans available at retail locations as ``storefront payday 
loans,'' but the requirements for borrowers taking online payday loans 
are generally similar, as described below. There are now 36 States that 
either have created a carve-out from their general usury cap for payday 
loans or have no usury caps on consumer loans.\23\ The remaining 14

[[Page 47869]]

States and the District of Columbia either ban payday loans or have fee 
or interest rate caps that payday lenders apparently find too low to 
sustain their business models. As discussed further below, several of 
these States previously had authorized payday lending but subsequently 
changed their laws.
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    \22\ For convenience, this discussion refers to the next 
scheduled inflow of income as the consumer's next ``payday'' and the 
inflow itself as the consumer's ``paycheck'' even though these are 
misnomers for consumers whose income comes from government benefits.
    \23\ For a list of States see, State Payday Loan Regulation and 
Usage Rates, The Pew Charitable Trusts (Jan. 14, 2014), http://www.pewtrusts.org/en/multimedia/data-visualizations/2014/state-payday-loan-regulation-and-usage-rates. One source lists 35 States 
as authorizing payday lending. Susanna Montezemolo, Ctr. for 
Responsible Lending, The State of Lending in America & Its Impact on 
U.S. Households: Payday Lending Abuses and Predatory Practices, at 
32-33 (2013), available at http://www.responsiblelending.org/sites/default/files/uploads/10-payday-loans.pdf. Another public 
compilation lists 32 States as having authorized or allowed payday 
lending. See Consumer Fed'n of Am., Legal Status of Payday Loans by 
State, http://www.paydayloaninfo.org/state-information (last visited 
Apr. 6, 2016).
---------------------------------------------------------------------------

    Product definition and regulatory environment. As noted above, 
payday loans are typically repayable in a single payment on the 
borrower's next payday. In order to help ensure repayment, in the 
storefront environment the lender generally holds the borrower's 
personal check made out to the lender--usually post-dated to the loan 
due date in the amount of the loan's principal and fees--or the 
borrower's authorization to electronically debit the funds from her 
checking account, commonly known as an automated clearing house (ACH) 
transaction.\24\ Payment methods are described in more detail below in 
part II.D.
---------------------------------------------------------------------------

    \24\ The Bureau is aware from market outreach that at a 
storefront payday lender's Tennessee branch, almost 100 percent of 
customers opted to provide ACH authorization rather than leave a 
post-dated check for their loans. See also Can Anyone Get a Payday 
Loan?, Speedy Cash, https://www.speedycash.com/faqs/payday-loans/can-anyone-get-a-payday-loan/ (last visited Feb. 4, 2016) (``If you 
choose to apply in one of our payday loan locations, you will need 
to provide a repayment source which can be a personal check or your 
bank routing information.''); QC Holdings, Inc., 2014 Annual Report 
(Form 10-K), at 3, 6 (Mar. 12, 2015), available at http://www.sec.gov/Archives/edgar/data/1289505/000119312515088809/d854360d10k.htm; First Cash Fin. Servs., Inc., 2015 Annual Report 
(Form 10-K), at 20 (Feb. 17, 2016), available at https://www.sec.gov/Archives/edgar/data/840489/000084048916000076/fcfs1231201510-k.htm.
---------------------------------------------------------------------------

    Payday loan sizes vary depending on State law limits, individual 
lender credit models, and borrower demand. Many States set a limit on 
payday loan size; $500 is a common loan limit although the limits range 
from $300 to $1,000.\25\ In 2013, the Bureau reported that the median 
loan amount for storefront payday loans was $350, based on supervisory 
data.\26\ This finding is broadly consistent with other studies using 
data from one or more lenders as well as with self-reported information 
in surveys of payday borrowers \27\ and State regulatory reports.\28\
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    \25\ At least 19 States cap payday loan amounts between $500 and 
$600 (Alabama, Alaska, Florida, Hawaii, Iowa, Kansas, Kentucky, 
Michigan, Mississippi, Missouri, Nebraska, North Dakota, Ohio, 
Oklahoma, Rhode Island, South Carolina, South Dakota, Tennessee, and 
Virginia), and California limits payday loans to $300 (including the 
fee) and Delaware caps loans at $1,000. Ala. Code sec. 5-18A-12(a), 
Alaska Stat. sec. 06.50.410, Cal. Fin. Code sec. 23035(a), Del. Code 
Ann. tit. 5, sec. 2227(7), Fla. Stat. sec. 560.404(5), Haw. Rev. 
Stat. sec. 480F-4(c), Iowa Code sec. 533D.10(1)(b), Kan. Stat. Ann. 
Sec. 16a-2-404(1)(c), Ky. Rev. Stat. Ann. Sec. 286.9-100(9), Mich. 
Comp. Laws sec. 487.2153(1), Miss. Code Ann. Sec. 75-67-519(2), Mo. 
Rev. Stat. sec. 408.500(1), Neb. Rev. Stat. sec. 45-919(1)(b), N.D. 
Cent. Code sec. 13-08-12(3); Ohio Rev. Code Ann. sec. 1321.39(A), 
Okla. Stat. tit. 59, sec. 3106(7), R.I. Gen. Laws sec. 19-14.4-
5.1(a), S.C. Code Ann. sec. 34-39-180(B), S.D. Codified Laws sec. 
54-4-66, Tenn. Code Ann. Sec. 45-17-112(o), Va. Code Ann. Sec. 6.2-
1816(5). States that limit the loan amount to the lesser of a 
percent of the borrower's income or a fixed dollar amount include 
Idaho--25 percent or $1,000, Illinois--25 percent or $1,000, 
Indiana--20 percent or $550, Washington--30 percent or $700, and 
Wisconsin--35 percent or $1,500. At least two States cap the maximum 
payday loan at 25 percent of the borrower's gross monthly income 
(Nevada and New Mexico). A few States laws are silent as to the 
maximum loan amount (Utah and Wyoming). Idaho Code Ann. Sec.  28-46-
413(1), (2); 815 Ill. Comp. Stat. 122/2-5(e); Ind. Code Sec. Sec.  
24-4.5-7-402, -404; Wash. Rev. Code Sec.  31.45.073(2); Wis. Stat. 
Sec.  138.14(12)(b); Nev. Rev. Stat. Sec.  604A.425(1)(b), N.M. 
Stat. Ann. Sec.  58-15-32(A), Utah Code Ann. Sec.  7-23-401, Wyo. 
Stat. Ann. Sec.  40-14-363.
    \26\ CFPB Payday Loans and Deposit Advance Products White Paper, 
at 15.
    \27\ Leslie Parrish & Uriah King, Ctr. for Responsible Lending, 
Phantom Demand: Short-term Due Date Generates Need for Repeat Payday 
Loans, Accounting for 76% of total Volume, at 21 (2009), available 
at http://www.responsiblelending.org/payday-lending/research-analysis/phantom-demand-final.pdf (reporting $350 as the average 
loan size); Pew Charitable Trusts, Payday Lending in America: Who 
Borrows, Where They Borrow, and Why, at 9 (2012) [hereinafter Pew 
Payday Lending in America: Report 1], available at http://
www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/
pewpaydaylendingreportpdf.pdf) (reporting $375 as the average).
    \28\ For example: $361.21 (Illinois average, see Ill. Dep't. of 
Fin. & Prof. Reg., Illinois Trends Report All Consumer Loan Products 
Through December 2013, at 15 (May 28, 2014), available at https://www.idfpr.com/dfi/ccd/pdfs/IL_Trends_Report%202013.pdf); $350 (Idaho 
average, see Idaho Dep't. of Fin., Idaho Credit Code ``Fast Facts'' 
With Fiscal and Annual Report Data as of January 1, 2016, at 5, 
available at https://www.finance.idaho.gov/ConsumerFinance/Documents/Idaho-Credit-Code-Fast-Facts-With-Fiscal-Annual-Report-Data-01012016.pdf); $389.50 (Washington average, see Wash. State 
Dep't. of Fin. Insts., 2014 Payday Lending Report, at 6, available 
at http://www.dfi.wa.gov/sites/default/files/reports/2014-payday-lending-report.pdf.
---------------------------------------------------------------------------

    The fee for a payday loan is generally structured as a percentage 
or dollar amount per $100 borrowed, rather than a periodic interest 
rate based on the amount of time the loan is outstanding. Many State 
laws set a maximum amount for these fees, with 15 percent ($15 per $100 
borrowed) being the most common limit.\29\ The median storefront payday 
loan fee is $15 per $100; thus for a $350 loan, the borrower must repay 
$52.50 in finance charges together with the $350 borrowed for a total 
repayment amount of $402.50.\30\ The annual percentage rate (APR) on a 
14-day loan with these terms is 391 percent.\31\ For payday borrowers 
who receive monthly income and thus receive a 30-day or monthly payday 
loan--many of whom are Social Security recipients \32\--a $15 per $100 
charge on a $350 loan for a term of 30 days equates to an APR of about 
180 percent. The Bureau has found the median loan term for a storefront 
payday loan to be 14 days, with an average term of 18.3 days. The 
longer average loan duration is due to State laws that require minimum 
loan terms that may extend beyond the borrower's next pay date.\33\ 
Fees and loan amounts are higher for online loans, described in more 
detail below.
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    \29\ Of the States that expressly authorize payday lending, 
Rhode Island has the lowest cap at 10 percent of the loan amount. 
Florida has the same fee amount but also allows a flat $5 
verification fee. Oregon's fees are $10 per $100 capped at $30 plus 
36 percent interest. Some States have tiered caps depending on the 
size of the loan. Generally, in these States the cap declines with 
loan size. However, in Mississippi, the cap is $20 per hundred for 
loans under $250 and $21.95 for larger loans (up to the State 
maximum of $500). Seven States do not cap fees on payday loans or 
are silent on fees (Delaware, Idaho, Nevada, South Dakota, Texas (no 
cap on credit access business fees), Utah, and Wisconsin). Depending 
on State law, the fee may be referred to as a ``charge,'' ``rate,'' 
``interest'' or other similar term. R.I. Gen. Laws Sec.  19-14.4-
4(4), Fla. Stat. Sec.  560.404(6), Or. Rev. Stat. Sec.  725A.064(1)-
(2), Miss. Code Ann. Sec.  75-67-519(4), Del. Code Ann. tit. 5, 
Sec.  2229, Idaho Code Ann. Sec.  28-46-412(3), S.D. Codified Laws 
Sec.  54-4-44, Tex. Fin. Code Ann. Sec.  393.602(b), Utah Code Ann. 
Sec.  7-23-401, Wis. Stat. Sec.  138.14(10) (a).
    \30\ CFPB Payday Loans and Deposit Advance Products White Paper, 
at 15-17.
    \31\ Throughout the part II., APR refers to the annual 
percentage rate calculated as required by the Truth in Lending Act, 
15 U.S.C. 1601 et seq. and Regulation Z, 12 CFR 1026, except where 
otherwise specified.
    \32\ CFPB Payday Loans and Deposit Advance Products White Paper, 
at 16, 19 (33 percent of payday loans borrowers receive income 
monthly; 18 percent of payday loan borrowers are public benefits 
recipients, largely from Social Security including Supplemental 
Security Income and Social Security Disability, typically paid on a 
monthly basis).
    \33\ For example, Washington requires the due date to be on or 
after the borrower's next pay date but if the pay date is within 
seven days of taking out the loan, the due date must be on the 
second pay date after the loan is made. Wash. Rev. Code Sec.  
31.45.073(2). A number of States set minimum loan terms, some of 
which are tied directly to the consumer's next payday.
---------------------------------------------------------------------------

    On the loan's due date, the terms of the loan obligate the borrower 
to repay the loan in full. Although the States that created exceptions 
to their usury limits for payday lending generally did so on the theory 
these were short-term loans to which the usual usury rules did not 
easily apply, in 19 of the States that authorize payday lending the 
lender is permitted to roll over the loan when it comes due. A rollover 
occurs when, instead of repaying the loan in full at maturity, the 
consumer pays only the fees due and the lender agrees to extend the due 
date.\34\ By rolling over, the loan repayment of the principal is 
extended for another period of time, usually equivalent to the original 
loan term, in

[[Page 47870]]

return for the consumer's agreement to pay a new set of fees calculated 
in the same manner as the initial fees (e.g., 15 percent of the loan 
principal). The rollover fee is not applied to reduce the loan 
principal or amortize the loan. As an example, if the consumer borrows 
$300 with a fee of $45 (calculated as $15 per $100 borrowed), the 
consumer will owe $345 on the due date, typically 14 days later. On the 
due date, if the consumer cannot afford to repay the entire $345 due or 
is otherwise offered the option to roll over the loan, she will pay the 
lender $45 for another 14 days. On the 28th day, the consumer will owe 
the original $345 and if she pays the loan in full then, will have paid 
a total of $390 for the loan.
---------------------------------------------------------------------------

    \34\ This proposal uses the term ``rollover'' but this practice 
is sometimes described under State law or by lenders as a 
``renewal'' or an ``extension.''
---------------------------------------------------------------------------

    In some States in which rollovers are permitted they are subject to 
certain limitations such as a cap on the number of rollovers or 
requirements that the borrower amortize--repay part of the original 
loan amount--on the rollover. Other States have no restrictions on 
rollovers. Specially, seventeen of the States that authorize single-
payment payday lending prohibit lenders from rolling over loans and 
twelve more States impose some rollover limitations.\35\ However, in 
most States where rollovers are prohibited or limited, there is no 
restriction on the lender immediately making a new loan to the consumer 
(with new fees) after the consumer has repaid the prior loan. New loans 
made the same day or ``back-to-back'' loans effectively replicate a 
rollover because the borrower remains in debt to the lender on the 
borrower's next payday.\36\ A handful of States have implemented a 
cooling-off period before a lender may make a new loan. The most common 
cooling-off period is one day, although some States have longer periods 
following a specified number of rollovers or back-to-back loans.\37\
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    \35\ States that prohibit rollovers include California, Florida, 
Hawaii, Illinois, Indiana, Kentucky, Michigan, Minnesota, 
Mississippi, Nebraska, New Mexico, Oklahoma, South Carolina, 
Tennessee, Virginia, Washington, and Wyoming. Other States such as 
Iowa and Kansas restrict a loan from being repaid with the proceeds 
of another loan. Cal. Fin. Code Sec.  23037(a), Fla. Stat. Sec.  
560.404(18), Haw. Rev. Stat. Sec.  480F-4(d), 815 Ill. Comp. Stat. 
122/2-30, Ind. Code Sec.  24-4.5-7-402(7), Ky. Rev. Stat. Ann. Sec.  
286.9-100(14), Mich. Comp. Laws Sec.  487.2155(1), Minn. Stat. Sec.  
47.60(2)(f), Miss. Code Ann. Sec.  75-67-519(5), Neb. Rev. Stat. 
Sec.  45-919(1)(f), N.M. Stat. Ann. Sec.  58-15-34(A), Okla. Stat. 
tit. 59, Sec.  3109(A), S.C. Code Ann. Sec.  34-39-180(F), Tenn. 
Code Ann. Sec.  45-17-112(q), Va. Code Ann. Sec.  6.2-1816(6), Wash. 
Rev. Code Sec.  31.45.073(2), Wyo. Stat. Ann. Sec.  40-14-364, Iowa 
Code Sec.  533D.10(1)(e), Kan. Stat. Ann. Sec.  16a-2-404(6). Other 
States that permit some degree of rollovers include Alabama (one), 
Alaska (two), Delaware (four), Idaho (three), Missouri (six if there 
is at least 5 percent principal reduction on each rollover), Nevada 
(may extend loan up to 60 days after the end of the initial loan 
term), North Dakota (one), Oregon (two), Rhode Island (one), South 
Dakota (four if there is at least 10 percent principal reduction on 
each rollover), Utah (allowed up to 10 weeks after the execution of 
the first loan), and Wisconsin (one). Ala. Code Sec.  5-18A-12 (b), 
Alaska Stat. Sec.  06.50.470(b), Del. Code Ann. tit. 5, Sec.  2235A 
(a)(2), Idaho Code Ann. Sec.  28-46-413(9), Mo. Rev. Stat. Sec.  
408.500(6), Nev. Rev. Stat. Sec.  604A.480(1), N.D. Cent. Code Sec.  
13-08-12(12), Or. Rev. Stat. Sec.  725A.064(6), R.I. Gen. Laws Sec.  
19-14.4-5.1(g), S.D. Codified Laws Sec.  54-4-65, Utah Code Ann. 
Sec.  7-23-401 (4)(b), Wis. Stat. Sec.  138.14 (12)(a).
    \36\ See CFPB Payday Loans and Deposit Advance Products White 
Paper, at 4; Adm'r of the Colo. Unif. Consumer Credit Code, Colo. 
Dep't of Law, Payday Lending Demographic and Statistical 
Information: July 2000 through December 2012, at 24 (Apr. 10, 2014) 
[hereinafter Colorado UCCC 2000-2012 Demographic and Statistical 
Information], available at http://www.coloradoattorneygeneral.gov/sites/default/files/contentuploads/cp/ConsumerCreditUnit/UCCC/AnnualReportComposites/DemoStatsInfo/ddlasummary2000-2012.pdf. Pew 
Payday Lending in America: Report 1, at 7; Parrish & King, at 7.
    \37\ States with cooling-off periods include: Alabama (next 
business day after a rollover is paid in full); Florida (24 hours); 
Illinois (seven days after a consumer has had payday loans for more 
than 45 days); Indiana (seven days after five consecutive loans); 
New Mexico (10 days after completing an extended payment plan); 
North Dakota (three business days); Ohio (one day with a two loan 
limit in 90 days, four per year); Oklahoma (two business days after 
fifth consecutive loan); Oregon (seven days); South Carolina (one 
business day between all loans and two business days after seventh 
loan in a calendar year); Virginia (one day between all loans, 45 
days after fifth loan in a 180 day period, and 90 days after 
completion of an extended payment plan or extended term loan); and 
Wisconsin (24 hour after renewals). Ala. Code Sec.  5-18A-12(b); 
Fla. Stat. Sec.  560.404(19); 815 Ill. Comp. Stat. 122/2-5(b); Ind. 
Code Sec.  24-4.5-7-401(2); N.M. Stat. Ann. Sec.  58-15-36; N.D. 
Cent. Code Sec.  13-08-12(4); Ohio Rev. Code Ann. Sec.  1321.41(E), 
(N), (R); Okla. Stat. tit. 59, Sec.  3110; Or. Rev. Stat. Sec.  
725A.064(7); S.C. Code Ann. Sec.  34-39-270(A), (B); Va. Code Ann. 
Sec.  6.2-1816(6); Wis. Stat. Sec.  138.14(12)(a).
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    Twenty States require payday lenders to offer extended repayment 
plans to borrowers who encounter difficulty in repaying payday 
loans.\38\ Some States' laws are very general and simply provide that a 
payday lender may allow additional time for repayment of a loan. Other 
laws provide more detail about the plans including: When lenders must 
offer repayment plans; how borrowers may elect to participate in 
repayment plans; the number and timing of payments; the length of 
plans; permitted fees for plans; requirements for credit counseling; 
requirements to report plan payments to a statewide database; cooling-
off or ``lock-out'' periods for new loans after completion of plans; 
and the consequences of plan defaults. The effects of these various 
restrictions are discussed further below in Market Concerns--Short-Term 
Loans.
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    \38\ States with statutory extended repayment plans include: 
Alabama, Alaska, California, Delaware, Florida, Idaho, Illinois, 
Indiana, Louisiana, Michigan (fee permitted), Nevada, New Mexico, 
Oklahoma (fee permitted), South Carolina, Utah, Virginia, 
Washington, Wisconsin, and Wyoming. Florida also requires that as a 
condition of providing a repayment plan (called a grace period), 
borrowers make an appointment with a consumer credit counseling 
agency and complete counseling by the end of the plan. Ala. Code 
Sec.  5-18A-12(c), Alaska Stat. Sec.  06.50.550(a), Cal. Fin. Code 
Sec.  23036(b), Del. Code Ann. tit. 5, Sec.  2235A(a)(2), Fla. Stat. 
Sec.  560.404(22)(a), Idaho Code Ann. Sec.  28-46-414, 815 Ill. 
Comp. Stat. 122/2-40, Ind. Code Sec.  24-4.5-7-401(3), La. Rev. 
Stat. Ann. Sec.  9:3578.4.1, Mich. Comp. Laws Sec.  487.2155(2), 
Nev. Rev. Stat. Sec.  604A.475(1), N.M. Stat. Ann. Sec.  58-15-35, 
Okla. Stat. tit. 59, Sec.  3109(D), S.C. Code Ann. Sec.  34-39-280, 
Utah Code Ann. Sec.  7-23-403, Va. Code Ann. Sec.  6.2-1816(26), 
Wash. Rev. Code Sec.  31.45.084(1), Wis. Stat. Sec.  138.14(11)(g), 
Wyo. Stat. Ann. Sec.  40-14-366(a).
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    Industry size and structure. There are various estimates as to the 
number of consumers who use payday loans on an annual basis. One survey 
found that 2.4 million households (2 percent of U.S. households) used 
payday loans in 2013.\39\ In another survey, 4.2 percent of households 
reported taking out a payday loan.\40\ These surveys referred to payday 
loans generally, and did not specify whether they were referring to 
loans made online or at storefront locations. One report estimated the 
number of individual borrowers, rather than households, was higher at 
approximately 12 million and included both storefront and online 
loans.\41\ See Market Concerns--Short-term Loans for additional 
information on borrower characteristics.
---------------------------------------------------------------------------

    \39\ Fed. Deposit Ins. Corp., 2013 FDIC National Survey of 
Unbanked and Underbanked Households: Appendices, at 83, 85 (2014), 
available at https://www.fdic.gov/householdsurvey/2013appendix.pdf.
    \40\ Jesse Bricker, et al., Changes in U.S. Family Finances from 
2010 to 2013: Evidence From the Survey of Consumer Finances, 100 
Fed. Reserve Bulletin no. 4, at 29 (Sept. 2014), available at http://www.federalreserve.gov/pubs/bulletin/2014/pdf/scf14.pdf.
    \41\ Pew Payday Lending in America: Report 1, at 4.
---------------------------------------------------------------------------

    There are several ways to gauge the size of the storefront payday 
loan industry. Typically, the industry has been measured by counting 
the total dollar value of each loan made during the course of a year, 
counting each rollover, back-to-back loan or other reborrowing as a new 
loan that is added to the total. By this metric, one analyst estimated 
that from 2009 to 2014, storefront payday lending generated 
approximately $30 billion in new loans per years and that by 2015 the 
volume had declined to $23.6 billion,\42\ although these numbers may 
include products other than single-payment loans. Alternatively, the 
industry can be measured by calculating the dollar amount of loan 
balances outstanding. Given the amount of payday loan reborrowing, 
which results in the same funds of the lender being used to

[[Page 47871]]

finance multiple loan originations, the dollar amount of loan balances 
outstanding may provide a more nuanced sense of the industry's scale. 
Using this metric, the Bureau estimates that in 2012, storefront payday 
lenders held approximately $2 billion in outstanding single-payment 
loans.\43\ In 2015, industry revenue (fees paid on storefront payday 
loans) was an estimated $3.6 billion, representing 15 percent of loan 
originations.\44\
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    \42\ John Hecht, Jefferies LLC, The State of Short-Term Credit 
Amid Ambiguity, Evolution and Innovation (2016) (slide presentation) 
(on file); John Hecht, Jeffries LLC, The State of Short-Term Credit 
in a Constantly Changing Environment (2015) at 4 (slide 
presentation) (on file).
    \43\ Bureau staff estimate based on public company financial 
information, confidential information gathered in the course of 
statutory functions, and industry analysts' reports. The estimate is 
derived from lenders' single-payment payday loans gross receivables 
and gross revenue and industry analysts' reports on loan volume and 
revenue. No calculations were done for 2013 to 2015, but that 
estimate would be less than $2 billion due to changes in the market 
as the industry has shifted away from single-payment payday loans to 
products discussed in part II.C below.
    \44\ Hecht, The State of Short-Term Credit Amid Ambiguity, 
Evolution and Innovation.
---------------------------------------------------------------------------

    About ten large firms account for half of all payday storefront 
locations.\45\ Several of these firms are publicly traded companies 
offering a diversified range of products that also include installment 
and pawn loans.\46\ Other large payday lenders are privately held,\47\ 
and the remaining payday loan stores are owned by smaller regional or 
local entities. The Bureau estimates there are about 2,400 storefront 
payday lenders that are small entities as defined by the Small Business 
Administration (SBA).\48\
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    \45\ See Montezemolo, Payday Lending Abuses and Predatory 
Practices, at 9.
    \46\ The publicly traded firms are Cash America (CSH), Community 
Choice Financial Inc./Checksmart (CCFI), EZCORP (EZPW), First Cash 
Financial Services (FCFS), and QC Holdings (QCCO). Cash America has 
de-emphasized payday loans with the exception of stores in Ohio and 
Texas, and in November 2014 it migrated its online loans to its 
spin-off company, Enova. Cash America Int'l, Inc., Investor 
Relations Presentation, at 6, 9, available at http://www.cashamerica.com/Files/InvestorPresentations/15_0331%20CSH%20IR%20Presentation.pdf. First Cash Financial Services 
closed most of its U.S. payday and vehicle title loan credit access 
business locations, leaving 42 Texas storefronts at the end of 2015. 
Its primary focus is on its pawn loan locations; only 4 percent of 
its revenue is from non-pawn consumer loans. (Credit access 
businesses are described below.) First Cash Fin. Servs., Inc., 2015 
Annual Report (Form 10-K), at 1, 7. As noted above, in April 2016, 
First Cash Financial Services announced a merger agreement with Cash 
America. QC Holdings delisted from Nasdaq on Feb. 16, 2016 and is 
traded over-the-counter. QC Holding Companies, http://www.qcholdings.com/investor.aspx?id=1 (last visited Apr. 7, 2016). 
Until July 2015, EZCORP offered payday, vehicle title, and 
installment loans but now focuses domestically on pawn lending. 
EZCORP, 2015 Annual Report (Form 10-K), at 3, 23.
    \47\ The larger privately held payday lending firms include 
Advance America, ACE Cash Express, Axcess Financial (CNG Financial, 
Check `n Go, Allied Cash), Check Into Cash, DFC Global (Money Mart), 
PLS Financial Services, and Speedy Cash Holdings Corporation. See 
Montezemolo, Payday Lending Abuses and Predatory Practices, at 9-10; 
John Hecht, Stephens, Inc., Alternative Financial Services: 
Innovating to Meet Customer Needs in an Evolving Regulatory 
Framework, (Feb. 27, 2014) (on file).
    \48\ Bureau staff estimated the number of storefront payday 
lenders using licensee information from State financial regulators, 
firm revenue information from public filings and non-public sources, 
and, for a small number of States, industry market research relying 
on telephone directory listings from Steven Graves and Christopher 
Peterson, available at http://www.csun.edu/~sg4002/research/data/
US_pdl_addr.xls. Based on these sources, there are approximately 
2,503 storefront payday lenders, including those operating primarily 
as loan arrangers or brokers, in the United States. Based on the 
publicly-available revenue information, at least 56 of the firms 
have revenue above the small entity threshold. Most of the remaining 
firms operate a very small number of storefronts. Therefore, while 
some of the firms without publicly available information may have 
revenue above the small entity threshold, in the interest of being 
inclusive they are all assumed to be small entities.
---------------------------------------------------------------------------

    There were an estimated 15,766 payday loan stores in 2014 within 
the 36 States in which storefront payday lending occurs.\49\ By way of 
comparison, there were 14,350 McDonald's fast food outlets in the 
United States in 2014.\50\
---------------------------------------------------------------------------

    \49\ Bureau staff estimated the number of storefront payday 
lenders using the method referenced in the immediately preceding 
footnote.
    \50\ McDonald's Corp., 2014 Annual Report (Form 10-K) at 22 
(Feb. 24, 2015), available at http://www.sec.gov/Archives/edgar/data/63908/000006390815000016/mcd-12312014x10k.htm.
---------------------------------------------------------------------------

    The average number of payday loan stores in a county with a payday 
loan store is 6.32.\51\ The Bureau has analyzed payday loan store 
locations in States which maintain lists of licensed lenders and found 
that half of all stores are less than one-third of a mile from another 
store, and three-quarters are less than a mile from the nearest 
store.\52\ Even the 95th percentile of distances between neighboring 
stores is only 4.3 miles. Stores tend to be closer together in counties 
within metropolitan statistical areas (MSA).\53\ In non-MSA counties 
the 75th percentile of distance to the nearest store is still less than 
one mile, but the 95th percentile is 22.9 miles.
---------------------------------------------------------------------------

    \51\ James R. Barth, Jitka Hilliard, John S. Jaera Jr., & Yanfei 
Sun, Do State Regulations Affect Payday Lender Concentration?, at 12 
(2015), available athttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=2581622.
    \52\ CFPB Report on Supplemental Findings, at ch. 3.
    \53\ An MSA is a geographic entity delineated by the Office of 
Management and Budget. An MSA contains a core urban area of 50,000 
or more in population. See Metropolitan and Micropolitan, U.S. 
Census Bureau, http://www.census.gov/population/metro/ (last visited 
Apr. 7, 2016).
---------------------------------------------------------------------------

    Research and the Bureau's own market outreach indicate that payday 
loan stores tend to be relatively small with, on average, three full-
time equivalent employees.\54\ An analysis of loan data from 29 States 
found that the average store made 3,541 advances in a year.\55\ Given 
rollover and reborrowing rates, a report estimated that the average 
store served fewer than 500 customers per year.\56\
---------------------------------------------------------------------------

    \54\ Mark Flannery & Katherine Samolyk, Payday Lending: Do the 
Costs Justify the Price? (FDIC Center for Fin. Research, Working 
Paper No. 2005-09, 2005), available at https://www.fdic.gov/bank/analytical/cfr/2005/wp2005/cfrwp_2005-09_flannery_samolyk.pdf; IHS 
Global Insight USA (Inc.), Economic Impact of the Payday Lending 
Industry, at 3 (2009), available at http://cfsaa.com/Portals/0/Policymakers/20090515_Research_IHS_EconomicImpactofPayday.pdf (and 
on file).
    \55\ Montezemolo, at 26.
    \56\ Pew Charitable Trusts, Payday Lending in America Report 3: 
Policy Solutions, at 18 (2013), available at http://
www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2013/
pewpaydaypolicysolutionsoct2013pdf.pdf.
---------------------------------------------------------------------------

    Marketing, underwriting, and collections practices. Payday loans 
tend to be marketed as a short-term bridge to cover emergency expenses. 
For example, one lender suggests that, for consumers who have 
insufficient funds on hand to meet such an expense or to avoid a 
penalty fee, late fee, or utility shut-off, a payday loan can ``come in 
handy'' and ``help tide you over until your next payday.'' \57\ Some 
lenders offer new borrowers their initial loans at no fee (``first loan 
free'') to encourage consumers to try a payday loan.\58\ Stores are 
typically located in high-traffic commuting corridors and near shopping 
areas where consumers obtain groceries and other staples.\59\
---------------------------------------------------------------------------

    \57\ Cash Advance/Short-term Loans, Cash America Int'l Inc., 
http://www.cashamerica.com/LoanOptions/CashAdvances.aspx (last 
visited Apr. 7, 2016).
    \58\ For example, Instant Cash Advance introductory offer of a 
free (no fee) cash advance of $200, http://www.instantcashadvancecorp.com/free-loan-offer-VAL312.php 
(storefront payday loans); Check N Title Loans, first loan free, 
http://www.checkntitle.com/ (storefront payday and title loans); 
AmeriTrust Financial LLC, first payday loan free, http://www.americantrustcash.com/payday-loans, (storefront payday, title, 
and installment loans, first loan free on payday loans) (all firm 
Web sites last visited on Dec. 21, 2015).
    \59\ First Cash Fin. Servs., Inc., 2015 Annual Report (Form 10-
K), at 9; QC Holdings, Inc., 2014 Annual Report (Form 10-K), at 11; 
Cmty. Choice Fin. Inc., 2015 Annual Report (Form 10-K), at 5 (Mar. 
30, 2016), available at https://www.sec.gov/Archives/edgar/data/1528061/000110465916108753/a15-23332_110k.htm.
---------------------------------------------------------------------------

    The evidence of price competition among payday lenders is mixed. In 
their financial reports, publicly traded payday lenders have reported 
their key competitive factors to be non-price related. For instance, 
they cite location, customer service, and convenience as some of the 
primary factors on which payday lenders compete with one another, as 
well as with other financial service providers.\60\ Academic studies 
have found that, in States with rate caps, loans are almost always made 
at

[[Page 47872]]

the maximum rate permitted.\61\ Another study likewise found that in 
States with rate caps, firms lent at the maximum permitted rate, but 
that lenders operating in multiple States with varying rate caps raise 
their fees to those caps rather than charging consistent fees company-
wide. The study additionally found that in States with no rate caps, 
different lenders operating in those States charged different rates. 
The study reviewed four lenders that operate in Texas \62\ and observed 
differences in the cost to borrow $300 per two-week pay period: Two 
lenders charged $61 in fees, one charged $67, and another charged $91, 
indicating some level of price variation between lenders (ranging from 
about $20 to $32 per $100 borrowed).\63\
---------------------------------------------------------------------------

    \60\ See QC Holdings, Inc., 2015 Annual Report (Form 10-K), at 
12-13.
    \61\ Robert DeYoung & Ronnie Phillips, Payday Loan Pricing (The 
Fed. Reserve Bank of Kansas City, Working Paper No. RWP 09-07, 
2009), at 27-28, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1066761 (studying rates on loans in Colorado 
between 2000 and 2006); Mark Flannery & Katherine Samolyk, at 9-10.
    \62\ In Texas, these lenders operate as credit services 
organizations or loan arrangers with no fee caps, described in more 
detail below. Pew Charitable Trusts, How State Rate Limits Affect 
Payday Loan Prices, (2014), available at http://www.pewtrusts.org/~/
media/legacy/uploadedfiles/pcs/content-level_pages/fact_sheets/
stateratelimitsfactsheetpdf.pdf.
    \63\ Id.
---------------------------------------------------------------------------

    The application process for a payday loan is relatively simple. For 
a storefront payday loan, a borrower must generally provide some 
verification of income (typically a pay stub) and evidence of a 
personal deposit account.\64\ Although a few States impose limited 
requirements that lenders consider a borrower's ability to repay,\65\ 
storefront payday lenders generally do not consider a borrower's other 
financial obligations or require collateral (other than the check or 
electronic debit authorization) for the loan. Most storefront payday 
lenders do not consider traditional credit reports or credit scores 
when determining loan eligibility, nor do they report any information 
about payday loan borrowing history to the nationwide consumer 
reporting agencies, TransUnion, Equifax, and Experian.\66\ From market 
outreach activities and confidential information gathered in the course 
of statutory functions, the Bureau is aware that a number of storefront 
payday lenders obtain data from one or more specialty consumer 
reporting agencies to check for previous payday loan defaults, identify 
recent inquiries that suggest an intention to not repay the loan, and 
perform other due diligence such as identity and deposit account 
verification. Some storefront payday lenders use analytical models and 
scoring that attempt to predict likelihood of default. Through market 
outreach and confidential information gathered in the course of 
statutory functions, the Bureau is aware that many storefront payday 
lenders limit their underwriting to first-time borrowers or those 
returning after an absence.
---------------------------------------------------------------------------

    \64\ See, e.g., the process as described by one lender: In-Store 
Cash Advance FAQ, Check Into Cash, https://checkintocash.com/faqs/in-store-cash-advance/ (last visited Feb. 4, 2016).
    \65\ For example, Utah requires lenders to make an inquiry to 
determine that the borrower has the ability to repay the loan, which 
may include rollovers or extended payment plans. This determination 
may be made through borrower affirmation of ability to repay, proof 
of income, repayment history at the same lender, or information from 
a consumer reporting agency. Utah Code Sec.  7-23-401. Missouri 
requires lenders to consider borrower financial ability to 
reasonably repay under the terms of the loan contract, but does not 
specify how lenders may satisfy this requirement Mo. Rev. Stat Sec.  
408.500(7). Other States prohibit loans that exceed a certain 
percentage of the borrower's gross monthly income (generally between 
20 and 35 percent) as a proxy for ability to repay. These States 
include Idaho, Illinois, Indiana, Montana, New Mexico, Oregon, 
Washington, and Wisconsin. Idaho Code Sec.  28-46-412(2), 815 Ill. 
Comp. Stat Sec.  122/2-5(e), Ind. Code Sec.  24-4.5-7-402(1), Mont. 
Code Ann. Sec.  31-1-723(8), N.M. Stat. Ann. Sec.  58-15-32(A), Or. 
Admin. Rule Sec.  441-735-0272(d), Wash. Rev. Code Sec.  
31.45.073(2), Wis. Stat. Sec.  138.14.
    \66\ See, e.g., Neil Bhutta, Paige Marta Skiba, & Jeremy 
Tobacman, Payday Loan Choices and Consequences (2014) at 3, 
available at http://www.calcfa.com/docs/PaydayLoanChoicesandConsequences.pdf.
---------------------------------------------------------------------------

    From market outreach, the Bureau is aware that the specialty 
consumer reporting agencies contractually require any lender that 
obtains data to also report data to them, although compliance may vary. 
Reporting usually occurs on a real-time or same-day basis. Separately, 
14 States require lenders to check statewide databases before making 
each loan in order to ensure that their loans comply with various State 
restrictions.\67\ These States likewise require lenders to report 
certain lending activity to the database, generally on a real-time or 
same-day basis. As discussed in more detail above, these State 
restrictions may include prohibitions on consumers having more than one 
payday loan at a time, cooling-off periods, or restrictions on the 
number of loans consumers may take out per year.
---------------------------------------------------------------------------

    \67\ The States with databases are Alabama, Delaware, Florida, 
Illinois Indiana, Kentucky, Michigan, New Mexico, North Dakota, 
Oklahoma, South Carolina, Virginia, Washington, and Wisconsin. 
Illinois also requires use of its database for payday installment 
loans, vehicle title loans, and some installment loans. Some State 
laws allow lenders to charge borrowers a fee to access the database 
that may be set by statute. Ala. Code Sec.  5-18A-13(o), Del. Code 
Ann. tit. 5, Sec.  2235B, Fla. Stat. Sec.  560.404(23), 815 Ill. 
Comp. Stat. 122/2-15, Ind. Code Sec.  24-4.5-7-404(4), Ky. Rev. 
Stat. Ann. Sec.  286.9-100(19)(b), Mich. Comp. Laws Sec.  487.2142, 
N.M. Stat. Ann. Sec.  58-15-37(B), N.D. Cent. Code Sec.  13-08-
12(4), Okla. Stat. tit. 59, Sec.  3109(B)(2)(b), S.C. Code Ann. 
Sec.  34-39-175, Va. Code Ann. Sec.  6.2-1810, Wash. Rev. Code Sec.  
31.45.093, Wis. Stat. Sec.  138.14(14).
---------------------------------------------------------------------------

    Although a consumer is generally required when obtaining a loan to 
provide a post-dated check or authorization for an electronic debit of 
the consumer's account which could be presented to the consumer's bank, 
consumers are in practice strongly encouraged and in some cases 
required by lenders to return to the store when the loan is due to 
``redeem'' the check.\68\ Some lenders give borrowers appointment cards 
with a date and time to encourage them to return with cash. For 
example, one major storefront payday lender explained that after loan 
origination ``the customer then makes an appointment to return on a 
specified due date, typically his or her next payday, to repay the cash 
advance . . . . Payment is usually made in person, in cash at the 
center where the cash advance was initiated . . . .'' \69\
---------------------------------------------------------------------------

    \68\ According to the Bureau's market outreach, if borrowers 
provided ACH authorization and return to pay the loan in cash, the 
authorization may be returned to them or voided.
    \69\ Advance America, 2011 Annual Report (Form 10-K) at 45 (Mar. 
15, 2012), available at http://www.sec.gov/Archives/edgar/data/1299704/000104746912002758/a2208026z10-k.htm. See also In-Store Cash 
Advance FAQ, Check Into Cash, https://checkintocash.com/faqs/in-store-cash-advance/ (last visited Feb. 4, 2016) (``We hold your 
check until your next payday, at which time you can come in and pay 
back the advance.'').
---------------------------------------------------------------------------

    The Bureau is aware, from confidential information gathered in the 
course of statutory functions and from market outreach, that lenders 
routinely make reminder calls to borrowers a few days before loan due 
dates to encourage borrowers to return to the store. One large lender 
reported this practice in a public filing.\70\ Another major payday 
lender with a predominantly storefront loan portfolio reported that in 
2014, over 90 percent of its payday and installment loans were repaid 
or renewed in cash; \71\ this provides an opportunity for store 
personnel to solicit borrowers to roll over or reborrow while they 
visit the store to discuss their loans or make loan payments. The 
Bureau is aware, from confidential information gathered in the course 
of statutory functions, that one or more storefront payday lenders have 
operating policies that specifically state that cash is preferred 
because only half of their

[[Page 47873]]

customers' checks would clear if deposited on the loan due dates. One 
storefront payday lender even requires its borrowers to return to the 
store to repay. Its Web site states: ``All payday loans must be repaid 
with either cash or money order. Upon payment, we will return your 
original check to you.'' \72\
---------------------------------------------------------------------------

    \70\ When Advance America was a publicly traded corporation, it 
reported: ``The day before the due date, we generally call the 
customer to confirm their payment due date.'' Advance America, 2011 
Annual Report (Form 10-K), at 11.
    \71\ QC Holdings, 2014 Annual Report (Form 10-K), at 7. These 
statistics appear to also include QC's online payday loans, but the 
online portfolio was very small in 2014 (approximately 4.6 percent 
of revenue).
    \72\ Instant Cash Advance introductory offer of a free (no fee) 
cash advance of $200, http://www.instantcashadvancecorp.com/free-loan-offer-VAL312.php.
---------------------------------------------------------------------------

    Encouraging or requiring borrowers to return to the store on the 
due date provides lenders an opportunity to offer borrowers the option 
to roll over the loan or, where rollovers are prohibited by State law, 
to reborrow following repayment or after the expiration of any cooling-
off period. Most storefront lenders examined by the Bureau employ 
monetary incentives that reward employees and store managers for loan 
volumes. Since as discussed below, a majority of loans result from 
rollovers of existing loans or reborrowing shortly after loans have 
been repaid, rollovers and reborrowing contribute substantially to 
employees' compensation. From confidential information gathered in the 
course of statutory functions, the Bureau is aware that rollover and 
reborrowing offers are made when consumers log into their accounts 
online, during ``courtesy calls'' made to remind borrowers of upcoming 
due dates, and when borrowers repay in person at storefront locations. 
In addition, some lenders train their employees to offer rollovers 
during courtesy calls even when borrowers responded that they had lost 
their jobs or suffered pay reductions.
    Store personnel often encourage borrowers to roll over their loans 
or to reborrow, even when consumers have demonstrated an inability to 
repay their existing loans. In an enforcement action, the Bureau found 
that one lender maintained training materials that actively directed 
employees to encourage reborrowing by struggling borrowers. It further 
found that if a borrower did not repay or pay to roll over the loan on 
time, store personnel would initiate collections. Store personnel or 
collectors would then offer the option to take out a new loan to pay 
off their existing loan, or refinance or extend the loan as a source of 
relief from the potentially negative outcomes (e.g., lawsuits, 
continued collections). This ``cycle of debt'' was depicted graphically 
as part of ``The Loan Process'' in the company's new hire training 
manual.\73\
---------------------------------------------------------------------------

    \73\ Press Release, Bureau of Consumer Fin. Prot., CFPB Takes 
Action Against ACE Cash Express for Pushing Payday Borrowers Into 
Cycle of Debt (July 10, 2014), http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-ace-cash-express-for-pushing-payday-borrowers-into-cycle-of-debt/.
---------------------------------------------------------------------------

    In addition, though some States require lenders to offer extended 
repayment plans and some trade associations have designated provision 
of such plans as a best practice, individual lenders may often be 
reluctant to offer them. In Colorado, for instance, some payday lenders 
reported prior to a regulatory change in 2010 that they had implemented 
practices to restrict borrowers from obtaining the number of loans 
needed to be eligible for State-mandated extended payment plans under 
the previous regime or banned borrowers on plans from taking new 
loans.\74\ The Bureau is also aware, from confidential information 
gathered in the course of statutory functions, that one or more lenders 
used training manuals that instructed employees not to mention these 
plans until after employees first offered rollovers, and then only if 
borrowers specifically asked about the plans. Indeed, details on 
implementation of the repayment plans that have been designated by two 
national trade associations for storefront payday lenders as best 
practices are unclear, and in some cases place a number of limitations 
on exactly how and when a borrower must request assistance to qualify 
for these ``off-ramps.'' For instance, one trade association claiming 
to represent more than half of all payday loan stores states that as a 
condition of membership, members must offer an ``extended payment 
plan'' but that borrowers must request the plan at least one day prior 
to the date on which the loan is due, generally in person at the store 
where the loan was made or otherwise by the same method used to 
originate the loan.\75\ It also states that borrowers must request an 
extended payment plan at least one day prior to the date on which the 
loan is due and must return to the store where the loan was made to do 
so or request the plan by using the same method used to originate the 
loan.\76\ Another trade association claiming over 1,300 members, 
including both payday lenders and firms that offer non-credit products 
such as check cashing and money transmission, states that members will 
provide the option of extended payment plans in the absence of State-
mandated plans to customers unable to repay but details of the plans 
are not available on its Web site.\77\
---------------------------------------------------------------------------

    \74\ State of Colo. Dep't of Law, 2009 Deferred Deposit/Payday 
Lenders Annual Report, at 2, available at http://www.coloradoattorneygeneral.gov/sites/default/files/contentuploads/cp/ConsumerCreditUnit/UCCC/AnnualReportComposites/2009_ddl_composite.pdf. See Market Concerns--Short-Term Loans below 
for additional discussion of lenders' extended payment plan 
practices.
    \75\ About CFSA, Cmty. Fin. Servs. Ass'n of America, http://cfsaa.com/about-cfsa.aspx (last visited Jan. 15, 2016); CFSA Member 
Best Practices, Cmty. Fin. Servs. Ass'n of America, http://cfsaa.com/cfsa-member-best-practices.aspx (last visited Jan. 15, 
2016). Association documents direct lenders to display a ``counter 
card'' describing the association's best practices. Plans are to be 
offered in the absence of State-mandated plans at no charge and 
payable in four equal payments coinciding with paydays.
    \76\ What Is an Extended Payment Plan?, Cmty. Fin. Servs. Ass'n 
of America, http://cfsaa.com/cfsa-member-best-practices/what-is-an-extended-payment-plan.aspx (last visited Jan. 15, 2016).
    \77\ Membership, Fin. Serv. Ctrs. of America, http://www.fisca.org/AM/Template.cfm?Section=Membership; Joseph M. Doyle, 
Chairman's Message, Fin. Serv. Ctrs. of America, http://www.fisca.org/AM/Template.cfm?Section=Chairman_s_Message&Template=/CM/HTMLDisplay.cfm&ContentID=19222 (last visited Jan. 15, 2016); 
FiSCA Best Practices, Fin. Serv. Ctrs. of America, http://www.fisca.org/Content/NavigationMenu/AboutFISCA/CodesofConduct/default.htm (last visited Jan. 15, 2016); Guidelines to Extended 
Payment Plan, Fin. Serv. Ctrs. of America, http://www.fisca.org/AM/Template.cfm?Section=Guidelines_to_Extended_Payment_Plan&Template=/MembersOnly.cfm&NavMenuID=642&ContentID=2249&DirectListComboInd=D 
(last visited Jan. 15, 2016).
---------------------------------------------------------------------------

    From confidential information gathered in the course of statutory 
functions and market outreach, the Bureau is aware that if a borrower 
fails to return to the store when a loan is due, the lender may attempt 
to contact the consumer and urge the consumer to make a cash payment 
before depositing the post-dated check that the consumer had provided 
at origination or electronically debiting the account. The Bureau is 
aware, from confidential information gathered in the course of its 
statutory functions and market outreach, that lenders may take various 
other actions to try to ensure that a payment will clear before 
presenting a check or ACH. These efforts may range from storefront 
lenders calling the borrower's bank to ask if a check of a particular 
size would clear the account or through the use of software offered by 
a number of vendors that attempts to model likelihood of repayment 
(``predictive ACH'').\78\ If these attempts are unsuccessful, store 
personnel at either the storefront level or at a centralized

[[Page 47874]]

location will then generally engage in collection activity.
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    \78\ For example, Press Release, Clarity Servs., ACH Presentment 
Will Help Lenders Reduce Failed ACH Pulls (Aug. 1, 2013), https://www.clarityservices.com/clear-warning-ach-presentment-will-help-lenders-reduce-failed-ach-pulls/; Products, Factor Trust, http://ws.factortrust.com/products/ (last visited Apr. 8, 2016); Bank 
Account Verify Suite, Microbilt, http://www.microbilt.com/bank-account-verification.aspx (last visited Apr. 8, 2016); Sufficient 
Funds, DataX, http://www.dataxltd.com/ancillary-services/successful-collections/ (last visited Apr.8, 2016).
---------------------------------------------------------------------------

    Collection activity may involve further in-house attempts to 
collect from the borrower's bank account.\79\ If the first attempt 
fails, the lender may make subsequent attempts at presentment by 
splitting payments into smaller amounts in hopes of increasing the 
likelihood of obtaining at least some funds, a practice for which the 
Bureau recently took enforcement action against a small-dollar 
lender.\80\ Or, the lender may attempt to present the payment multiple 
times, a practice that the Bureau has noted in supervisory 
examinations.\81\
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    \79\ For example, one payday lender stated in its public 
documents that it ``subsequently collects a large percentage of 
these bad debts by redepositing the customers' checks, ACH 
collections or receiving subsequent cash repayments by the 
customers.'' First Cash Fin. Servs., 2014 Annual Report (Form 10-K), 
at 5 (Feb. 12, 2015), available at https://www.sec.gov/Archives/edgar/data/840489/000084048915000012/fcfs1231201410-k.htm.
    \80\ Press Release, Bureau of Consumer Fin. Prot., CFPB Orders 
EZCORP to Pay $10 Million for Illegal Debt Collection Tactics (Dec. 
16, 2015), http://www.consumerfinance.gov/newsroom/cfpb-orders-ezcorp-to-pay-10-million-for-illegal-debt-collection-tactics/.
    \81\ See Bureau of Consumer Fin. Prot., Supervisory Highlights, 
at 20 (Spring 2014), available at http://files.consumerfinance.gov/f/201405_cfpb_supervisory-highlights-spring-2014.pdf.
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    Eventually, the lender may attempt other means of collection. The 
Bureau is aware of in-house collections activities, either by 
storefront employees or by employees at a centralized collections 
division, including calls, letters, and visits to consumers and their 
workplaces,\82\ as well as the selling of debt to third-party 
collectors.\83\ The Bureau observed in its consumer complaint data that 
from November 2013 through December 2015 approximately 24,000 debt 
collection complaints had payday loan as the underlying debt. More than 
10 percent of the complaints the Bureau has received about debt 
collection stem from payday loans.\84\
---------------------------------------------------------------------------

    \82\ Bureau of Consumer Fin. Prot., CFPB Compliance Bulletin 
2015-07, In-Person Collection of Consumer Debt, (Dec. 16, 2015), 
http://files.consumerfinance.gov/f/201512_cfpb_compliance-bulletin-in-person-collection-of-consumer-debt.pdf.
    \83\ For example, prior to discontinuing its payday lending 
operations, EZCorp indicated that it used a tiered structure of 
collections on defaulted loans (storefront employees, centralized 
collections, and then third-parties debt sales). EZCORP, Inc., 2014 
Annual Report (Form 10-K) at 9 (Nov. 26, 2014), available at https://www.sec.gov/Archives/edgar/data/876523/000087652314000102/a2014-10k9302014.htm). Advance America utilized calls and letters to past-
due consumers, as well as attempts to convert the consumer's check 
into a cashier's check, as methods of collection. Advance America, 
2011 Annual Report (Form 10-K), at 11. For CFPB Consent orders, see 
ACE Cash Express, Inc., CFPB No. 2014-CFPB-0008, Consent Order (July 
10, 2014), available at (http://files.consumerfinance.gov/f/201407_cfpb_consent-order_ace-cash-express.pdf) and EZCorp, CFPB No. 
2015-CFPB-0031, Consent Order (Dec. 16, 2015), available at (http://files.consumerfinance.gov/f/201512_cfpb_ezcorp-inc-consent-order.pdf).
    \84\ Bureau of Consumer Fin. Prot., Monthly Complaint Report, at 
12 (March 2016), http://files.consumerfinance.gov/f/201603_cfpb_monthly-complaint-report-vol-9.pdf.
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    Some payday lenders sue borrowers who fail to repay their loans. A 
study of small claims court cases filed in Utah from 2005 to 2010 found 
that 38 percent of cases were attributable to payday loans.\85\ A 
recent news report found that the majority of non-traffic civil cases 
filed in 14 Utah small claims courts are payday loan collection 
lawsuits and in one justice court the percentage was as high as 98.8 
percent.\86\ In 2013, the Bureau entered into a Consent Order with a 
large national payday and installment lender based, in part, on the 
filing of flawed court documents in about 14,000 debt collection 
lawsuits.\87\
---------------------------------------------------------------------------

    \85\ Coalition of Religious Communities, Payday Lenders and 
Small Claims Court Cases in Utah, at 2, available at http://www.consumerfed.org/pdfs/PDL-UTAH-court-doc.pdf.
    \86\ Lee Davidson, Payday Lenders Sued 7,927 Utahns Last Year, 
The Salt Lake City Tribune (Dec. 20, 2015), http://www.sltrib.com/home/3325528-155/payday-lenders-sued-7927-utahns-last.
    \87\ Press Release, Bureau of Consumer Fin. Prot. Consumer 
Financial Protection Bureau Takes Action Against Payday Lender for 
Robo-Signing (Nov. 20, 2013), http://www.consumerfinance.gov/newsroom/consumer-financial-protection-bureau-takes-action-against-payday-lender-for-robo-signing/.
---------------------------------------------------------------------------

    Business model. As previously noted, the storefront payday industry 
has built a distribution model that involves a large number of small 
retail outlets, each serving a relatively small number of consumers. 
That implies that the overhead cost on a per consumer basis is 
relatively high.
    Additionally, the loss rates on storefront payday loans--the 
percentage or amounts of loans that are charged off by the lender as 
uncollectible--are relatively high. Loss rates on payday loans often 
are reported on a per-loan basis but, given the frequency of rollovers 
and renewals, that metric understates the amount of principal lost to 
borrower defaults. For example, if a lender makes a $100 loan that is 
rolled over nine times, at which point the consumer defaults, the per-
loan default rate would be 10 percent whereas the lender would have in 
fact lost 100 percent of the amount loaned. In this example, the lender 
would still have received substantial revenue, as the lender would have 
collected fees for each rollover prior to default. The Bureau estimates 
that during the 2011-2012 timeframe, charge-offs (i.e., uncollectible 
loans defaulted on and never repaid) equaled nearly one-half of the 
average amount of outstanding loans during the year. In other words, 
for every $1.00 loaned, only $.50 in principal was eventually 
repaid.\88\ One academic study found loss rates to be even higher.\89\
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    \88\ Staff estimate based on public company financial statements 
and confidential information gathered in the course of the Bureau's 
statutory functions. Ratio of gross charged off loans to average 
balances, where gross charge-offs represent single-payment loan 
losses and average balance is the average of beginning and end of 
year single-payment loan receivables.
    \89\ Mark Flannery and Katherine Samolyk, at 16 (estimating 
annual charge-offs on storefront payday loans at 66.6 percent of 
outstandings).
---------------------------------------------------------------------------

    To sustain these significant costs, the payday lending business 
model is dependent upon a large volume of reborrowing--that is, 
rollovers, back-to-back loans, and reborrowing within a short period of 
paying off a previous loan--by those borrowers who do not default on 
their first loan. The Bureau's research found that over the course of a 
year, 90 percent of all loan fees comes from consumers who borrowed 
seven or more times and 75 percent comes from consumers who borrowed 
ten or more times.\90\ Similarly, when the Bureau identified a cohort 
of borrowers and tracked them over ten months, the Bureau found that 
more than two-thirds of all loans were in sequences of at least seven 
loans, and that over half of all loans were in sequences of ten or more 
loans.\91\ The Bureau defines a sequence as an initial loan plus one or 
more subsequent loans renewed within a period of time after repayment 
of the prior loan; a sequence thus captures not only rollovers and 
back-to-back loans but also re-borrowing that occurs within a short 
period of time after repayment of a prior loan either at the point at 
which a State-mandated cooling-off period ends or at the point at which 
the consumer, having repaid the prior loan, runs out of money.\92\
---------------------------------------------------------------------------

    \90\ CFPB Payday Loans and Deposit Advance Products White Paper, 
at 22.
    \91\ CFPB Report on Supplemental Findings, at ch. 5.
    \92\ CFPB Data Point: Payday Lending, at 7. The Bureau's Data 
Point defined a sequence to encompass all loans made within 14 days 
of a prior loan. Other reports have proposed other definitions of 
sequence length including 30 days (Marc Anthony Fusaro & Patricia J. 
Cirillo, Do Payday Loans Trap Consumers in a Cycle of Debt?, at 12 
(2011), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1960776&download=yes) and sequences based on 
the borrower's pay period (nonPrime 101, Report 7B: Searching for 
Harm in Storefront Payday Lending, at 4 n.9 (2016), available at 
https://www.nonprime101.com/wp-content/uploads/2016/02/Report-7-B-Searching-for-Harm-in-Storefront-Payday-Lending-nonPrime101.pdf.) 
See part Market Concerns--Short-Term Loans below for an additional 
discussion of these alternative definitions.
---------------------------------------------------------------------------

    Other studies are broadly consistent. For example, a 2013 report 
based on

[[Page 47875]]

lender data from Florida, Kentucky, Oklahoma, and South Carolina found 
that 85 percent of loans were made to borrowers with seven or more 
loans per year, and 62 percent of loans were made to borrowers with 12 
or more loans per year.\93\ These four States have restrictions on 
payday loans such as cooling-off periods and limits on rollovers that 
are enforced by State-regulated databases, as well as voluntary 
extended repayment plans.\94\ An updated report on Florida payday loan 
usage derived from the State database noted this trend has continued 
with 83 percent of payday loans in 2015 made to borrowers with seven or 
more loans and 57 percent of payday loans that same year made to 
borrowers with 12 or more loans.\95\ Other reports have found that over 
80 percent of total payday loans and loan volume is due to repeat 
borrowing within thirty days of a prior loan.\96\ One trade association 
has acknowledged that ``[i]n any large, mature payday loan portfolio, 
loans to repeat borrowers generally constitute between 70 and 90 
percent of the portfolio, and for some lenders, even more.'' \97\
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    \93\ Montezemolo, Payday Lending Abuses and Predatory Practices, 
at 13 tbl. 7.
    \94\ Id. at 12. For additional information on Florida loan use, 
see Veritec Solutions LLC, State of Florida Deferred Presentment 
Program Through May 2012, (2012), available at http://geerservices.net/veritecs.com/wp-content/uploads/2013/07/2012-FL-Trend-Report1.pdf.
    \95\ Brandon Coleman & Delvin Davis, Ctr. for Responsible 
Lending, Perfect Storm: Payday Lenders Harm Florida Consumer Despite 
State Law, at 4 (March 2016), available at http://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/crl_perfect_storm_florida_mar2016_0.pdf.
    \96\ Parrish & King, at 11-12.
    \97\ Letter from Hilary B. Miller, Esq. on behalf of Cmty. Fin. 
Servs. Ass'n. of America, to Bureau of Consumer Fin. Prot., Petition 
of Community Financial Services Association of America, Ltd. For 
Retraction of ``Payday Loans and Deposit Advance Products: A White 
Paper of Initial Data Findings, at 5 (June 20, 2013), available at 
http://files.consumerfinance.gov/f/201308_cfpb_cfsa-information-quality-act-petition-to-CFPB.pdf.
---------------------------------------------------------------------------

    Market Concerns--Short-Term Loans below discusses the impact of 
these outcomes for consumers who are unable to repay and either default 
or reborrow.
    Recent regulatory and related industry developments. A number of 
Federal and State regulatory developments have occurred over the last 
15 years as concerns about the effects of payday lending have spread. 
Regulators have found that the industry has tended to shift to new 
models and products in response.
    Since 2000, it has been clear from commentary added to Regulation 
Z, that payday loans constitute ``credit'' under the Truth in Lending 
Act (TILA) and that cost of credit disclosures are required to be 
provided in payday loan transactions, regardless of how State law 
characterizes payday loan fees.\98\
---------------------------------------------------------------------------

    \98\ 12 CFR 1026.2(a)(14)-2.
---------------------------------------------------------------------------

    In 2006, Congress enacted the Military Lending Act (MLA) to address 
concerns that servicemembers and their families were becoming over-
indebted in high-cost forms of credit.\99\ The MLA, as implemented by 
the Department of Defense's regulation, imposes two broad classes of 
requirements applicable to a creditor. First, the creditor may not 
impose a military annual percentage rate \100\ (MAPR) greater than 36 
percent in connection with an extension of consumer credit to a covered 
borrower. Second, when extending consumer credit, the creditor must 
satisfy certain other terms and conditions, such as providing certain 
information, both orally and in a form the borrower can keep, before or 
at the time the borrower becomes obligated on the transaction or 
establishes the account, refraining from requiring the borrower to 
submit to arbitration in the case of a dispute involving the consumer 
credit, and refraining from charging a penalty fee if the borrower 
prepays all or part of the consumer credit. In 2007, the Department of 
Defense issued its initial regulation under the MLA, limiting the Act's 
application to closed-end loans with a term of 91 days or less in which 
the amount financed did not exceed $2,000; closed-end vehicle title 
loans with a term of 181 days or less; and closed-end tax refund 
anticipation loans.\101\ However, the Department found that evasions 
developed in the market as ``the extremely narrow definition of 
`consumer credit' in the [then-existing rule] permits a creditor to 
structure its credit products in order to reduce or avoid altogether 
the obligations of the MLA.'' \102\
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    \99\ The Military Lending Act, part of the John Warner National 
Defense Authorization Act for Fiscal Year 2007, was signed into law 
in October 2006. The interest rate cap took effect October 1, 2007. 
See 10 U.S.C. 987.
    \100\ The military annual percentage rate is an ``all-in'' APR 
that includes a broader range of fees and charges than the APR that 
must be disclosed under the Truth in Lending Act. See 32 CFR 232.4.
    \101\ 72 FR 50580 (Aug. 31, 2007).
    \102\ 80 FR 43560, 43567 n.78 (July 22, 2015).
---------------------------------------------------------------------------

    As a result, effective October 2015 the Department of Defense 
expanded its definition of covered credit to include open-end credit 
and longer-term loans so that the MLA protections generally apply to 
all credit subject to the requirements of Regulation Z of the Truth in 
Lending Act, other than certain products excluded by statute.\103\ In 
general, creditors must comply with the new regulations for extensions 
of credit after October 3, 2016; for credit card accounts, creditors 
are required to comply with the new rule starting October 3, 2017.\104\
---------------------------------------------------------------------------

    \103\ 80 FR 43560 (July 22, 2015) (to be codified at 32 CFR Pt. 
232), available at https://www.gpo.gov/fdsys/pkg/FR-2015-07-22/pdf/2015-17480.pdf.
    \104\ Id.
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    At the State level, the last States to enact legislation 
authorizing payday lending, Alaska and Michigan, did so in 2005.\105\ 
At least eight States that previously had authorized payday loans have 
taken steps to restrict or eliminate payday lending. In 2001, North 
Carolina became the first State that had previously permitted payday 
loans to adopt an effective ban by allowing the authorizing statute to 
expire. In 2004, Georgia also enacted a law banning payday lending.
---------------------------------------------------------------------------

    \105\ Alaska Stat. Sec. Sec.  06.50.010 through 06.50.900; Mich. 
Comp. Laws Sec. Sec.  487.2121 through 487.2173.
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    In 2008, the Ohio legislature adopted the Short Term Lender Act 
with a 28 percent APR cap, including all fees and charges, for short-
term loans and repealed the existing Check-Cashing Lender Law that 
authorized higher rates and fees.\106\ In a referendum later that year, 
Ohioans voted against reinstating the Check-Cashing Lender Law, leaving 
the 28 percent APR cap and the Short Term Lending Act in effect.\107\ 
After the vote, some payday lenders began offering vehicle title loans. 
Other lenders continued to offer payday loans utilizing Ohio's Credit 
Service Organization Act \108\ and the Mortgage Loan Act; \109\ the 
latter practice was upheld by the State Supreme Court in 2014.\110\
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    \106\ Ohio Rev. Code Sec. Sec.  1321.35 and 1321.40.
    \107\ Ohio Neighborhood Fin., Inc. v. Scott, 139 Ohio St.3d 536, 
2014-Ohio-2440, at 4-7, available at https://www.supremecourt.ohio.gov/rod/docs/pdf/0/2014/2014-ohio-2440.pdf 
(reported at 13 NE.3d 1115).
    \108\ Ohio Rev. Code, Ch. Sec.  4712.01.
    \109\ Ohio Rev. Code, Ch. Sec.  1321.52(C).
    \110\ See generally Ohio Neighborhood Fin., Inc. v. Scott, 139 
Ohio St.3d 536, 2014-Ohio-2440.
---------------------------------------------------------------------------

    In 2010, Colorado's legislature banned short-term single-payment 
balloon loans in favor of longer-term, six-month loans. Colorado's 
regulatory framework is described in more detail in the discussion of 
payday installment lending below.
    As of July 1, 2010, Arizona effectively prohibited payday lending 
after the authorizing statute expired and a statewide referendum that 
would have continued to permit payday lending failed to pass.\111\ 
However, small-dollar

[[Page 47876]]

lending activity continues in the State. The State financial regulator 
issued an alert in 2013, in response to complaints about online 
unlicensed lending, advising consumers and lenders that payday and 
consumer loans of $1,000 or less are generally subject to a rate of 36 
percent per annum and loans in violation of those rates are void.\112\ 
In addition, vehicle title loans continue to be made in Arizona as 
secondary motor vehicle finance transactions.\113\ The number of 
licensed vehicle title lenders has increased by about 300 percent since 
the payday lending law expired and now exceeds the number of payday 
lenders that were licensed prior to the ban.\114\
---------------------------------------------------------------------------

    \111\ Ariz. Rev. Stat. Sec.  6-1263; Ariz. Sec'y of State, State 
of Arizona Official Canvass, at 15 (2008), available at http://apps.azsos.gov/election/2008/General/Canvass2008GE.pdf; Arizona 
Attorney General's Office, Operation Sunset FAQ, available at 
https://www.azag.gov/sites/default/files/sites/all/docs/consumer/op-sunset-FAQ.pdf.
    \112\ Regulatory and Consumer Alert CL/CO-13-01 from Ariz. Dep't 
of Fin. Insts., to Consumers; Financial Institutions and Enterprises 
Conducting Business in Arizona, Arizona Department of Financial 
Institutions, Regulatory and Consumer Alert, CL/CO-13-01, Unlicensed 
Consumer Lending Transactions (Feb. 7, 2013), http://www.azdfi.gov/LawsRulesPolicy/Forms/FE-AD-PO-Regulatory_and_Consumer_Alert_CL_CO_13_01%2002-06-2013.pdf
    \113\ Ariz. Rev. Stat. Sec. Sec.  44-281 and 44-291; Frequently 
Asked Questions from Licensees, Question #6 ``What is a Title 
Loan,'' Arizona Dept. of Fin. Insts., http://www.azdfi.gov/Licensing/Licensing_FAQ.html#MVDSFC (last visited Apr. 20, 2016).
    \114\ These include loans ``secured'' by borrowers' 
registrations of encumbered vehicles. Jean Ann Fox, Kelly Griffith, 
Tom Feltner, Consumer Fed'n of America and Ctr. for Econ. Integrity, 
Wrong Way: Wrecked by Debt, at 6, 8-9 (2016), available at http://consumerfed.org/wp-content/uploads/2016/01/160126_wrongway_report_cfa-cei.pdf.
---------------------------------------------------------------------------

    In 2009, Virginia amended its payday lending law. It extended the 
minimum loan term to the length of two income periods, added a 45-day 
cooling-off period after substantial time in debt (the fifth loan in a 
180-day period) and a 90-day cooling-off period after completing an 
extended payment plan, and implemented a database to enforce limits on 
loan amounts and frequency. The payday law applies to closed-end loans. 
Virginia has no interest rate regulations or licensure requirements for 
open-end credit.\115\ After the amendments, a number of lenders that 
were previously licensed as payday lenders in Virginia and that offer 
closed-end payday loans in other States now operate in Virginia by 
offering open-end credit without a State license.\116\
---------------------------------------------------------------------------

    \115\ Va. Code Ann. Sec.  6.2-312.
    \116\ See, e.g., What We Offer, CashNetUSA, https://www.cashnetusa.com/what-we-offer.html (Nov. 15, 2015). CashNetUSA is 
part of Enova, https://www.enova.com/brands-services/cashnetusa/ 
(Nov. 15, 2015); Check Into Cash, https://checkintocash.com/virginia-line-of-credit/ (Nov. 15, 2015); Allied Cash Advance (``VA: 
Loans made through open-end credit account.'') https://www.alliedcash.com/ (Nov. 15, 2015); Community Choice Financial 
through First Virginia Financial Services, http://www.firstvirginialoans.com/loan-options/ (Nov. 15, 2015) (First 
Virginia is part of Community Choice, see ``Our Brands'' http://ccfi.com/news/ (Nov. 15, 2015). For a list of payday lender license 
surrenders and dates of surrender, see https://www.scc.virginia.gov/SCC-INTERNET/bfi/reg_inst/sur/pay_sur_0112.pdf (Nov. 15, 2015).
---------------------------------------------------------------------------

    Washington and Delaware have restricted repeat borrowing by 
imposing limits on the number of payday loans consumers may obtain. In 
2009, Washington made several changes to its payday lending law. These 
changes, effective January 1, 2010, include a cap of eight loans per 
borrower from all lenders in a rolling 12-month period where there had 
been no previous limit on the number of total loans, an extended 
repayment plan for any loan, and a database to which that lenders are 
required to report all payday loans.\117\ In 2013, Delaware, a State 
with no fee restrictions for payday loans, implemented a cap of five 
payday loans, including rollovers, in any 12-month period.\118\ 
Delaware defines payday loans as loans due within 60 days for amounts 
up to $1,000. Some Delaware lenders have shifted from payday loans to 
longer-term installment loans with interest-only payments followed by a 
final balloon payment of the principal and an interest fee payment--
sometimes called a ``flexpay'' loan.\119\
---------------------------------------------------------------------------

    \117\ Wash., Dep't of Fin. Insts., 2010 Payday Lending Report, 
at 3, available at http://www.dfi.wa.gov/sites/default/files/reports/2010-payday-lending-report.pdf.
    \118\ Del. Code Ann. 5 Sec. Sec.  2227(7), 2235A(a)(1).
    \119\ See, e.g., James v. National Financial, LLC, No. C.A. 
8931-VCL at 8, 65-67 (Del. Ch. Mar. 14, 2016), available at http://courts.delaware.gov/opinions/list.aspx?ag=court%20of%20chancery 
(reported at 132 A.3d 799).
---------------------------------------------------------------------------

    At least 35 Texas municipalities have adopted local ordinances 
setting business regulations on payday lending (and vehicle title 
lending).\120\ Some of the ordinances, such as those in Dallas, El 
Paso, Houston, and San Antonio, include requirements such as limits on 
loan amounts (no more than 20 percent of the borrower's gross annual 
income for payday loans), limits on the number of rollovers, required 
amortization of the principal loan amount for repeat loans--usually in 
25 percent increments, record retention for at least three years, and a 
registration requirement.\121\ On a statewide basis, there are no Texas 
laws specifically governing payday lenders or payday loan terms; credit 
access businesses that act as loan arrangers or broker payday loans 
(and vehicle title loans) are regulated and subject to licensing, 
reporting, and requirements to provide consumers with disclosures about 
repayment and reborrowing rates.\122\
---------------------------------------------------------------------------

    \120\ A description of the municipalities is available at Texas 
Municipal League. An additional 15 Texas municipalities have adopted 
land use ordinances on payday or vehicle title lending. City 
Regulation of Payday and Auto Title Lenders, Tex. Mun. League, 
http://www.tml.org/payday-updates (last visited May 6, 2016).
    \121\ Other municipalities have adopted similar ordinances. For 
example, at least seven Oregon municipalities, including Portland 
and Eugene, have enacted ordinances that include a 25 percent 
amortization requirement on rollovers and a requirement that lenders 
offer a no-cost payment plan after two rollovers. Portland, Or., 
Code Sec.  7.26.050, Eugene Or., Code Sec.  3.556.
    \122\ CABs must include a pictorial disclosure with the 
percentage of borrowers who will repay the loan on the due date and 
the percentage who will roll over (called renewals) various times. 
See State of Texas, Consumer Disclosure, Payday Loan-Single Payment, 
available at http://occc.texas.gov/sites/default/files/uploads/disclosures/cab-disclosure-payday-single-011012.pdf. The CABs, 
rather than the lenders, maintain storefront locations, and qualify 
borrowers, service and collect the loans for the lenders. CABs may 
also guaranty the loans. There is no cap on CAB fees and when these 
fees are included in the loan finance charges, the disclosed APRs 
for Texas payday and vehicle title loans are similar to those in 
other States with deregulated rates. See Ann Baddour, Why Texas' 
Small Dollar Lending Market Matter, 12 e-Perspectives Issue 2 
(2012), available at https://www.dallasfed.org/microsites/cd/epersp/2012/2_2.cfm. In 2004, a Federal appellate court dismissed a 
putative class action related to these practices. Lovick v. 
RiteMoney, Ltd., 378 F.3d 433 (5th Cir. 2004).
---------------------------------------------------------------------------

Online Payday and Hybrid Payday Loans
    With the growth of the internet, a significant online payday 
lending industry has developed. Some storefront lenders use the 
internet as an additional method of originating payday loans in the 
States in which they are licensed to do business. In addition, there 
are now a number of lenders offering payday, and what are referred to 
as ``hybrid'' payday loans, exclusively through the internet. Hybrid 
payday loans are structured so that rollovers occur automatically 
unless the consumer takes affirmative action to pay off the loan, thus 
effectively creating a series of interest-only payments followed by a 
final balloon payment of the principal amount and an additional 
fee.\123\ Hybrid loans with automatic rollovers would fall within the 
category of ``covered longer-term loans'' under the proposed rule as 
discussed more fully below.
---------------------------------------------------------------------------

    \123\ nonPrime101, Report 1: Profiling Internet Small Dollar 
Lending- Basic Demographics and Loan Characteristics, at 2-3, 
(2014), available at https://www.nonprime101.com/wp-content/uploads/2015/02/Profiling-Internet-Small-Dollar-Lending-Final.pdf. The 
report refers to these automatic rollovers as ``renewals.''
---------------------------------------------------------------------------

    Industry size, structure, and products. The online payday market 
size is difficult to measure for a number of reasons. First, many 
online lenders offer a variety of products including single-

[[Page 47877]]

payment loans (what the Bureau refers to as payday loans), longer-term 
installment loans, and hybrid loans; this poses challenges in sizing 
the portion of these firms' business that is attributable to payday and 
hybrid loans. Second, many online payday lenders are not publicly 
traded, resulting in little available financial information about this 
market segment. Third, many other online payday lenders claim exemption 
from State lending laws and licensing requirements, stating they are 
located and operated from other jurisdictions.\124\ Consequently, these 
lenders report less information publicly, whether individually or in 
aggregate compilations, than lenders holding traditional State 
licenses. Finally, storefront payday lenders who are also using the 
online channel generally do not separately report their online 
originations. Bureau staff's reviews of the largest storefront lenders' 
Web sites indicate an increased focus in recent years on online loan 
origination.
---------------------------------------------------------------------------

    \124\ For example, in 2015 the Bureau filed a lawsuit in Federal 
district court against NDG Enterprise, NDG Financial Corp., Northway 
Broker, Ltd., and others alleging that defendants illegally 
collected online payday loans that were void or that consumers had 
no obligations to repay, and falsely threatened consumers with 
lawsuits and imprisonment. Several defendants are Canadian 
corporations and others are incorporated in Malta. The case is 
pending. See Press Release, Bureau of Consumer Fin. Prot., CFPB Sues 
Offshore Payday Lender (Aug. 4, 2015), http://www.consumerfinance.gov/newsroom/cfpb-sues-offshore-payday-lender/.
---------------------------------------------------------------------------

    With these caveats, a frequently cited industry analyst has 
estimated that by 2012 online payday loans had grown to generate nearly 
an equivalent amount of fee revenue as storefront payday loans on 
roughly 62 percent of the origination volume, about $19 billion, but 
originations had then declined somewhat to roughly $15.9 billion during 
2015.\125\ This trend appears consistent with storefront payday loans, 
as discussed above, and is likely related at least in part to 
increasing lender migration from short-term into longer-term products. 
Online payday loan fee revenue has been estimated for 2015 at $3.1 
billion, or 19 percent of origination volume.\126\ However, these 
estimates may be both over- and under-inclusive; they may not 
differentiate precisely between online lenders' short-term and longer-
term loans, and they may not account for the online lending activities 
by storefront payday lenders.
---------------------------------------------------------------------------

    \125\ Hecht, The State of Short-Term Credit Amid Ambiguity, 
Evolution and Innovation; John Hecht, Jefferies LLC, The State of 
Short-Term Credit in a Constantly Changing Environment (2015); 
Jessica Silver-Greenberg, The New York Times, Major Banks Aid in 
Payday Loans Banned by States (Feb. 23, 2013) http://www.nytimes.com/2013/02/24/business/major-banks-aid-in-payday-loans-banned-by-states.html.
    \126\ Hecht, The State of Short-Term Credit Amid Ambiguity, 
Evolution and Innovation.
---------------------------------------------------------------------------

    Whatever its precise size, the online industry can broadly be 
divided into two segments: online lenders licensed in the State in 
which the borrower resides and lenders that are not licensed in the 
borrower's State of residence.
    The first segment consists largely of storefront lenders with an 
online channel to complement their storefronts as a means of 
originating loans, as well as a few online-only payday lenders who lend 
only to borrowers in States where they have obtained State lending 
licenses. Because this segment of online lenders is State-licensed, 
State administrative payday lending reports include this data but 
generally do not differentiate loans originated online from those 
originated in storefronts. Accordingly, this portion of the market is 
included in the market estimates summarized above, and the lenders 
consider themselves to be subject to, or generally follow, the relevant 
State laws discussed above.
    The second segment consists of lenders that claim exemption from 
State lending laws. Some of these lenders claim exemption because their 
loans are made from a physical location outside of the borrower's State 
of residence, including from an off-shore location outside of the 
United States. Other lenders claim exemption because they are lending 
from tribal lands, with such lenders claiming that they are regulated 
by the sovereign laws of federally recognized Indian tribes.\127\ These 
lenders claim immunity from suit to enforce State or Federal consumer 
protection laws on the basis of their sovereign status.\128\ A 
frequently cited source of data on this segment of the market is a 
series of reports using data from a specialty consumer reporting agency 
serving certain online lenders, most of whom are unlicensed.\129\ These 
data are not representative of the entire online industry, but 
nonetheless cover a large enough sample (2.5 million borrowers over a 
period of four years) to be significant. These reports indicate the 
following concerning this market segment:
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    \127\ According to a tribal trade association representative, 
about 30 tribes are involved in the payday lending industry. Julia 
Harte & Joanna Zuckerman Bernstein, AlJazeera America, Payday Nation 
(June 17, 2014) http://projects.aljazeera.com/2014/payday-nation/. 
The Bureau is unaware of other public sources for an estimate of the 
number of tribal lenders.
    \128\ See Great Plains Lending, L.L.C., CFPB No. 2013-MISC-Great 
Plains Lending-0001 (2013), available at http://files.consumerfinance.gov/f/201309_cfpb_decision-on-petition_great-plains-lending-to-set-aside-civil-investigative-demands.pdf (Sept. 
26, 2013); First Amended Complaint, Consumer Financial Protection 
Bureau v. CashCall, Inc. No. 13-cv-13167, 2014 WL 10321537 (D. Mass. 
March 21, 2014), available at http://files.consumerfinance.gov/f/201403_cfpb_amended-complaint_cashcall.pdf; Order, Fed. Trade Comm'n 
v. AMG Services, Inc., No. 12-cv-00536, 2014 WL 910302 (D. Nev. Mar. 
07, 2014), available at https://www.ftc.gov/system/files/documents/cases/140319amgorder.pdf; State ex rel. Suthers v. Cash Advance & 
Preferred Cash Loans, 205 P.3d 389 (Colo. App. 2008), aff'd sub nom; 
Cash Advance & Preferred Cash Loans v. State, 242 P.3d 1099 (Colo. 
2010); California v. Miami Nation Enterprises et al., 166 
Cal.Rptr.3d 800 (2014).
    \129\ nonPrime101, Report 1, at 9.
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     Although the mean and median loan size among the payday 
borrowers in this data set are only slightly higher than the 
information reported above for storefront payday loans,\130\ the online 
payday lenders charge higher rates than storefront lenders. As noted 
above, most of the online lenders reporting this data claim exemption 
from State laws and do not comply with State rate caps. The median loan 
fee in this data set is $23.53 per $100 borrowed, compared to $15 per 
$100 borrowed for storefront payday loans. The mean fee amount is even 
higher at $26.60 per $100 borrowed.\131\ Another study based on a 
similar dataset from three online payday lenders is generally 
consistent, putting the range of online payday loan fees at between $18 
and $25 per $100 borrowed.\132\
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    \130\ The median online payday loan size is $400, compared to a 
median loan size of $350 for storefront payday loans. Id. at 10.
    \131\ Id.
    \132\ G. Michael Flores, Bretton Woods, Inc.: Online Short-Term 
Lending: Statistical Analysis Report, at 15 (Feb. 28, 2014), 
available at http://www.bretton-woods.com/media/a28fa8e9a85dce6fffff81bbffffd502.pdf.
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     More than half of the payday loans made by these online 
lenders are hybrid payday loans. As described above, a hybrid loan 
involves automatic rollovers with payment of the loan fee until a final 
balloon payment of the principal and fee.\133\ For the hybrid payday 
loans, the most frequently reported payment amount is 30 percent of 
principal, implying a finance charge during each pay period of $30 for 
each $100 borrowed.\134\
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    \133\ nonPrime101, Report 5: Loan Product Structures and Pricing 
in Internet Installment Lending, at 4 (May 15, 2015), available at 
https://www.nonprime101.com/wp-content/uploads/2015/05/Report-5-Loan-Product-Structures-1.3-5.21.15-Final3.pdf. As noted above, 
these loans may also be called flexpay loans. Such loans would 
likely be covered longer-term loans under this proposal.
    \134\ nonPrime101, Report 5: Loan Product Structures and Pricing 
in Internet Installment Lending at 6.
---------------------------------------------------------------------------

     Unlike storefront payday loan borrowers who generally 
return to the same store to reborrow, the credit reporting data may 
suggest that online borrowers tend to move from lender to

[[Page 47878]]

lender. As discussed further below, however, it is difficult to 
evaluate whether some of this apparent effect is due to online lenders 
simply not consistently reporting lending activity.\135\
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    \135\ nonPrime101, Report 7-A: How Persistent is the Borrower-
Lender Relationship in Payday Lending (2015), available at https://www.nonprime101.com/wp-content/uploads/2015/10/Report-7A-How-Persistent-Is-the-Borrow-Lender-Relationship_1023151.pdf.
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    Marketing, underwriting, and collection practices. To acquire 
customers, online lenders have relied heavily on direct marketing and 
lead generators. Online lead generators purchase web advertising, 
usually in the form of banner advertisements or paid search results 
(the advertisements that appear at the top of an internet search on 
Google, Bing, or other search engines). When a consumer clicks through 
on a banner or search advertisement, she is usually prompted to 
complete a brief form with personal information that will be used to 
determine the loans for which she may qualify. If a lead generator is 
involved, the consumer's information becomes a lead that is in turn 
sold directly to a lender, to a reseller, or to a ``lender network'' 
that operates as an auction in which the lead is sold to the highest 
bidder. A consumer's personal information may be offered to multiple 
lenders and other vendors as a result of submitting a single form, 
raising significant privacy and other concerns.\136\ In a survey of 
online payday borrowers, 39 percent reported that their personal or 
financial information was sold to a third party without their 
knowledge.\137\
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    \136\ In October 2015 the Federal Trade Commission (FTC) held a 
workshop on online lead generators and how they operate in a number 
of industries. The transcript from the workshop is available at: 
https://www.ftc.gov/system/files/documents/videos/follow-lead-ftc-workshop-lead-generation-part-1/ftc_lead_generation_workshop_-_transcript_segment_1.pdf.
    \137\ Pew Charitable Trusts, Payday Lending in America Report 4: 
Fraud and Abuse Online: Harmful Practices in Internet Payday 
Lending, at 11-12, (2014), available at http://www.pewtrusts.org/~/
media/assets/2014/10/payday-lending-report/
fraud_and_abuse_online_harmful_practices_in_internet_payday_lending.p
df.
---------------------------------------------------------------------------

    From the Bureau's market outreach activities, it is aware that 
large payday and small-dollar installment lenders using lead generators 
for high quality, ``first look'' or high-bid leads have paid an average 
cost per new account of between $150 and $200. Indeed, the cost to a 
lender simply to purchase such leads can be $100 or more.\138\ Customer 
acquisition costs reflect lead purchase prices. One online lender 
reported its customer acquisition costs to be $297, while in 2015 
another spent 25 percent of its total marketing expenditures on 
customer acquisition, including lead purchases.\139\
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    \138\ The high lead cost reflects both the value lenders place 
on new accounts (what they are willing to bid for the leads) and, in 
turn, the advertising costs that lead sellers incur in order to 
generate an actionable lead. For example, one report lists the 
advertising costs of a click-through on a sponsored search 
advertisement for the search phrase ``payday loan'' as ranging from 
$5 to $9 at a point in time in 2014. Pew Charitable Trusts, Payday 
Lending in America Report 4, at 7. These costs were captured by 
market research firms SpyFu, SEMRush, and KeywordSpy on February 18, 
2014. A click-through only results in a live lead when a potential 
borrower has completed an applicant form. One internet advertising 
executive at a recent FTC workshop on online lead generation 
estimated that approximately one in 10 click-throughs result in a 
live lead, though this finding is not specific to payday loans. FTC, 
Lead Generation Workshop Transcript. This conversion rate brings the 
lead generator's advertising cost per lead to $50-$90. A lender 
seeking to directly acquire its own borrowers competes for the same 
advertising space in sponsored searches or online banner 
advertisements (bidding up the cost per click-through) and likely 
incurs similar advertising costs for each new borrower.
    \139\ Elevate Credit Inc., Registration Statement (Form S-1), at 
12 (Nov. 9, 2015), available at https://www.sec.gov/Archives/edgar/data/1651094/000119312515371673/d83122ds1.htm; Enova Int'l Inc., 
2015Annual Report (Form 10-K), at 103 (Mar. 7, 2016), https://www.sec.gov/Archives/edgar/data/1529864/000156459016014129/enva-10k_20151231.htm.
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    Online lenders view fraud (i.e., consumers who mispresent their 
identity) as a significant risk and also express concerns about ``bad 
faith'' borrowing (i.e., consumers with verified identities who borrow 
without the intent to repay).\140\ Consequently, online payday and 
hybrid lenders attempt to verify the borrower's identity and the 
existence of a bank account in good standing. Several specialty 
consumer reporting agencies have evolved primarily to serve the online 
payday lending market. The Bureau is aware from market outreach that 
these lenders also generally report loan closure information on a real-
time or daily basis to the specialty consumer reporting agencies. In 
addition, some online lenders report to the Bureau they use nationwide 
credit report information to evaluate both credit and potential fraud 
risk associated with first-time borrowers, including recent bankruptcy 
filings. However, there is evidence that online lenders do not 
consistently utilize credit report data for every loan, and instead 
typically check and report data only for new borrowers or those 
returning after an extended absence from the lender's records.\141\
---------------------------------------------------------------------------

    \140\ For example, Enova states that it uses its own analysis of 
previous fraud incidences and third party data to determine if 
applicant information submitted matches other indicators and whether 
the applicant can authorize transactions from the submitted bank 
account. In addition, it uses proprietary models to predict fraud. 
Enova Int'l Inc., 2015 Annual Report (Form 10-K), at 8.
    \141\ See Flores, Bretton Woods, 2014 Statistical Report, at 5; 
the Bureau's market outreach with lenders and specialty consumer 
reporting agencies.
---------------------------------------------------------------------------

    Typically, proceeds from online payday loans are disbursed 
electronically to the consumer's bank account. The consumer authorizes 
the lender to debit her account as payments are due. If the consumer 
does not agree to authorize electronic debits, lenders generally will 
not disburse electronically, but instead will require the consumer to 
wait for a paper loan proceeds check to arrive in the mail.\142\ 
Lenders may also charge higher interest rates or fees to consumers who 
do not commit to electronic debits.\143\
---------------------------------------------------------------------------

    \142\ For example, see Mobiloans, Line of Credit Terms and 
Conditions, www.mobiloans.com/terms-and-conditions (last visited 
Feb. 5, 2016) (``If you do not authorize electronic payments from 
your Demand Deposit Account and instead elect to make payments by 
mail, you will receive your Mobiloans Cash by check in the mail.''
    \143\ Under the Electronic Fund Transfer Act (EFTA) and its 
implementing regulation (Regulation E), lenders cannot condition the 
granting of credit on a consumer's repayment by preauthorized 
(recurring) electronic fund transfers, except for credit extended 
under an overdraft credit plan or extended to maintain a specified 
minimum balance in the consumer's account. 12 CFR 1005.10(e). The 
summary in the text of current lender practices is intended to be 
purely descriptive. The Bureau is not addressing in this rulemaking 
the question of whether any of the practices described in text are 
consistent with EFTA.
---------------------------------------------------------------------------

    Unlike storefront lenders that seek to bring consumers back to the 
stores to make payments, online lenders collect via electronic debits. 
Online payday lenders, like their storefront counterparts, use various 
models and software, described above, to predict when an electronic 
debit is most likely to succeed in withdrawing funds from a borrower's 
bank account. As discussed further below, the Bureau has observed 
lenders seeking to collect multiple payments on the same day. Lenders 
may be dividing the payment amount in half and presenting two debits at 
once, presumably to reduce the risk of a larger payment being returned 
for nonsufficient funds. Indeed, the Bureau found that about one-third 
of presentments by online payday lenders occur on the same day as 
another request by the same lender. The Bureau also found that split 
presentments almost always result in either payment of all presentments 
or return of all presentments (in which event the consumer will likely 
incur multiple nonsufficient funds (NSF) fees from the bank). The 
Bureau's study indicates that when an online payday lender's first 
attempt to obtain a payment from the consumer's account is 
unsuccessful, it will make a second attempt 75 percent

[[Page 47879]]

of the time and if that attempt fails the lender will make a third 
attempt 66 percent of the time.\144\ As discussed further at part II.D, 
the success rate on these subsequent attempts is relatively low, and 
the cost to consumers may be correspondingly high.\145\
---------------------------------------------------------------------------

    \144\ See generally CFPB Online Payday Loan Payments, at 14.
    \145\ Because these online lenders may offer single-payment 
payday, hybrid, and installment loans, reviewing the debits does not 
necessarily distinguish the type of loan involved. Storefront payday 
lenders were not included. Id. at 7, 13.
---------------------------------------------------------------------------

    There is limited information on the extent to which online payday 
lenders that are unable to collect payments through electronic debits 
resort to other collection tactics.\146\ The available evidence 
indicates, however, that online lenders sustain higher credit losses 
and risk of fraud than storefront lenders. One lender with publicly 
available financial information that originated both storefront and 
online single-payment loans reported in 2014, a 49 percent and 71 
percent charge-off rate, respectively, for these loans.\147\ Online 
lenders generally classify as ``fraud'' both consumers who 
misrepresented their identity in order to obtain a loan and consumers 
whose identity is verified but default on the first payment due, which 
is viewed as reflecting the intent not to repay.
---------------------------------------------------------------------------

    \146\ One publicly-traded online-only lender that makes single-
payment payday loans as well as online installment loans and lines 
of credit reports that its call center contacts borrowers by phone, 
email, and in writing after a missed payment and periodically 
thereafter and that it also may sell uncollectible charged off debt. 
Enova Int'l Inc., 2015 Annual Report (Form, 10-K), at 9 (Mar. 7, 
2016), available at https://www.sec.gov/Archives/edgar/data/1529864/000156459016014129/enva-10k_20151231.htm.
    \147\ Net charge-offs over average balance based on data from 
Cash America and Enova Form 10-Ks. See Cash America Int'l, Inc., 
2014 Annual Report (Form 10-K) at 102 (Mar. 13, 2015), available at 
https://www.sec.gov/Archives/edgar/data/807884/000080788415000012/a201410-k.htm; Enova Int'l Inc., 2014 Annual Report (Form 10-K) at 
95 (Mar. 20, 2015), available at https://www.sec.gov/Archives/edgar/data/1529864/000156459015001871/enva-10k_20141231.htm. Net charge-
offs represent single-payment loan losses less recoveries for the 
year. Averages balance is the average of beginning and end of year 
single-payment loan receivables. Prior to November 14, 2014, Enova 
comprised the e-commerce division of Cash America. Using the 2014 
10-Ks allows for a better comparison of payday loan activity, than 
the 2015 10-Ks, as Cash America's payday loan operations declined 
substantially after 2014.
---------------------------------------------------------------------------

    Business model. While online lenders tend to have fewer costs 
relating to operation of physical facilities than do storefront 
lenders, as discussed above, they face high costs relating to lead 
acquisition, loan origination screening to verify applicant identity, 
and potentially larger losses due to fraud than their storefront 
competitors.
    Accordingly, it is not surprising that online lenders--like their 
storefront counterparts--are dependent upon repeated reborrowing. 
Indeed, even at a cost of $25 or $30 per $100 borrowed, a typical 
single online payday loan would generate fee revenue of under $100, 
which is not sufficient to cover the typical origination costs 
discussed above. Consequently, as discussed above, hybrid loans that 
roll over automatically in the absence of affirmative action by the 
consumer account for a substantial percentage of online payday 
business. These products effectively build a number of rollovers into 
the loan. For example, the Bureau has observed online payday lenders 
whose loan documents suggest that they are offering a single-payment 
loan but whose business model is to collect only the finance charges 
due, roll over the principal, and require consumers to take affirmative 
steps to notify the lender if consumers want to repay their loans in 
full rather than allowing them to roll over. The Bureau recently 
initiated an action against an online lender alleging that it engaged 
in deceptive practices in connection with such products.\148\ In a 
recent survey conducted of online payday borrowers, 31 percent reported 
that they had experienced loans with automatic renewals.\149\
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    \148\ Press Release, Bureau of Consumer Fin. Prot., CFPB Takes 
Action Against Online Lender for Deceiving Borrowers (Nov. 18, 
2015), http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-online-lender-for-deceiving-borrowers/. The FTC raised and 
resolved similar claims against online payday lenders. See Press 
Release, FTC, FTC Secures $4.4 Million From Online Payday Lenders to 
Settle Deception Charges (Jan. 5, 2016), https://www.ftc.gov/news-events/press-releases/2016/01/ftc-secures-44-million-online-payday-lenders-settle-deception.
    \149\ The Pew Charitable Trusts, Payday Lending in America 
Report 4, at 8.
---------------------------------------------------------------------------

    As discussed above, a number of online payday lenders claim 
exemption from State laws and the limitations established under those 
laws. As reported by a specialty consumer reporting agency with data 
from that market, more than half of the payday loans for which 
information is furnished to it are hybrid payday loans with the most 
common fee being $30 per $100 borrowed, twice the median amount for 
storefront payday loans.\150\
---------------------------------------------------------------------------

    \150\ nonprime101, Report 5: Loan Product Structures and Pricing 
in Internet Installment Lending, at 4, 6; CFPB Payday Loans and 
Deposit Advance Products White Paper, at 16.
---------------------------------------------------------------------------

    Similar to associations representing storefront lenders as 
discussed above, a national trade association representing online 
lenders includes loan repayment plans as one of its best practices, but 
does not provide many details in its public material.\151\ A trade 
association that represents tribal online lenders has adopted a set of 
best practices but they do not address repayment plans.\152\
---------------------------------------------------------------------------

    \151\ Online Lenders Alliance, Best Practices at 27 (March 
2016), available at http://onlinelendersalliance.org/wp-content/uploads/2016/03/Best-Practices-2016.pdf. The materials state that 
its members ``shall comply'' with any required State repayment 
plans; otherwise, if a borrower is unable to repay a loan according 
to the loan agreement, the trade association's members ``should 
create'' repayment plans that ``provide flexibility based on the 
customer's circumstances.''
    \152\ Best Practices, Native American Financial Services 
Association, http://www.mynafsa.org/best-practices/ (last visited 
Apr. 20, 2016).
---------------------------------------------------------------------------

Single-Payment Vehicle Title Loans
    Vehicle title loans--also known as ``automobile equity loans''--are 
another form of liquidity lending permitted in certain States. In a 
title loan transaction, the borrower must provide identification and 
usually the title to the vehicle as evidence that the borrower owns the 
vehicle ``free and clear.'' \153\ Unlike payday loans, there is 
generally no requirement that the borrower have a bank account, and 
some lenders do not require a copy of a paystub or other evidence of 
income.\154\ Rather than holding a check or ACH authorization for 
repayment as with a payday loan, the lender generally retains the 
vehicle title or some other form of security interest that provides it 
with the right to repossess the vehicle, which may then be sold, with 
the proceeds used for repayment.\155\
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    \153\ Arizona also allows vehicle title loans to be made against 
as secondary motor vehicle finance transactions. Ariz. Rev. Stat. 
Sec. Sec.  44-281, 44-291G; Arizona Dept. of Fin. Inst., Frequently 
Asked Questions from Licensees, Question #6 ``What is a Title 
Loan,'' http://www.azdfi.gov/Licensing/Licensing_FAQ.html#MVDSFC
    \154\ See FAQ, Fast Cash Title Loans, http://fastcashvirginia.com/faq/ (last visited Mar. 3, 2016) (``There is no 
need to have a checking account to get a title loan.''); How Title 
Loans Work, Title Max, https://www.titlemax.com/how-it-works/ (last 
visited Jan. 15, 2016) (borrowers need a vehicle title and 
government issued identification plus any additional requirements of 
State law).
    \155\ See Speedy Cash, ``Title Loan FAQ's,'' https://www.speedycash.com/faqs/title-loans/ (last visited Mar. 29, 2016) 
(title loans are helpful ``when you do not have a checking account 
to secure your loan. . . .your car serves as collateral for your 
loan.'').
---------------------------------------------------------------------------

    The lender retains the vehicle title or some other form of security 
interest during the duration of the loan, while the borrower retains 
physical possession of the vehicle. In some States the lender files a 
lien with State officials to record and perfect its interest in the 
vehicle or the lender may charge a fee for non-filing insurance. In a 
few States, a clear vehicle title is not required and vehicle title 
loans may be made as secondary liens against the title or against the

[[Page 47880]]

borrower's automobile registration.\156\ In Georgia, vehicle title 
loans are made under the State's pawnbroker statute that specifically 
permits borrowers to pawn vehicle certificates of title.\157\ Almost 
all vehicle title lending is conducted at storefront locations, 
although some title lending does occur online.\158\
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    \156\ See, e.g., discussion about Arizona law applicable to 
vehicle title lending above.
    \157\ Ga. Code Sec.  44-12-131 (2015).
    \158\ For example, see the Bureau's action involving Wilshire 
Consumer Credit for illegal collection practices. Consumers 
primarily applied for Wilshire's vehicle title loans online. Press 
Release, Bureau of Consumer Fin. Prot., CFPB Orders Indirect Auto 
Finance Company to Provide Consumers $44.1 Million in Relief for 
Illegal Debt Collection Tactics (Oct. 1, 2015), http://www.consumerfinance.gov/newsroom/cfpb-orders-indirect-auto-finance-company-to-provide-consumers-44-1-million-in-relief-for-illegal-debt-collection-tactics/. See also State actions against 
Liquidation, LLC dba Sovereign Lending Solutions, LLC and other 
names, purportedly organized in the Cook Islands, New Zealand, by 
Oregon, Michigan and Pennsylvania. Press Release, Oregon Dep't of 
Justice, AG Rosenblum and DCBS Sue Predatory Title Loan Operator 
(Aug. 18, 2015), http://www.doj.state.or.us/releases/Pages/2015/rel081815.aspx; Press Release, Michigan Attorney General, Schuette 
Stops Collections by High Interest Auto Title Loan Company (Jan. 26, 
2016), http://www.michigan.gov/ag/0,4534,7-164-46849-374883_
,00.html; Press Release, Pennsylvania Dep't of Banking and 
Securities, Consumers Advised about Illegal Auto Title Loans 
Following Court Decision (Feb. 3, 2016), http://www.media.pa.gov/pages/banking_details.aspx?newsid=89; Press Release, North Carolina 
Dep't of Justice, Online Car Title Lender Banned from NC for 
Unlawful Loans, AG Says (May 2, 2016), http://ncdoj.com/News-and-Alerts/News-Releases-and-Advisories/Press-Releases/Online-car-title-lender-banned-from-NC-for-unlawfu.aspx. Consumers applied for the 
title loans online and sent their vehicle titles to the lender. The 
lender used local agents for repossession services.
---------------------------------------------------------------------------

    Product definition and regulatory environment. There are two types 
of vehicle title loans: Single-payment loans and installment loans. Of 
the 25 States that permit some form of vehicle title lending, seven 
States permit only single-payment title loans, 13 States allow the 
loans to be structured as single-payment or installment loans, and five 
permit only title installment loans.\159\ (Installment title loans are 
discussed in more detail below.) All but three of the States that 
permit some form of title lending (Arizona, Georgia, and New Hampshire) 
also permit payday lending.
---------------------------------------------------------------------------

    \159\ Pew Charitable Trusts, Auto Title Loans: Market Practices 
and Borrowers' Experiences, at 4 (2015), available at http://
www.pewtrusts.org/~/media/Assets/2015/03/
AutoTitleLoansReport.pdf?la=en.
---------------------------------------------------------------------------

    Single-payment vehicle title loans are typically due in 30-days and 
operate much like payday loans: The consumer is charged a fixed price 
per $100 borrowed and when the loan is due the consumer is obligated to 
repay the full amount of the loan plus the fee but is typically given 
the opportunity to roll over or reborrow.\160\ The Bureau recently 
studied anonymized data from vehicle title lenders, consisting of 
nearly 3.5 million loans made to over 400,000 borrowers in 20 States. 
For single-payment vehicle title loans with a typical duration of 30 
days, the median loan amount is $694 with a median APR of 317 percent, 
and the average loan amount is $959 and the average APR is 291 
percent.\161\ Two other studies contain similar findings.\162\ Vehicle 
title loans are therefore for larger amounts than typical payday loans 
but carry similar APRs for similar terms.
---------------------------------------------------------------------------

    \160\ Id. at 5; Susanna Montezemolo, Ctr. for Responsible 
Lending, Car-Title Lending: The State of Lending in America & its 
Impact on U.S. Households, at 6 (2013), available at http://www.responsiblelending.org/state-of-lending/reports/7-Car-Title-Loans.pdf. See also Idaho Dep't of Fin., Idaho Credit Code ``Fast 
Facts'' With Fiscal and Annual Report Data as of January 1, 2015, 
available at https://www.finance.idaho.gov/ConsumerFinance/Documents/Idaho-Credit-Code-Fast-Facts-With-Fiscal-Annual-Report-Data-01012016.pdf; Tennessee Dep't of Fin. Insts., Financial 
Institutions, 2016 Report on the Title Pledge Industry, at 4 (2016), 
available at http://www.tennessee.gov/assets/entities/tdfi/attachments/Title_Pledge_Report_2016_Final_Draft_Apr_6_2016.pdf.
    \161\ CFPB Single-Payment Vehicle Title Lending, at 7.
    \162\ Pew, Auto Title Loans: Market Practices and Borrowers' 
Experience, at 3 (average loan is $1,000, most common APR is a one-
month title loan is 300 percent); Montezemolo, The State of Lending 
in America, at 3.
---------------------------------------------------------------------------

    Some States that authorize vehicle title loans limit the rates 
lenders may charge to a percentage or dollar amount per one hundred 
dollars borrowed, similar to some State payday lending pricing 
structures. A common fee limit is 25 percent of the loan amount per 
month, but roughly half of the authorizing States have no restrictions 
on rates or fees.\163\ Some, but not all, States limit the maximum 
amount that may be borrowed to a fixed dollar amount, a percentage of 
the borrower's monthly income (50 percent of the borrower's gross 
monthly income in Illinois), or a percentage of the vehicle's 
value.\164\ Some States limit the initial loan term to one month, but 
several States authorize rollovers, including automatic rollovers 
arranged at the time of the original loan.\165\ Unlike payday loan 
regulation, few States require cooling-off periods between loans or 
optional extended repayment plans for borrowers who cannot repay 
vehicle title loans.\166\ State vehicle title regulations sometimes 
address default, repossession and related fees; any cure periods prior 
to and after repossession, whether the lender must refund any surplus 
after the repossession and sale or disposition of the vehicle, and 
whether the borrower is liable for any deficiency remaining after sale 
or disposition.\167\ Some States have imposed limited requirements that 
lenders consider a borrower's ability to repay. For example, both Utah 
and South Carolina require lenders to consider borrower ability to 
repay, but this may be accomplished through a

[[Page 47881]]

borrower affirming that she has provided accurate financial information 
and has the ability to repay.\168\ Nevada requires lenders to consider 
borrower ability to repay and obtain borrower affirmation of their 
ability to repay.\169\ Missouri requires that lenders consider borrower 
financial ability to reasonably repay the loan under the loan's 
contract, but does not specify how lenders may satisfy this 
requirement.\170\
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    \163\ States with a 15 percent to 25 percent per month cap 
include Alabama, Georgia (rate decreases after 90 days), 
Mississippi, and New Hampshire; Tennessee limits interest rates to 2 
percent per month, but also allows for a fee up to 20 percent of the 
original principal amount. Virginia's fees are tiered at 22 percent 
per month for amounts up to $700 and then decrease on larger loans. 
Ala. Code Sec.  5-19A-7(a), Ga. Code Ann. Sec.  44-12-131(a)(4), 
Miss. Code Ann. Sec.  75-67-413(1), N.H. Rev. Stat. Ann. Sec.  399-
A:18(I)(f), Tenn. Code Ann. Sec.  45-15-111(a), Va. Code Ann. Sec.  
6.2-2216(A).
    \164\ For example, some maximum vehicle title loan amounts are 
$2,500 in Mississippi, New Mexico, and Tennessee, and $5,000 in 
Missouri. Illinois limits the loan to $4,000 or 50 percent of 
monthly income, Virginia and Wisconsin limit the loan amount to 50 
percent of the vehicle's value and Wisconsin also has a $25,000 
maximum loan amount. Examples of States with no limits on loan 
amounts, limits of the amount of the value of the vehicle, or 
statutes that are silent about loan amounts include Arizona, Idaho, 
South Dakota, and Utah. Miss. Code Ann. Sec.  75-67-415(f), N.M. 
Stat. Ann. Sec.  58-15-3(A), Tenn. Code Ann. Sec.  45-15-115(3), Mo. 
Rev. Stat. Sec.  367.527(2), Ill. Admin. Code tit. 38, Sec.  
110.370(a), Va. Code Ann. Sec.  6.2-2215(1)(d); Wis. Stat. Sec.  
138.16(1)(c), (2)(a), Ariz. Rev. Stat. Ann. Sec.  44-291(A), Idaho 
Code Ann. Sec.  28-46-508(3), S.D. Codified Laws Sec.  54-4-44, Utah 
Code Ann. Sec.  7-24-202(3)(c).
    \165\ States that permit rollovers include Delaware, Georgia, 
Idaho, Illinois, Mississippi, Missouri, Nevada, New Hampshire, South 
Dakota, Tennessee, and Utah. Idaho and Tennessee limit title loans 
to 30 days but allow automatic rollovers and require a principal 
reduction of 10 percent and 5 percent respectively, starting with 
the third rollover. Virginia prohibits rollovers and requires a 
minimum loan term of at least 120 days. Del. Code Ann. tit. 5, Sec.  
2254 (rollovers may not exceed 180 days from date of fund 
disbursement), Ga. Code Ann. Sec.  44-12-138(b)(4), Idaho Code Ann. 
Sec.  28-46-506(1) & (3), Ill. Admin. Code tit. 38, Sec.  
110.370(b)(1) (allowing refinancing if principal is reduced by 20%), 
Miss. Code Ann. Sec.  75-67-413(3), Mo. Rev. Stat. Sec.  367.512(4), 
Nev. Rev. Stat. Sec.  604A.445(2), N.H. Rev. Stat. Ann. Sec.  399-
A:19(II) (maximum of 10 rollovers), S.D. Codified Laws Sec.  54-4-
71, Tenn. Code Ann. Sec.  45-15-113(a), Utah Code Ann. Sec.  7-24-
202(3)(a), Va. Code Ann. Sec.  6.2-2216(F).
    \166\ Illinois requires 15 days between title loans. Delaware 
requires title lenders to offer a workout agreement after default 
but prior to repossession that repays at least 10 percent of the 
outstanding balance each month. Delaware does not cap fees on title 
loans and interest continues to accrue on workout agreements. Ill. 
Admin. Code tit. 38, Sec.  110.370(c); Del. Code Ann. 5 Sec. Sec.  
2255 & 2258 (2015).
    \167\ For example, Georgia allows repossession fees and storage 
fees. Arizona, Delaware, Idaho, Missouri, South Dakota, Tennessee, 
Utah, Virginia, and Wisconsin specify that any surplus must be 
returned to the borrower. Mississippi requires that 85 percent of 
any surplus be returned. Ga. Code Ann. Sec.  44-12-131(a)(4)(C), 
Ariz. Rev. Stat. Ann. Sec.  47-9608(A)(4), Del. Code Ann. tit. 5, 
Sec.  2260, Idaho Code Ann. Sec.  28-9-615(d), Mo. Rev. Stat. Sec.  
408.553, S.D. Codified Laws Sec.  54-4-72, Tenn. Code Ann. Sec.  45-
15-114(b)(2), Utah Code Ann. Sec.  7-24-204(3), Va. Code Ann. Sec.  
6.2-2217(C), Wis. Stat. Sec.  138.16(4)(e), Miss. Code Ann. Sec.  
75-67-411(5).
    \168\ Utah Code Ann. Sec.  7-24-202. S.C. Code Ann. Sec.  37-3-
413(3).
    \169\ Nev. Rev. Stat. Sec.  640A.450(3).
    \170\ Mo. Rev. Stat Sec.  367.525(4).
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    Industry size and structure. Information about the vehicle title 
market is more limited than with respect to the payday industry because 
there are currently no publicly traded vehicle title loan companies, 
most payday lending companies that offer vehicle title loans are not 
publicly traded, and less information is generally available from State 
regulators and other sources.\171\ One national survey conducted in 
June 2013 found that 1.1 million households reported obtaining a 
vehicle title loan over the preceding 12 months.\172\ Another study 
extrapolating from State regulatory reports estimates that about two 
million Americans use vehicle title loans annually.\173\ In 2014, 
vehicle title loan originations were estimated at $2.4 billion with 
revenue estimates of $3 to $5.6 billion.\174\ These estimates may not 
include the full extent of vehicle title loan expansion by payday 
lenders.
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    \171\ A trade association representing several larger title 
lenders, the American Association of Responsible Auto Lenders, does 
not have a public-facing Web site but has provided the Bureau with 
some information about the industry.
    \172\ FDIC, 2013 Unbanked and Underbanked Survey, at 93.
    \173\ Pew, Auto Title Loans: Market Practices and Borrowers' 
Experience, at 1, citing among other sources the 2013 FDIC National 
Survey of Unbanked and Underbanked Households. Pew's estimate 
includes borrowers of single-payment and installment vehicle title 
loans. The FDIC's survey question did not specify any particular 
type of title loan.
    \174\ Pew, Auto Title Loans: Market Practices and Borrowers' 
Experience, at 1; Ctr. for Fin. Servs. Innovation, 2014 Underserved 
Market Size: Financial Size: Financial Health Opportunity in Dollars 
and Cents (2015) (on file and available from Center for Financial 
Services Innovation Web site at no charge with registration).
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    There are approximately 8,000 title loan storefront locations in 
the United States, about half of which also offer payday loans.\175\ 
Three privately held firms dominate the vehicle title lending market 
and together account for about 3,200 stores in about 20 States.\176\ 
These lenders are concentrated in the southeastern and southwestern 
regions of the country.\177\ In addition to the large title lenders, 
smaller vehicle title lenders are estimated to have about 800 
storefront locations,\178\ and as noted above several companies offer 
both title loans and payday loans.\179\ The Bureau understands that for 
some firms for which the core business had been payday loans, the 
volume of vehicle title loan originations now exceeds payday loan 
originations.
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    \175\ Pew, Auto Title Loans: Market Practices and Borrowers' 
Experience, at 1, 33 n.7.
    \176\ The largest vehicle title lender is TMX Finance, LLC 
formally known as Title Max Holdings, LLC with about 1,400 stores in 
17 States. It was publicly-traded until 2013 when it was taken 
private. Its last 10-K reported annual revenue of $656.8 million. 
TMX Fin. LLC, 2012 Annual Report (Form 10-K), at 21 (Mar. 27, 2013), 
available at, http://www.sec.gov/Archives/edgar/data/1511967/000110465913024898/a12-29657_110k.htm (year ended Dec. 31, 2012). 
For TMX Finance store counts see Store Locations, TMX Finance 
Careers, https://www.tmxcareers.com/store-locations/ (last visited 
May 10, 2016). Community Loans of America has almost 900 stores and 
Select Management Resources has about 700 stores. Fred Schulte, 
Public Integrity, Lawmakers protect title loan firms while borrowers 
pay sky-high interest rates (Dec. 9, 2015), http://www.publicintegrity.org/2015/12/09/18916/lawmakers-protect-title-loan-firms-while-borrowers-pay-sky-high-interest-rates.
    \177\ Fred Schulte, Public Integrity, Lawmakers protect title 
loan firms while borrowers pay sky-high interest rates (Dec. 9, 
2015).
    \178\ State reports supplemented with estimates from Center for 
Responsible Lending, revenue information from public filings and 
from non-public sources. See Montezemolo, Car-Title Lending: The 
State of Lending in America.
    \179\ Pew, Auto Title Loans: Market Practices and Borrowers' 
Experience, at 1.
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    State loan data also show vehicle title loans are growing rapidly. 
The number of borrowers in Illinois taking vehicle title loans 
increased 78 percent from 2009 to 2013, the most current year for which 
data are available.\180\ The number of title loans taken out in 
California increased 178 percent between 2011 and 2014.\181\ In 
Virginia, between 2011 and 2014, the number of motor vehicle title 
loans made increased by 21 percent while the number of individual 
consumers taking title loans increased by 25 percent.\182\ In addition 
to the growth in loans made under Virginia's vehicle title law, a 
series of reports notes that some Virginia title lenders are offering 
``consumer finance'' installment loans without the corresponding 
consumer protections of the vehicle title lending law and, accounting 
for about ``a quarter of the money loaned in Virginia using automobile 
titles as collateral.'' \183\ In Tennessee, the number of licensed 
vehicle title (title pledge) locations at year-end has been measured 
yearly since 2006. The number of locations peaked in 2014 at 1,071, 52 
percent higher than the 2006 levels. In 2015, the number of locations 
declined to 965. However, in each year since 2013, the State regulator 
has reported more licensed locations than existed prior to the State's 
title lending regulation, the Tennessee Title Pledge Act.\184\
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    \180\ Ill. Dep't. of Fin. & Prof. Reg., Illinois Trends 2013 
Report, at 6.
    \181\ Compare 38,148 vehicle title loans in CY 2011 to 106,373 
in CY 2014. California Dep't of Corps., 2011 Annual Report Operation 
of Finance Companies Licensed under the California Finance Lenders 
Law, at 12 (2012), available at http://www.dbo.ca.gov/Licensees/Finance_Lenders/pdf/CFL2011ARC.pdf; California Department of 
Business Oversight, 2014 Annual Report Operation of Finance 
Companies Licensed Under the California Finance Lenders Law, at 13 
(2014), available at http://www.dbo.ca.gov/Press/press_releases/2015/CFLL_Annual_Report_2014.pdf.
    \182\ Va. State Corp. Comm'n, The 2014 Annual Report of the 
Bureau of Financial Institutions, Payday Lender Licensees, Check 
Cashers, Motor Vehicle Title Lender Licensees Operating in Virginia 
at the Close of Business December 31, 2014, at 71 (2014), available 
at http://www.scc.virginia.gov/bfi/annual/ar04-14.pdf. Because 
Virginia vehicle title lenders are authorized by State law to make 
vehicle title loans to residents of other States, the data reported 
by licensed Virginia vehicle title lenders may include loans made to 
out-of-State residents.
    \183\ Michael Pope, How Virginia Became the Region's Hub For 
High-Interest Loans, WAMU (Oct. 6, 2015), http://wamu.org/news/15/10/06/how_virginia_became_the_regional_leader_for_car_title_loans.
    \184\ Tennessee Dep't of Fin. Institutions, 2014 Report on the 
Title Pledge Industry, at 1 (2014), available at http://www.tennessee.gov/assets/entities/tdfi/attachments/Title_Pledge_Report_2014.pdf; Tennessee Dep't of Fin. Institutions, 
2016 Report on the Title Pledge Industry, at 2.
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    Vehicle title loan storefront locations serve a relatively small 
number of customers. One study estimates that the average vehicle title 
loan store made 227 loans per year, not including rollovers.\185\ 
Another study using data from four States and public filings from the 
largest vehicle title lender estimated that the average vehicle title 
loan store serves about 300 unique borrowers per year--or slightly more 
than one unique borrower per business day.\186\ The same report 
estimated that the largest vehicle title lender had 4.2 employees per 
store.\187\ But, as mentioned, a number of large payday firms offer 
both products from the same storefront and may use the same employees 
to do so. In addition, small vehicle title lenders are

[[Page 47882]]

likely to have fewer employees per location than do larger title 
lenders.
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    \185\ Ctr. for Responsible Lending, The State of Lending in 
America and its Impact on U.S. Households, at 133 (2013), available 
at http://www.responsiblelending.org/state-of-lending/State-of-Lending-report-1.pdf
    \186\ Pew, Auto Title Loans: Market Practices and Borrowers' 
Experience, at 5. The four States were Mississippi, Tennessee, 
Texas, and Virginia. The public filing was from TMX Finance, the 
largest lender by store count. Id. at 35 n.37.
    \187\ Pew, Auto Title Loans: Market Practices and Borrowers' 
Experience, at 22. The estimate is based on TMX Finance's total 
store and employee count reported in its Form 10-K as of the end of 
2012 (1,035 stores and 4,335 employees). TMX Fin. LLC, 2012 Annual 
Report (Form 10-K), at 3, 6. The calculation does not account for 
employees at centralized non-storefront locations.
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    Marketing, underwriting, and collections practices. Vehicle title 
loans are marketed to appeal to borrowers with impaired credit who seek 
immediate funds. The largest vehicle title lender described title loans 
as a ``way for consumers to meet their liquidity needs'' and described 
their customers as those who ``often . . . have a sudden and unexpected 
need for cash due to common financial challenges.'' \188\ 
Advertisements for vehicle title loans suggest that title loans can be 
used ``to cover unforeseen costs this month . . . .[if] utilities are a 
little higher than you expected,'' if consumers are ``in a bind,'' for 
a ``short term cash flow'' problem, or for ``fast cash to deal with an 
unexpected expense.'' \189\ Vehicle title lenders advertise quick loan 
approval ``in as little as 15 minutes.'' \190\ Some lenders offer 
promotional discounts for the initial loan and bonuses for 
referrals,\191\ for example, a $100 prepaid card for referring friends 
for vehicle title loans.\192\
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    \188\ TMX Fin. LLC, 2012 Annual Report (Form 10-K), at 4, 21.
    \189\ See, e.g., https://www.cash1titleloans.com/apply-now/arizona.aspx?st-t=cash1titleloans_srch&gclid=Cj0KEQjwoM63BRDK_bf4_MeV3ZEBEiQAuQWqkU6O5gtz6kRjP8T3Al-BvylI-bIKksDT-r0NMPjEG4kaAqZe8P8HAQ; https://www.speedycash.com/title-loans/; http://metroloans.com/title-loans-faqs/; http://info.lendingbear.com/blog/need-money-now-2-short-term-solutions-for-your-cash-flow-problem ; http://fastcashvirginia.com/ 
(all sites last visited March 24, 2016).
    \190\ Arizona Title Loans, Check Smart, http://www.checksmartstores.com/arizona/title-loans/ (last visited Jan. 14, 
2016); Fred Schulte, Public Integrity, Lawmakers protect title loan 
firms while borrowers pay sky-high interest rates (Dec. 9, 2015), 
http://www.publicintegrity.org/2015/12/09/18916/lawmakers-protect-title-loan-firms-while-borrowers-pay-sky-high-interest-rates.
    \191\ Ctr. for Responsible Lending, Car Title Lending: Disregard 
for Borrowers' Ability to Repay, at 1 (2014), available at http://www.responsiblelending.org/other-consumer-loans/car-title-loans/research-analysis/Car-Title-Policy-Brief-Abilty-to-Repay-May-12-2014.pdf
    \192\ Special Offers, Check Smart, http://www.checksmartstores.com/arizona/special-offers/ (last visited Mar. 
29, 2016).
---------------------------------------------------------------------------

    The underwriting policies and practices that vehicle title lenders 
use vary and may depend on such factors as State law requirements and 
individual lender practices. As noted above, some vehicle title lenders 
do not require borrowers to provide information about their income and 
instead rely on the vehicle title and the underlying collateral that 
may be repossessed and sold in the event the borrower defaults--a 
practice known as asset-based lending.\193\ The largest vehicle title 
lender stated in 2011 that its underwriting decisions were based 
entirely on the wholesale value of the vehicle.\194\ Other title 
lenders' Web sites state that proof of income is required,\195\ 
although it is unclear whether employment information is verified or 
used for underwriting, whether it is used for collections and 
communication purposes upon default, or for both purposes. The Bureau 
is aware, from confidential information gathered in the course of its 
statutory functions, that one or more vehicle title lenders regularly 
exceed their maximum loan amount guidelines and instruct employees to 
consider a vehicle's sentimental or use value to the borrower when 
assessing the amount of funds they will lend.
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    \193\ Advance America's Web site states ``[l]oan amount will be 
based on the value of your car* (*requirements may vary by state).'' 
Title Loans, Advance America, https://www.advanceamerica.net/services/title-loans (last visited Mar. 3, 2016); Pew, Auto Title 
Loans: Market Practices and Borrowers' Experience, at 1; Fred 
Schulte, Public Integrity, Lawmakers protect title loan firms while 
borrowers pay sky-high interest rates (Dec. 9, 2015), http://www.publicintegrity.org/2015/12/09/18916/lawmakers-protect-title-loan-firms-while-borrowers-pay-sky-high-interest-rates.
    \194\ TMX Fin. LLC, 2012 Annual Report (Form 10-K), at 5.
    \195\ See, e.g., https://checkintocash.com/title-loans/ (last 
visited March 3, 2016); https://www.speedycash.com/title-loans/ 
(last visited March 3, 2016); https://www.acecashexpress.com/title-loans (last visited March 3, 2016); http://fastcashvirginia.com/faq/ 
(last visited March 3, 2016).
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    One large title lender stated that it competes on factors such as 
location, customer service, and convenience, and also highlights its 
pricing as a competitive factor.\196\ An academic study found evidence 
of price competition in the vehicle title market, citing the abundance 
of price-related advertising and evidence that in States with rate 
caps, such as Tennessee, approximately half of the lenders charged the 
maximum rate allowed by law, with the other half charging lower 
rates.\197\ However, another report found that like payday lenders, 
title lenders compete primarily on location, speed, and customer 
service, gaining customers by increasing the number of locations rather 
than decreasing their prices.\198\
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    \196\ TMX Fin. LLC, 2012 Annual Report (Form 10-K), at 6.
    \197\ Jim Hawkins, Credit on Wheels: The Law and Business of 
Auto-Title Lending, 69 Wash. & Lee L. Rev. 535, 558-559 (2012).
    \198\ Pew, Auto Title Loans: Market Practices and Borrowers' 
Experience, at 5.
---------------------------------------------------------------------------

    Loan amounts are typically for less than half the wholesale value 
of the consumer's vehicle. Low loan-to-value ratios reduce lenders' 
risk. A survey of title lenders in New Mexico found that the lenders 
typically lend between 25 and 40 percent of a vehicle's wholesale 
value.\199\ At one large title lender, the weighted average loan-to-
value ratio was found to be 26 percent of Black Book retail value.\200\ 
The same lender has two principal operating divisions; one division 
requires that vehicles have a minimum appraised value greater than 
$500, but the lender will lend against vehicles with a lower appraised 
value through another brand.\201\
---------------------------------------------------------------------------

    \199\ Nathalie Martin & Ozymandias Adams, Grand Theft Auto 
Loans: Repossession and Demographic Realities in Title Lending, 77 
Mo. L. Rev. 41 (2012).
    \200\ TMX Fin. LLC, 2011 Annual Report (Form 10-K), at 3 (Mar. 
19, 2012), available at https://www.sec.gov/Archives/edgar/data/1511967/000119312512121419/d315506d10k.htm.
    \201\ Id. at 5.
---------------------------------------------------------------------------

    When a borrower defaults on a vehicle title loan, the lender may 
repossess the vehicle. The Bureau believes, based on market outreach, 
that the decision whether to repossess a vehicle will depend on factors 
such as the amount due, the age and resale value of the vehicle, the 
costs to locate and repossess the vehicle, and State law requirements 
to refund any surplus amount remaining after the sale proceeds have 
been applied to the remaining loan balance.\202\ Available information 
indicates that lenders are unlikely to repossess vehicles they do not 
expect to sell. The largest vehicle title lender sold 83 percent of the 
vehicles it repossessed but did not report overall repossession 
rates.\203\ In 2012, its firm-wide gross charge-offs equaled 30 percent 
of its average outstanding title loan balances.\204\ The Bureau is 
aware of vehicle title lenders engaging in illegal debt collection 
activities in order to collect amounts claimed to be due under title 
loan agreements. These practices include altering caller ID information 
on outgoing calls to borrowers to make it appear that calls were from 
other businesses, falsely threatening to refer borrowers for criminal 
investigation or prosecution, and unlawful disclosures of debt 
information to borrowers' employers, friends, and family.\205\ In 
addition, approximately 20 percent of consumer complaints handled by 
the Bureau about vehicle title loans

[[Page 47883]]

involved consumers reporting concerns about repossession issues.\206\
---------------------------------------------------------------------------

    \202\ See also Pew, Auto Title Loans: Market Practices and 
Borrowers' Experience, at 13.
    \203\ Missouri sales of repossessed vehicles calculated from 
data linked to Walter Moskop, St. Louis Post-Dispatch, Title Max is 
thriving in Missouri--and repossessing thousands of cars in the 
process (Sept. 21, 2015), http://www.stltoday.com/business/local/titlemax-is-thriving-in-missouri-and-repossessing-thousands-of-cars/article_d8ea72b3-f687-5be4-8172-9d537ac94123.html.
    \204\ Bureau estimates based on publicly available financial 
statements by TMX Fin. LLC, 2012 Annual Report (Form 10-K), at 22, 
43.
    \205\ Bureau of Consumer Fin. Prot., CFPB Orders Relief for 
Illegal Debt Collection Tactics.
    \206\ This represents complaints received between November 2013 
and December 2015.
---------------------------------------------------------------------------

    Some vehicle title lenders have installed electronic devices on the 
vehicles, known as starter interrupt devices, automated collection 
technology, or more colloquially as ``kill switches,'' that can be 
programmed to transmit audible sounds in the vehicle before or at the 
payment due date. The devices may also be programmed to prevent the 
vehicle from starting when the borrower is in default on the loan, 
although they may allow a one-time re-start upon the borrower's call to 
obtain a code.\207\ One of the starter interrupt providers states that 
``[a]ssuming proper installation, the device will not shut off the 
vehicle while driving.''\208\ Due to concerns about consumer harm, one 
State financial regulator prohibited the devices as an unfair 
collection practice in all consumer financial transactions,\209\ and a 
State attorney general issued a consumer alert about the use of starter 
interrupt devices specific to vehicle title loans.\210\ The alert also 
noted that some title lenders require consumers to provide an extra key 
to their vehicles. In an attempt to avoid illegal repossessions, 
Wisconsin's vehicle title law prohibits lenders from requiring 
borrowers to provide the lender with an extra key to the vehicle.\211\ 
The Bureau has received several complaints about starter interrupt 
devices.
---------------------------------------------------------------------------

    \207\ See, e.g., Eric L. Johnson & Corinne Kirkendall, Starter 
Interrupt and GPS Devices: Best Practices, PassTime GPS (Jan. 14, 
2016), http://www.passtimegps.com/index.php/2016/01/14/starter-interrupt-and-gps-devices-best-practices/. These products may be 
used in conjunction with GPS devices and are also marketed for 
subprime automobile financing and insurance.
    \208\ Id.
    \209\ Paul Egide, Wisconsin Dep't of Fin. Instits., Starter 
Interrupter Devices, (Jan. 18, 2012), available at https://www.wdfi.org/_resources/indexed/site/wca/StarterInterrupterDevices.pdf.
    \210\ The alert also noted that vehicle title loans are illegal 
in Michigan. Michigan Attorney General Bill Schuette, Auto Title 
Loans Consumer Alert, http://www.michigan.gov/ag/0,4534,7-164-17337-
371738_,00.html (last visited Jan. 13, 2016).
    \211\ Wis. Stat. Sec.  138.16(4)(b).
---------------------------------------------------------------------------

    Business model. As noted above, short-term vehicle title lenders 
appear to have overhead costs relatively similar to those of storefront 
payday lenders. Vehicle title lenders' loss rates and reliance on 
reborrowing activity appear to be even greater than that of storefront 
payday lenders.
    Based on data analyzed by the Bureau, the default rate on single-
payment vehicle title loans is six percent and the sequence-level 
default rate is 33 percent, compared with a 20 percent sequence-level 
default rate for storefront payday loans. One-in-five single-payment 
vehicle title loan borrowers has their vehicle repossessed by the 
lender.\212\
---------------------------------------------------------------------------

    \212\ CFPB Single-Payment Vehicle Title Lending, at 23, and CFPB 
Report on Supplemental Findings, at ch. 5.
---------------------------------------------------------------------------

    Similarly, the rate of vehicle title reborrowing appears high. In 
the Bureau's data analysis, more than half, 56 percent, of single-
payment vehicle title loan sequences stretched for at least four loans; 
over a third, 36 percent, were seven or more loans; and 23 percent of 
loan sequences consisted of ten or more loans. While other sources on 
vehicle title lending are more limited than for payday lending, the 
Tennessee Department of Financial Institutions publishes a biennial 
report on vehicle title lending. Like the single-payment vehicle title 
loans the Bureau has analyzed, the vehicle title loans in Tennessee are 
30-day single-payment loans. The most recent report shows similar 
patterns to those the Bureau found in its research, with a substantial 
number of consumers rolling over their loans multiple times. According 
to the report, of the total number of loan agreements made in 2014, 
about 15 percent were paid in full after 30 days without rolling over. 
Of those loans that are rolled over, about 65 percent were at least in 
their fourth rollover, about 44 percent were at least in their seventh 
rollover, and about 29 percent were at least in their tenth, up to a 
maximum of 22 rollovers.\213\
---------------------------------------------------------------------------

    \213\ Tennessee Dep't of Fin. Institutions, 2016 Report on the 
Title Pledge Industry, at 8. In comparison, rollovers are prohibited 
on payday loans in Tennessee, see Tenn. Code Ann. Sec.  45-17-
112(q).
---------------------------------------------------------------------------

    The impact of these outcomes for consumers who are unable to repay 
and either default or reborrow is discussed in Market Concerns--Short-
Term Loans.
Bank Deposit Advance Products and Other Short-Term Lending
    As noted above, within the banking system, consumers with liquidity 
needs rely primarily on credit cards and overdraft services. Some 
institutions have experimented with short-term payday-like products or 
partnering with payday lenders, but such experiments have had mixed 
results and in several cases have prompted prudential regulators to 
take action discouraging certain types of activity.
    In 2000, the Office of the Comptroller of the Currency (OCC) issued 
an advisory letter alerting national banks that the OCC had significant 
safety and soundness, compliance, and consumer protection concerns with 
banks entering into contractual arrangements with vendors seeking to 
avoid certain State lending and consumer protection laws. The OCC noted 
it had learned of nonbank vendors approaching federally chartered banks 
urging them to enter into agreements to fund payday and title loans. 
The OCC also expressed concern about unlimited renewals (what the 
Bureau refers to as reborrowing), and multiple renewals without 
principal reduction.\214\ The agency subsequently took enforcement 
actions against two national banks for activities relating to payday 
lending partnerships.\215\
---------------------------------------------------------------------------

    \214\ Office of the Comptroller of the Currency, Advisory Letter 
AL 2000-10, Payday Lending (Nov. 27, 2000), available at http://www.occ.gov/static/news-issuances/memos-advisory-letters/2000/advisory-letter-2000-10.pdf.
    \215\ See OCC consent orders involving Peoples National Bank and 
First National Bank in Brookings. Press Release, OCC, NR 2003-06, 
Peoples National Bank to Pay $175,000 Civil Money Penalty And End 
Payday Lending Relationship with Advance America (Jan. 31, 2003), 
http://www.occ.gov/static/news-issuances/news-releases/2003/nr-occ-2003-6.pdf; First National Bank in Brookings, OCC Consent Order No. 
2003-1 (Jan. 17, 2003), available at http://www.occ.gov/static/enforcement-actions/ea2003-1.pdf.
---------------------------------------------------------------------------

    The Federal Deposit Insurance Corporation (FDIC) has also expressed 
concerns with similar agreements between payday lenders and the 
depositories under its purview. In 2003, the FDIC issued Guidelines for 
Payday Lending applicable to State-chartered FDIC-insured banks and 
savings associations; the guidelines were revised in 2005 and most 
recently in 2015. The guidelines focus on third-party relationships 
between the chartered institutions and other parties, and specifically 
address rollover limitations. They also indicate that banks should 
ensure borrowers exhibit both a willingness and ability to repay when 
rolling over a loan. Among other things, the guidelines indicate that 
institutions should: (1) ensure that payday loans are not provided to 
customers who had payday loans outstanding at any lender for a total of 
three months during the previous 12 months; (2) establish appropriate 
cooling-off periods between loans; and (3) provide that no more than 
one payday loan is outstanding with the bank at a time to any one 
borrower.\216\ In 2007, the FDIC issued guidelines encouraging banks to 
offer affordable small-dollar loan alternatives with APRs of 36 percent 
or less, reasonable and limited fees, amortizing payments, underwriting 
focused on a borrower's ability to repay but allowing flexible

[[Page 47884]]

documentation, and to avoid excessive renewals.\217\
---------------------------------------------------------------------------

    \216\ FDIC Financial Institution Letters, Guidelines for Payday 
Lending, Fed. Deposit Ins. Corp. (Revised Nov. 2015), https://www.fdic.gov/news/news/financial/2005/fil1405a.html.
    \217\ Financial Institution Letters, Affordable Small-Dollar 
Loan Products, Final Guidelines FIL 50-2007 (June 19, 2007), https://www.fdic.gov/news/news/financial/2007/fil07050.html.
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    The NCUA has taken some steps to encourage federally chartered 
credit unions to offer ``payday alternative loans,'' which generally 
have a longer term than traditional payday products. This program is 
discussed in more detail in part II.C.
    As the payday lending industry grew, a handful of banks decided to 
offer their deposit customers a similar product termed a deposit 
advance product (DAP). While one bank started offering deposit advances 
in the mid-1990s, the product began to spread more rapidly in the late 
2000s and early 2010s. DAP could be structured a number of ways but 
generally involved a line of credit offered by depository institutions 
as a feature of an existing consumer deposit account with repayment 
automatically deducted from the consumer's next qualifying deposit. 
Deposit advance products were available to consumers who received 
recurring electronic deposits if they had an account in good standing 
and, for some banks, several months of account tenure, such as six 
months. When an advance was requested, funds were deposited into the 
consumer's account. Advances were automatically repaid when the next 
qualifying electronic deposit, whether recurring or one-time, was made 
to the consumer's account rather than on a fixed repayment date. If an 
outstanding advance was not fully repaid by an incoming electronic 
deposit within about 35 days, the consumer's account was debited for 
the amount due and could result in a negative balance on the account.
    The Bureau estimates that at the product's peak from mid-2013 to 
mid-2014, banks originated roughly $6.5 billion of advances, which 
represents about 22 percent of the volume of storefront payday loans 
issued in 2013. The Bureau estimates that at least 1.5 million unique 
borrowers took out one or more DAP loans during that same time 
period.\218\
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    \218\ CFPB staff analysis based on confidential information 
gathered in the course of statutory functions. Estimates made by 
summing aggregated data across a number of DAP-issuing institutions. 
For payday industry size, see, John Hecht, Alternative Financial 
Services, at 7.
---------------------------------------------------------------------------

    DAP fees, like payday loan fees, did not vary with the amount of 
time that the advance was outstanding but rather were set as dollars 
per amount advanced. A typical fee was $2 per $20 borrowed, the 
equivalent of $10 per $100. Research undertaken by the Bureau using a 
supervisory dataset found that the median duration for a DAP advance 
was 12 days, yielding an effective APR of 304 percent.\219\
---------------------------------------------------------------------------

    \219\ CFPB Payday Loans and Deposit Advance Products White 
Paper, at 27-28.
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    The Bureau further found that while the average draw on a DAP was 
$180, users typically took more than one draw before the advance was 
repaid. The multiple draws resulted in a median average daily DAP 
balance of $343, which is similar to the size of a typical payday loan. 
With the typical DAP fee of $2 per $20 advanced, the fees for $343 in 
advances equate to about $34.30. The median DAP user was indebted for 
112 days over the course of a year and took advances in seven months. 
Fourteen percent of borrowers took advances totaling over $9,000 over 
the course of the year; these borrowers had a median number of days in 
debt of 254.\220\
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    \220\ Id. at 33 fig. 11, 37 fig. 14.
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    In 2010, the Office of Thrift Supervision (OTS) issued a 
supervisory directive ordering one bank to terminate its DAP program, 
which the bank offered in connection with prepaid accounts, after 
determining the bank engaged in unfair or deceptive acts or practices 
and violated the OTS' Advertising Regulation.\221\ Consequently, in 
2011, pursuant to a cease and desist order, the bank agreed to 
remunerate its DAP consumers nearly $5 million and pay a civil monetary 
penalty of $400,000.\222\
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    \221\ Meta Fin. Grp., Inc., 2010 Annual Report (Form 10-K), at 
59 (Dec. 13, 2010) (FY 2010), available at https://www.sec.gov/Archives/edgar/data/907471/000110465910062243/a10-22477_110k.htm.
    \222\ Meta Fin. Grp., Inc., Quarter Report (Form 10-Q) at 31 
(Aug. 5, 2011), available at https://www.sec.gov/Archives/edgar/data/907471/000114036111039958/form10q.htm. The OTS was merged with 
the OCC effective July 21, 2011. See OTS Integration, OCC, http://www.occ.treas.gov/about/who-we-are/occ-for-you/bankers/ots-integration.html (last visited Apr. 27, 2016).
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    In November 2013, the FDIC and OCC issued final supervisory 
guidance on DAP.\223\ This guidance stated that banks offering DAP 
should adjust their programs in a number of ways, including applying 
more scrutiny in underwriting DAP loans and discouraging repetitive 
borrowing. Specifically, the OCC and FDIC stated that banks should 
ensure that the customer relationship is of sufficient duration to 
provide the bank with adequate information regarding the customer's 
recurring deposits and expenses, and that the agencies would consider 
sufficient duration to be no less than six months. In addition, the 
guidance said that banks should conduct a more stringent financial 
capacity assessment of a consumer's ability to repay the DAP advance 
according to its terms without repeated reborrowing, while meeting 
typical recurring and other necessary expenses as well as outstanding 
debt obligations. In particular, the guidance stated that banks should 
analyze a consumer's account for recurring inflows and outflows at the 
end, at least, of each of the preceding six months before determining 
the appropriateness of a DAP advance. Additionally, the guidance noted 
that in order to avoid reborrowing, a cooling-off period of at least 
one monthly statement cycle after the repayment of a DAP advance should 
be completed before another advance could be extended. Finally, the 
guidance stated that banks should not increase DAP limits automatically 
and without a fully underwritten reassessment of a consumer's ability 
to repay, and banks should reevaluate a consumer's eligibility and 
capacity for DAP at least every six months.\224\
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    \223\ OCC, Guidance on Supervisory Concerns and Expectations 
Regarding Deposit Advance Products, 78 FR 70624 (Nov. 26, 2013), 
available at http://www.occ.treas.gov/news-issuances/federal-register/78fr70624.pdf; Fed. Deposit Ins. Corp. Guidance on 
Supervisory Concerns and Expectations Regarding Deposit Advance 
Products, 78 FR 70552 (Nov. 26, 2013), available at http://www.gpo.gov/fdsys/pkg/FR-2013-11-26/pdf/2013-28306.pdf.
    \224\ Office of the Comptroller of the Currency Guidance on 
Supervisory Concerns and Expectations Regarding Deposit Advance 
Products, Federal Register, 78 FR 70624 (Nov. 26, 2013), available 
at http://www.occ.treas.gov/news-issuances/federal-register/78fr70624.pdf; Fed. Deposit Ins. Corp. Guidance on Supervisory 
Concerns and Expectations Regarding Deposit Advance Products, 78 FR 
70552, 70556-70557 (Nov. 26, 2013), available at http://www.gpo.gov/fdsys/pkg/FR-2013-11-26/pdf/2013-28306.pdf.
---------------------------------------------------------------------------

    Following the issuance of the FDIC and OCC guidance, banks 
supervised by the FDIC and OCC ceased offering DAP. Of two DAP-issuing 
banks supervised by the Board of Governors of the Federal Reserve 
System (Federal Reserve Board) and therefore not subject to either the 
FDIC or OCC guidance, one eliminated its DAP program while another 
continues to offer a modified version of DAP to its existing DAP 
borrowers.\225\ Today, with the exception of some short-term lending 
within the NCUA's Payday Alternative Loan program, described below in 
part II.C, relatively

[[Page 47885]]

few banks or credit unions offer large-scale formal loan programs of 
this type.
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    \225\ Products and Services, Fifth Third Bank, https://www.53.com/site/personal-banking/account-management-services/early-access.html (last visited Apr. 27, 2016). The Federal Reserve issued 
a statement to its member banks on DAP, ``Statement on Deposit 
Advance Products,'' (Apr. 25, 2013), available at http://www.federalreserve.gov/bankinforeg/caletters/CALetter13-07.pdf.
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C. Longer-Term, High-Cost Loans

    As discussed above, beginning in the 1990s, a number of States 
created carve-outs from their usury laws to permit single-payment 
payday loans at annualized rates of between 300 percent and 400 
percent. Although this lending initially focused primarily on loans 
lasting for a single income cycle, lenders have introduced newer, 
longer forms of liquidity loans over time. These longer loan forms 
include the ``hybrid payday loans'' discussed above, which are high-
cost loans where the consumer is automatically scheduled to make a 
number of interest or fee only payments followed by a balloon payment 
of the entire amount of the principal and any remaining fees. They also 
include ``payday installment loans,'' described in more detail below. 
In addition, as discussed above, a number of States have authorized 
longer term vehicle title loans that extend beyond 30 days. Some 
longer-term, high cost installment loans likely were developed in 
response to the Department of Defense's 2007 rules implementing the 
Military Lending Act. As discussed above in part II.B, those rules 
applied to payday loans of 91 days or less (with an amount financed of 
$2,000 or less) and to vehicle title loans of 180 days of less. The 
Department of Defense recently expanded the scope of the rules due to 
its belief that creditors were structuring products to avoid the MLA's 
application.\226\
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    \226\ 80 FR 43560, 43567 n.78 (July 22, 2015).
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Payday Installment Loans
    Product definition and regulatory environment. The term ``payday 
installment loan'' refers to a high-cost loan repaid in multiple 
installments, with each installment typically due at the consumer's 
payday and with the lender generally having the ability to collect the 
payment from the consumer's bank account as money is deposited or 
directly from the consumer's paycheck.\227\
---------------------------------------------------------------------------

    \227\ Lenders described in part II.C as payday installment 
lenders may not use this terminology.
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    Two States, Colorado and Illinois, have authorized payday 
installment loans. A number of other States have adopted usury laws 
that payday lenders use to offer payday installment loans in addition 
to more traditional payday loans. For example, a recent report found 
that eight States have no rate or fee limits for closed-end loans of 
$500 and that 11 States have no rate or fee limits for closed-end loans 
of $2,000.\228\ The same report noted that for open-end credit, 14 
States do not limit rates for a $500 advance and 16 States do limit 
them for a $2,000 advance.\229\ Another recent study of the Web sites 
of five payday lenders, that operate both online and at storefront 
locations, found that these five lenders offered payday installment 
loans in at least 17 States.\230\
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    \228\ Nat'l. Consumer Law Ctr., Installment Loans, Will States 
Protect Borrowers From A New Wave Of Predatory Lending?, at v-vi 
(2015), available at http://www.nclc.org/images/pdf/pr-reports/report-installment-loans.pdf. Roughly half of the States with no set 
limits do prohibit unconscionable interest rates.
    \229\ Id., at vi.
    \230\ Diane Standaert, Ctr. for Responsible Lending, Payday and 
Car Title Lenders' Migration to Unsafe Installment Loans, at 7 tbl.1 
(2015), available at http://www.responsiblelending.org/other-consumer-loans/car-title-loans/research-analysis/crl_brief_cartitle_lenders_migrate_to_installmentloans.pdf. CRL 
surveyed the Web sites for: Cash America, Enova International (dba 
CashNetUSA and dba NetCredit), Axcess Financial (dba Check `N Go), 
and ACE Cash Express (see Standaert at 10 n.52).
---------------------------------------------------------------------------

    In addition, as discussed above, a substantial segment of the 
online payday industry operates outside of the constraints of State 
law, and this segment, too, has migrated towards payday installment 
loans. For example, a study commissioned by a trade association for 
online lenders surveyed seven lenders and concluded that, while single-
payment loans are still a significant portion of these lenders' volume, 
they are on the decline while installment loans are growing. Several of 
the lenders represented in the report had either eliminated single-
payment products or were migrating to installment products while still 
offering single-payment loans.\231\
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    \231\ Michael Flores, Bretton-Woods, Inc., The State of Online 
Short-Term Lending, Second Annual Statistical Analysis Report at 4, 
available at http://onlinelendersalliance.org/wp-content/uploads/2015/07/2015-Bretton-Woods-Online-Lending-Study-FINAL.pdf. The 
report does not address the State licensing status of the study 
participants but based on its market outreach activities, the Bureau 
believes that some of the loans included in the study were not made 
subject to the licensing laws of the borrowers' States of residence. 
See also nonPrime101, Report 1, at 9, 11.
---------------------------------------------------------------------------

    There is less public information available about payday installment 
loans than about single-payment payday loans. Publicly traded payday 
lenders that make both single-payment and installment loans often 
report all loans in aggregate and do not report separately on their 
installment loan products or do not separate their domestic installment 
loan products from their international installment loan product lines, 
making sizing the market difficult. However, one analyst suggests that 
the continuing trend is for installment loans to take market share--
both volume and revenue--away from single-payment payday loans.\232\
---------------------------------------------------------------------------

    \232\ Hecht, Alternative Financial Services, at 9.
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    More specifically, data on payday installment lending is available, 
however, from the two States that expressly authorize it. Through 2010 
amendments to its payday loan law, Colorado no longer permits short-
term single-payment payday loans. Instead, in order to charge fees in 
excess of the 36 percent APR cap for most other consumer loans, the 
minimum loan term must be six months.\233\ The maximum payday loan 
amount remains capped at $500, and lenders are permitted to take a 
series of post-dated checks or payment authorizations to cover each 
payment under the loan, providing lenders with the same access to 
borrower's accounts as a single-payment payday loan. The average payday 
installment loan amount borrowed in Colorado in 2014 was $392 and the 
average contractual loan term was 189 days. The average APR on these 
payday installment loans was 190 percent, which reflects the fact that 
at the same time that Colorado mandated minimum six-month terms it also 
imposed a new set of pricing restrictions on these loans.\234\ 
Borrowers may prepay without a penalty and receive a pro-rata refund of 
all fees paid. According to loan data from Colorado, the average actual 
loan term was 94 days, resulting in an effective APR of 121 
percent.\235\
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    \233\ Colo. Rev. Stat. Sec.  5-3.1-103. Although loans may be 
structured in multiple installments of substantially equal payments 
or a single installment, almost all lenders contract for repayment 
in monthly or bi-weekly installments. 4 Colo. Code Regs. Sec.  902-
1, Rule 17(B)1, available at http://www.sos.state.co.us/CCR/GenerateRulePdf.do?ruleVersionId=3842; Adm'r of the Colo. Unif. 
Consumer Credit Code, Colorado Payday Lending July 2000 Through 
December 2012, at 15-16.
    \234\ The 2010 amendments also established a complex pricing 
formula with an origination fee averaging $15 per $100 borrowed, a 
maximum 45 percent interest rate, and up to $30 per month as a 
maintenance fee after the first month. Colo. Rev. Stat. Sec.  5-3.1-
105.
    \235\ State of Colo. Dep't of Law, 2014 Deferred Deposit/Payday 
Lenders Annual Report, at 2, available at http://www.coloradoattorneygeneral.gov/sites/default/files/contentuploads/cp/ConsumerCreditUnit/UCCC/2014_ddl_ar_composite.pdf.
---------------------------------------------------------------------------

    In Illinois, lenders have been permitted to make payday installment 
loans since 2011 for terms of 112 to 180 days and amounts up to the 
lesser of $1,000 or 22.5 percent of gross monthly income.\236\ A 
consumer may take out two loans concurrently (single-payment payday, 
payday installment, or a combination thereof) so long as the total 
amount borrowed does not exceed the cap. The maximum permitted charge 
on Illinois payday installment loans is $15.50 per $100 on the initial 
principal

[[Page 47886]]

balance and on the balance scheduled to be outstanding at each 
installment period. For 2013, the average payday installment loan 
amount was $634 to be repaid in 163 days along with total fees of $645. 
The average APR on Illinois payday installment loans was 228 
percent.\237\
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    \236\ 815 Ill. Comp. Stat. 122/2-5.
    \237\ Ill. Dep't. of Fin. & Prof. Reg., Illinois Trends Report 
Through December 2013, at 4-8, 22-25.
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    In Illinois, payday installment loans have grown rapidly. In 2013, 
the volume of payday installment loans made was 113 percent of the 2011 
volume. From 2010 to 2013, however, the volume of single-payment payday 
loans decreased by 21 percent.\238\
---------------------------------------------------------------------------

    \238\ Id., at 20.
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    Beyond the data from these two States, several studies shed 
additional light on payday installment lending. A research paper based 
on a dataset from several payday installment lenders, consisting of 
over 1.02 million loans made between January 2012 and September 2013, 
provides some information on payday installment loans.\239\ It contains 
data from both storefront installment loans (55 percent) and online 
installment loans (45 percent). It found that the median loan amount 
borrowed was $900 for six months (181 days) with 12 bi-weekly 
installment payments coinciding with paydays. The median APR on these 
loans was 295 percent. Online borrowers had higher median gross incomes 
than storefront borrowers ($39,000 compared to $31,000). When the 
researchers included additional loans they described as being made 
under ``alternative business models, such as loans extended under 
tribal jurisdiction,'' the median loan amount borrowed was $800 for 187 
days due in 12 installments at a higher median APR of 319 percent.\240\
---------------------------------------------------------------------------

    \239\ Howard Beales & Anand Goel, Small Dollar Installment 
Loans: An Empirical Analysis, at 9 (2015), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2581667.
    \240\ Id., at 11, 14, 15.
---------------------------------------------------------------------------

    Similarly, a report using data from a specialty consumer reporting 
agency that included data primarily from online payday lenders that 
claim exemption from State lending laws examined the pricing and 
structure of their installment loans.\241\ From 2010 to 2014, loans 
that may be described as payday installment loans generally accounted 
for one-third of all loans in the sample; however, this fluctuated by 
quarter between approximately 10 and 50 percent.\242\ The payday 
installment loans had a median APR of 335 percent, across all payment 
structures. The most common payday installment loan in the sample had 
12 bi-weekly payments; a median size of $500 and a median APR of 348 
percent.
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    \241\ nonPrime 101, Report 5: Loan Product Structures and 
Pricing in Internet Installment Lending.
    \242\ The other loan types in the sample were hybrid payday 
loans (described above in part II.B), which made up approximately 
one-third of the loans, traditional single-payment payday loans, 
also one-third of the loans, and non-amortizing payday installment 
loans, which made up a negligible percentage of loans in the 
dataset. Id. at 7.
---------------------------------------------------------------------------

    A third study commissioned by an online lender trade association 
surveyed a number of online lenders. The survey found that the average 
payday installment loan was for $667 with an average term of five 
months. The average fees for these loans were $690. The survey did not 
provide any APRs but the Bureau estimates that the average APR for a 
loan with these terms (and bi-weekly payments, the most common payment 
frequency seen) is about 373 percent.\243\
---------------------------------------------------------------------------

    \243\ Flores, State of Online Short-Term Lending, Second Annual 
Statistical Analysis, at 3-4.
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    In a few States, such as Virginia discussed above in part II.B, and 
Kansas,\244\ lenders offer loans structured as open-end payday 
installment loans. The Bureau believes based on market outreach, that 
lenders utilize open-end credit structures where they view State 
licensing or lending provisions as more favorable for open-end 
products. Some open-end products are for similar loan amounts as 
single-payment payday loans, cash advances are restricted to set 
increments such as $50 and must be requested in person, by calling the 
lender, or visiting the lender's Web site, and payments under the open-
end line of credit are due on the borrower's scheduled paydays.
---------------------------------------------------------------------------

    \244\ See, e.g., QC Holdings, Inc., 2015 Annual Report (Form 10-
K), at 9.
---------------------------------------------------------------------------

    Marketing and underwriting practices. The Bureau believes based on 
market outreach, that some lenders use similar underwriting practices 
for both single-payment and payday installment loans (borrower 
identification, and information about income and a bank account) so 
long as they have access to the borrower's bank account for repayment. 
Some payday installment lenders, particularly but not exclusively 
online lenders, may use underwriting technology that pulls data from 
nationwide consumer reporting agencies and commercial or proprietary 
credit scoring models based on alternative data to assess fraud and 
credit risk.\245\ In 2014, net charge-offs at two of the large licensed 
online installment lenders were over 50 percent of average 
balances.\246\
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    \245\ For example, use of risk assessment and national 
databases. Payday Loans/Cash Advance, Advance America, https://www.advanceamerica.net/locations/details/store-4500/2828-S-17th-Ave-Unit-B/Broadview/IL/60155 (last visited March 10, 2016). For 
example, obtain credit report from a national consumer reporting 
agency. Check'nGo, http://checkngoloans.com/default (last visited 
March 10, 2016).
    \246\ Bureau staff calculation of ratio of net charged off loans 
(gross charge-offs less recoveries) to average loan balances 
(average of beginning and end of year receivables) of the same loan 
type based on Forms 10-K (Enova) and S-1 (Elevate) public documents. 
Elevate's public documents do not separate domestic from 
international operations, or installment loans from lines of credit. 
Enova does not separate domestic from international operations in 
its public documents. Elevate Credit Inc., Registration Statement 
(Form S-1), at 12 (Nov. 9, 2015), available at https://www.sec.gov/Archives/edgar/data/1651094/000119312515371673/d83122ds1.htm. This 
figure includes costs for lines of credit as well and also includes 
costs for its business in the United Kingdom. Enova Int'l Inc., 2014 
Annual Report (Form, 10-K), at 49, 95 (Mar. 20, 2015), available at 
https://www.sec.gov/Archives/edgar/data/1529864/000156459015001871/enva-10k_20141231.htm. This figure includes both domestic and 
international short-term loans.
---------------------------------------------------------------------------

    The Bureau likewise believes that the customer acquisition costs 
for online payday installment loans are likely similar to the costs to 
acquire a customer for an online single-payment payday loan. For 
example, one large licensed online payday installment lender reported 
that its 2014 customer acquisition cost per new loan was $297.\247\ 
Another large online lender with both single-payment and payday 
installment loans reported that its marketing expense is 15.8 percent 
of revenue in 2014.\248\
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    \247\ Elevate Credit Inc., Registration Statement (Form S-1), at 
12 (Nov. 9, 2015), available at https://www.sec.gov/Archives/edgar/data/1651094/000119312515371673/d83122ds1.htm. This figure includes 
costs for lines of credit as well and also includes costs for its 
business in the United Kingdom.
    \248\ Enova Int'l Inc., 2015 Annual Report (Form, 10-K), at 50 
(Mar. 7, 2016), available at https://www.sec.gov/Archives/edgar/data/1529864/000156459016014129/enva-10k_20151231.htm.
---------------------------------------------------------------------------

    Business model. In many respects, payday installment loans are 
similar to single-payment payday loans. However, one obvious difference 
is that the loan agreements provide for repayment in installments, 
rather than single-payment loans that may be rolled over or hybrid 
loans that automatically rollover, described above in part II.B above.
    Regulatory reports from Colorado and Illinois provide evidence of 
repeat borrowing on payday installment loans. In Colorado, in 2012, two 
years after the State's amendments to its payday lending law, 36.7 
percent of new loans were taken out on the same day that a previous 
loan was paid off, an increase from the prior year; for larger loans, 
nearly 50 percent were taken out on the same day that a previous loan 
was

[[Page 47887]]

repaid.\249\ Further, despite a statutorily-required minimum loan term 
of six months, on average, consumers took out 2.9 loans from the same 
lender during 2012 (by prepaying before the end of the loan term and 
then reborrowing).\250\ Colorado's regulatory reports demonstrate that 
in 2013, the number of loan defaults on payday installment loans, 
calculated as a percent of the total number of borrowers, was 38 
percent but increased in 2014 to 44 percent.\251\
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    \249\ Colorado UCCC 2000-2012 Demographic and Statistical 
Information, at 25.
    \250\ Id. at 15, 18.
    \251\ State of Colo. Dep't of Law, 2014 Deferred Deposit/Payday 
Lenders Annual Report; http://www.coloradoattorneygeneral.gov/sites/default/files/contentuploads/cp/ConsumerCreditUnit/UCCC/2014_ddl_ar_composite.pdf; The Pew Charitable Trusts, Trial, Error, 
and Success in Colorado's Payday Lending Reforms, at 6 (2014), 
available at http://www.pewtrusts.org/~/media/assets/2014/12/
pew_co_payday_law_comparison_dec2014.pdf,
---------------------------------------------------------------------------

    One feature of Illinois' database is that it tracks applications 
declined due to ineligibility. In 2013, of those payday installment 
loan applications declined, 54 percent were declined because the 
applicants would have exceeded the permissible six months of 
consecutive days in debt and 29 percent were declined as they would 
have violated the prohibition on more than two concurrently open 
loans.\252\
---------------------------------------------------------------------------

    \252\ Ill. Dep't. of Fin. & Prof. Reg., Illinois Trends 2013 
Report, at 24.
---------------------------------------------------------------------------

    In a study of high-cost unsecured installment loans, the Bureau has 
found that 37 percent of these loans are refinanced. For a subset of 
loans made at storefront locations, 94 percent of refinances involved 
cash out (meaning the consumer received cash from the loan refinance); 
for a subset of loans made online, nearly 100 percent of refinanced 
loans involved cash out. At the loan level, for unsecured installment 
loans in general, 24 percent resulted in default; for those made at 
storefront locations, 17 percent defaulted, compared to a 41 percent 
default rate for online loans.\253\
---------------------------------------------------------------------------

    \253\ CFPB Report on Supplemental Findings, at ch. 1.
---------------------------------------------------------------------------

    A report based on data from several payday installment lenders was 
generally consistent. It found that nearly 34 percent of these payday 
installment loans ended in charge-off. Charge-offs were more common for 
loans in the sample that had been made online (42 percent) compared to 
those made at storefront locations (27 percent).\254\
---------------------------------------------------------------------------

    \254\ Beales & Goel, at 24-25. These figures refer to data from 
the authors' main sample, which excludes loans made under 
``alternative business models, such as loans extended under tribal 
jurisdiction.''
---------------------------------------------------------------------------

Installment Vehicle Title Loans
    Product definition and regulatory environment. Installment vehicle 
title loans are vehicle title loans that are contracted to be repaid in 
multiple installments rather than in a single payment. Operationally, 
they are similar to single-payment vehicle title loans that are rolled 
over and discussed above in part II.B. As discussed in that section, 
about half of the States authorizing vehicle title loans permit the 
loans to be repaid in installments rather than, or in addition to, a 
single lump sum.\255\
---------------------------------------------------------------------------

    \255\ Pew, Auto Title Loans: Market Practices and Borrowers' 
Experience, at 4.
---------------------------------------------------------------------------

    As with single-payment vehicle title loans, the State laws 
applicable to installment vehicle title loans vary. Illinois requires 
vehicle title loans to be repaid in equal installments, limits the 
maximum loan amount to the lesser of $4,000 or 50 percent of the 
borrower's monthly income, has a 15-day cooling-off period except for 
refinances (defined as extensions or renewals) but does not limit fees. 
A refinance may be made only when the original principal of the loan is 
reduced by at least 20 percent.\256\ Texas limits the loan term for 
CSO-arranged title loans to 180 days but does not cap fees.\257\ 
Virginia has both a minimum loan term (120 days) and a maximum loan 
term (12 months) and caps fees at between 15 to 22 percent of the loan 
amount per month.\258\ It also prohibits rollovers. Wisconsin limits 
the original loan term to six months but does not limit fees other than 
default charges, which are limited to 2.75 percent per month; it caps 
the maximum loan amount at $25,000.\259\ Rollovers are not permitted on 
Wisconsin installment loans.
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    \256\ Ill. Admin. Code, tit. 38, Sec.  110.370.
    \257\ Tex. Fin. Code Ann. Sec.  393.221 to 393.224.
    \258\ VA. Code Sec. Sec.  6.2-2215, 6.2.2216. As noted above in 
part II.B, Virginia has no interest rate regulations or licensure 
requirements for open-end credit.
    \259\ Wis. Stat. Sec.  138.16(2)(b)(2).
---------------------------------------------------------------------------

    Some States do not specify loan terms for vehicle title loans, 
thereby authorizing both single-payment and installment title loans. 
These States include Arizona, New Mexico, and Utah. Arizona limits fees 
to between 10 and 17 percent per month depending on the loan amount; 
fees do not vary by loan duration.\260\ New Mexico and Utah do not 
limit fees for vehicle title loans, regardless of the loan term.\261\ 
Delaware has no limit on fees but limits the term to 180 days, 
including rollovers, likewise authorizing either 30-day loans or 
installment loans.\262\
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    \260\ Ariz. Rev. Stat Sec.  44-281 and Sec.  44-291.
    \261\ N.M. Stat. Sec. Sec.  58-15-1 to 30; Utah Code Sec.  7-24-
101 through 305.
    \262\ Del. Code ANN. tit. 5, Sec. Sec.  2250, 2254.
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    State regulator data from two States track loan amounts, APRs, and 
loan terms for installment vehicle title loans. Illinois reported that 
in 2013, the average installment vehicle title loan amount was over 
$950 to be repaid in 442.7 days along with total fees of $2,316.43, and 
the average APR was 201 percent.\263\ Virginia data show similar 
results. In 2014, the average amount borrowed on vehicle title loans 
was $1,048. The average APR was 222 percent and the average loan term 
was 345 days.\264\ For a $1,048 loan, a Virginia title lender could 
charge interest of about $216.64 per month, or $2,491.36 for 345 
days.\265\ The average installment vehicle title loan amounts borrowed 
are similar to the amounts borrowed in single-payment title loan 
transactions; the average APRs are generally lower due to the longer 
loan term, described above in part II.B.
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    \263\ Ill. Dep't. of Fin. & Prof. Reg., Illinois Trends Report 
Through December 2013, at 28.
    \264\ Va. State Corp. Comm'n, The 2014 Annual Report, at 71.
    \265\ A licensed vehicle title lender may charge 22 percent per 
month on the principal up to $700, 18 percent per month on amounts 
over $700 to $1,400, and 15 percent per month on amount that exceed 
$1,400. VA Code Sec.  6.2-2216.
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    The Bureau obtained anonymized multi-year data from seven lenders 
offering either or both vehicle title and payday installment loans. The 
vehicle title installment loan data are from 2010 through 2013; the 
payday installment data are from 2007 through 2014. The Bureau reported 
that the average vehicle title installment loan amount was $1,098 and 
the median loan amount was $710; the average was 14 percent higher, and 
the median was two percent higher, than for single-payment vehicle 
title loans. The average APR was 250 percent and the median 259 percent 
compared to 291 percent and 317 percent for single-payment vehicle 
title loans.
    Industry size and structure. The three largest vehicle title 
lenders, as defined by store count and described above in part II.B, 
make both single-payment and installment vehicle title loans, depending 
on the requirements and authority of State laws. As discussed above, 
there are no publicly traded vehicle title lenders (though some of the 
publicly-traded payday lenders also make vehicle title loans) and the 
one formerly public company did not distinguish its single-payment 
title loans from its installment title loans in its financial reports. 
Consequently, estimates of vehicle title loan market size include both 
single-payment and

[[Page 47888]]

installment vehicle title loans, including the estimates provided above 
in part II.B, above.
    Marketing and underwriting practices. In most respects, installment 
vehicle title loans are similar to single-payment vehicle title loans 
in marketing, borrower demographics, underwriting, and collections. For 
example, the Bureau is aware from market outreach and market monitoring 
activities that some installment vehicle title lenders require proof of 
income as part of the application process for installment vehicle title 
loans,\266\ while others do not. Some installment vehicle title loans 
are set up to include repayment by ACH from the borrower's account, a 
practice common to payday installment loans. The Bureau has reviewed 
some installment vehicle title lenders' loan agreements that provide 
for delinquency fees if a payment is late.
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    \266\ Advance America requires proof of income for installment 
title loans in Illinois. Payday Loans/Cash Advance, Advance America, 
https://www.advanceamerica.net/locations/details/store-4500/2828-S-17th-Ave-Unit-B/Broadview/IL/60155 (last visited March 10, 2016).
---------------------------------------------------------------------------

    Business model. Installment vehicle title loans generally perform 
in a manner similar to single-payment vehicle title loans. One study 
has analyzed data on repeat borrowing in installment vehicle title 
loans. The study found that in Q4 2014 in Texas, over 20 percent of 
installment vehicle title loans were refinanced in the same quarter the 
loan was made, and that during 2014 as a whole, the dollar volume of 
vehicle title loans refinanced almost equaled the volume of these loans 
originated.\267\ More recent Texas regulator data indicates similar 
findings. Of the installment vehicle title loans originated in 2015, 39 
percent were subsequently refinanced in the same year, and of all 
refinances of installment vehicle title loans in 2015, regardless of 
year of origination, 17 percent were refinanced five or more 
times.\268\
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    \267\ Diane Standaert, Ctr. for Responsible Lending, Payday and 
Car Title Lenders' Migration, at 2-3.
    \268\ Texas Office of Consumer Credit Commissioner, Credit 
Access Business (CAB) Annual Data Report, CY 2015 (Apr. 20, 2016), 
available at http://occc.texas.gov/sites/default/files/uploads/reports/cab-annual-2015.pdf
---------------------------------------------------------------------------

    The Bureau has also analyzed installment vehicle lending data. The 
Bureau found that 20 percent of vehicle title installment loans were 
refinanced, with about 96 percent of refinances involving cash out. The 
median cash-out amount was $450, about 35 percent of the new loan's 
principal. At the loan level, 22 percent of installment vehicle title 
loans resulted in default and 8 percent in repossession; at the loan 
sequence level, 31 percent resulted in default and 11 percent in 
repossession.\269\
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    \269\ CFPB Report on Supplemental Findings, at ch. 1.
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Other Nonbank Installment Loans
    Product definition and regulatory environment. Before the advent of 
single-payment payday loans or online lending, and before widespread 
availability of credit cards, liquidity loans--also known as ``personal 
loans'' or ``personal installment loans''--were offered by storefront 
nonbank installment lenders, often referred to as ``finance 
companies.'' ``Personal loans'' are typically unsecured loans used for 
any variety of purposes and distinguished from loans where the lender 
generally requires the funds be used for the specific intended purpose, 
such as automobile purchase loans, student loans, and mortgage loans. 
As discussed below, these finance companies, and their newer online 
counterparts (that offer similar loan products but place more reliance 
on automated processes and innovative underwriting), have a different 
business model than payday installment lenders and vehicle title 
installment lenders. Nonetheless, some loans offered by these 
installment lenders fall within the proposal's definition of ``covered 
longer-term loan,'' as they are made at interest rates that exceed 36 
percent or include fees that result in a total cost of credit that 
exceeds 36 percent, and include repayment by access to the borrower's 
account or include a non-purchase money security interest in a 
consumer's vehicle. Additional information regarding the market for 
these finance company loans and their online counterparts is described 
below.
    According to a report from a consulting firm using data derived 
from a nationwide consumer reporting agency, in 2015, finance companies 
originated 8.2 million personal loans (unsecured installment loans) 
totaling $37.6 billion in originations, of which approximately 6.8 
million loans worth $24.3 billion were made to nonprime consumers 
(categorized as near prime, subprime, and deep subprime, with 
VantageScores of 660 and below), with an average loan size of about 
$3,593.\270\ As of the end of 2015 there were 7.1 million outstanding 
loans worth $29.2 billion to nonprime consumers. These nonprime 
consumers accounted for 71 percent of outstanding accounts and 59 
percent of outstanding balances, with an average balance outstanding of 
about $4,113. Subprime and deep subprime consumers, those with scores 
between 300 and 600 represented 41 percent of the borrowers and 28 
percent of outstanding balances with an average balance of 
approximately $3,380.\271\
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    \270\ Experian & Oliver Wyman, 2015 Q4 Market Intelligence 
Report: Personal Loans Report, at 11-13 figs. 9, 10, 12, & 13 
(2016), available at http://www.marketintelligencereports.com; 
Experian & Oliver Wyman, 2015 Q3 Market Intelligence Report: 
Personal Loans Report, at 11-13 figs. 9, 10, 12 & 13 (2015), 
available at http://www.marketintelligencereports.com; Experian & 
Oliver Wyman, 2015 Q2 Market Intelligence Report: Personal Loans 
Report, at 11-13 figs. 9, 10, 12, & 13 (2015), available at http://www.marketintelligencereports.com; Experian & Oliver Wyman, 2015 Q1 
Market Intelligence Report: Personal Loans Report, at 11-13 figs. 9, 
10, 12, & 13 (2015), available at http://www.marketintelligencereports.com. These finance company personal 
loans are not segmented by cost and likely include some loans with a 
total cost of credit of 36 percent APR or less that would not be 
covered by the Bureau's proposed rule as described below in proposed 
Sec.  1041.2(a)(18).
    \271\ Experian & Oliver Wyman, 2015 Q4 Market Intelligence 
Report: Personal Loans Report at 20-22 figs. 27, 28, 30, & 31. In 
contrast, 29 percent of the loans and 41 percent of the loan volume 
were made to consumers with prime or superprime credit scores 
(VantageScore 3.0 of 661 or above). These loans likely have a total 
cost of credit of 36 percent APR or less and would not be covered by 
the Bureau's proposed rule.
---------------------------------------------------------------------------

    APRs at storefront locations in States that do not cap rates on 
installment loans can be 50 to 90 percent for subprime and deep 
subprime borrowers; APRs in States with rate caps are about 36 percent 
APR for near prime and subprime borrowers.\272\ A survey of finance 
companies conducted in conjunction with a national trade association 
reported that 80 percent of loans were for $2,000 or less and 85 
percent of loans had durations of 24 months or less (60 percent of 
loans had durations of one year or less).\273\ No average loan amount 
was stated. Almost half of the loans had APRs between 49 and 99 
percent; 9 percent of loans of $501 or less had APRs between 100 and 
199 percent, but there was substantial rate variation among 
States.\274\ Although APR calculations under Regulation Z include 
origination fees, lenders generally are not required to include within 
the finance charge application fees, document preparation fees, and 
add-on services such as optional credit insurance and guaranteed 
automobile

[[Page 47889]]

protection.\275\ A wider range and number of such up-front fees and 
add-on products and services appear to be charged by the storefront 
lenders than by their newer online counterparts.
---------------------------------------------------------------------------

    \272\ See Hecht, Alternative Financial Services, at 11 for 
listing of typical rates and credit scores for licensed installment 
lenders.
    \273\ Thomas A. Durkin, Gregory Elliehausen, and Min Hwang, 
Findings from the AFSA Member Survey of Installment Lending, at 24 
tbl. 3 (2014), available at http://www.masonlec.org/site/rte_uploads/files/Manne/11.21.14%20JLEP%20Consumer%20Credit%20and%20the%20American%20Economy/Findings%20from%20the%20AFSA%20Member%20Survey%20of%20Installment%20Lending.pdf. It appears that lenders made loans in at least 27 
States, but the majority of loans were from 10 States. Id. at 28 
tbl. 9.
    \274\ Id. at 24 tbl. 3.
    \275\ 12 CFR 1026.4(a) to (d).
---------------------------------------------------------------------------

    Finance companies generally hold State lending licenses in each 
State in which they lend money and are subject to each State's usury 
caps. Finance companies operate primarily from storefront locations, 
but some of them now offer complete online loan platforms.\276\
---------------------------------------------------------------------------

    \276\ For example, see iLoan offered by Springleaf, now OneMain 
Holdings, https://iloan.com/ (last visited Mar. 10, 2016). These may 
not necessarily be covered loans, depending on the total cost of 
credit. On November 15, 2015, Springleaf Holdings acquired OneMain 
Financial Holdings and became OneMain Holdings. OneMain Holdings 
Inc., 2015 Annual Report (Form 10-K) at 5 (Feb. 29, 2016), available 
at https://www.sec.gov/Archives/edgar/data/1584207/000158420716000065/omh-20151231x10k.htm.
---------------------------------------------------------------------------

    Industry size and structure. There are an estimated 8,000 to 10,000 
storefront finance company locations in the United States \277\--about 
half to two-thirds the number of payday loan stores--with approximately 
seven million loans to nonprime borrowers outstanding at any given 
point in time.\278\ Three publicly traded companies account for about 
40 percent of these storefront locations.\279\ Of these, one makes the 
majority of its loans to consumers with FICO Scores above 600, and 
another makes a majority of loans to consumers who have either FICO 
Scores below 600 or no credit scores due to an absence of credit 
experience. Another considers its customer base to include borrowers 
with FICO Scores as low as 500.\280\ Among the three publicly traded 
finance companies in this market, one will make installment loans 
starting at about $500 and another at $1,500, as well as larger 
installment loans as high as $15,000 to $25,000.\281\
---------------------------------------------------------------------------

    \277\ Hecht, Alternative Financial Services, at 10.
    \278\ Estimates of number of borrowers from Bureau staff 
calculations using Form 10-Ks of publicly traded companies and other 
material. For the estimate of seven million nonprime consumers, see 
Experian & Oliver Wyman, 2015 Q4 Market Intelligence Report: 
Personal Loans, at 20-21 figs. 27 & 31. The Bureau believes that 
most consumers have only one finance company installment loan at any 
given time as lenders likely consolidate multiple loans or refinance 
additional needs into a single loan. Consequently, the estimate of 
seven million loans outstanding is roughly equal to the number of 
consumers with an outstanding installment loan.
    \279\ Estimates of storefront locations from Bureau staff 
calculations using Form 10-Ks of publicly traded companies and other 
materials.
    \280\ FICO is a producer of commercially available credit risk 
scores developed using data reported by the three national consumer 
reporting agencies. Base FICO Scores range from 350 to 850, and 
those below 670 are generally considered below average. For a 
description of FICO Scores, see myFICO, Understanding FICO Scores, 
at 4-5, available at http://www.myfico.com/Downloads/Files/myFICO_UYFS_Booklet.pdf. Prior to Springleaf's acquisition of One 
Main, Springleaf reported that 45 percent of its customers had FICO 
Scores below 600 and another 32 percent had scores between 601 and 
660. At OneMain, a higher percentage of customers (40 percent) had 
FICO Scores between 601 and 660 and a lower percentage (22 percent) 
had scores below 600. One Main, ``New'' OneMain Overview, at 8 (Jan. 
2016), available at http://files.shareholder.com/downloads/AMDA-28PMI5/1420156915x0x873656/635ABE19-CE94-44BB-BB27-BC1C6B78266B/New_OneMain_Overview_Jan_2016.final.pdf. World Acceptance reports 
over half of its domestic borrowers have either no credit score (< 5 
percent) or FICO Scores under 600 (50 percent), while approximately 
20 percent have scores above 650. World Acceptance Corp., Investor 
Presentation, at 16 (June 30, 2015), available at http://www.worldacceptance.com/wp-content/uploads/2015/09/Investor-Presentation-6-30-15-reduced.pdf. Regional Management's target 
borrowers have FICO Scores between 500-749. See Regional Mgmt. 
Corp., Investor Presentation, at 12 (Sept. 21, 2015), available at 
http://www.regionalmanagement.com/phoenix.zhtml?c=246622&p=irol-irhome.
    \281\ World Acceptance reports that two-thirds of its loans are 
for $1,500 or less, but its larger installment loans average about 
$3,400 and it will lend a maximum of about $13,500. World Acceptance 
Corp., June 2015 Investor Presentation, at 14-15. Regional 
Management makes loans of $500 to $2,500 but will make loans up to 
$25,000 excluding auto and retail loans. Regional Mgmt., Sept. 2015 
Investor Presentation, at 4. OneMain Holdings through its Springleaf 
brand makes loans as small as $1,500 but will loan up to $15,000, 
excluding direct auto loans. Springleaf, https://www.springleaf.com/ 
(last visited Apr. 29, 2016); One Main, ``New'' OneMain Overview, at 
6.
---------------------------------------------------------------------------

    Given the range of loan sizes of personal loans made by finance 
companies, and the range of credit scores of some finance company 
borrowers, it is likely that some of these loans are used to address 
liquidity shortfalls while others are used either to finance new 
purchases or to consolidate and pay off other debt.
    Marketing and underwriting practices. Customer acquisition methods 
are generally similar for finance companies and online installment 
lenders. Finance companies rely on direct mail marketing and online 
advertising including banner advertisements, search engine 
optimization, and purchasing online leads to drive traffic to stores. 
Where allowed by State law, some finance companies mail ``live'' or 
``convenience checks'' that, when endorsed and cashed or deposited, 
commit the consumer to repay the loan at the terms stated in the 
accompanying loan disclosures.\282\ Promotional offers include 0 
percent interest loans for borrowers who prepare and file their tax 
returns at the lender's office or refer friends \283\ and free credit 
scores and gift cards.\284\
---------------------------------------------------------------------------

    \282\ World Acceptance, 2015 Annual Report (Form 10-K) at Part 
I, Item 1 (June 1, 2015), available at http://www.sec.gov/Archives/edgar/data/108385/000010838515000036/wrld-331201510xk.htm and 
Regional Mgmt. Corp., 2015 Annual Report (Form 10-K) at 2 (Feb. 23, 
2016), available at https://www.sec.gov/Archives/edgar/data/1519401/000119312516473676/d105580d10k.htm.
    \283\ Loans, World Acceptance Corp., http://www.worldacceptance.com/loans/ (last visited Apr. 29, 2016).
    \284\ Springleaf Rewards, Springleaf, https://www.springleaf.com/rewards (last visited Apr. 29, 2016).
---------------------------------------------------------------------------

    Finance companies suggest that loans may be used for bill 
consolidation, home repairs or improvements, or unexpected expenses 
such as medical bills and automobile repairs.\285\ Like their 
storefront counterparts, online installment lenders also offer 
promotions such as offers of lower rates on installment loans after a 
history of successful loan repayments.\286\
---------------------------------------------------------------------------

    \285\ Need a Loan?, 1st Franklin Fin. Corp., http://www.1ffc.com/loans/#.VzEGvfnR9QL (last visited May 9, 2016); 
Personal Loans, Springleaf, https://www.springleaf.com/personal-loans (last visited May 9, 2016) and Personal Loans, OneMain, 
https://www.onemainfinancial.com/USCFA/finser/marktn/flow.action?contentId=personalloans (last visited May 9, 2016).
    \286\ Frequently Asked Questions, Why is Rise Needed, Rise, 
https://www.risecredit.com/frequently-asked-questions/ (last visited 
Apr. 29, 2016).
---------------------------------------------------------------------------

    Finance companies secure some of their loans with vehicle titles or 
with a legal security interest in borrowers' vehicles, although the 
Bureau believes based on market outreach that these loans are generally 
underwritten based on an assessment of the consumer's income and 
expenses and are not based primarily on the value of the vehicle in 
which the interest is provided as collateral. The portfolio of finance 
company loans collateralized by security interests in vehicles varies 
by lender and some do not separately report this data from overall 
portfolio metrics that include direct larger loans, automobile purchase 
loans, real estate loans, and retail sales finance loans.\287\ The 
Bureau's market outreach with finance companies and their trade 
associations indicates that at most, 20 to 25 percent of finance 
company loans--though a higher percentage of receivables--involved a 
non-purchase money security interest in a vehicle.
---------------------------------------------------------------------------

    \287\ World Acceptance estimates that 13 percent of the total 
number of loans and 20 percent of gross loan volume are vehicle-
secured loans. World Acceptance Corp., 2015 Annual Report (Form 10-
K), at Item 1A. OneMain Holdings reported that as of the end of 
2015, $2.8 billion or 21 percent of personal loan net finance 
receivables were secured by titled personal property, such as 
automobiles. In contrast, the previous year, before acquiring 
OneMain, the portfolio (consisting solely of Springleaf loans) had 
49 percent of personal loan receivables secured by titled personal 
property. OneMain Holdings Inc., 2015 Annual Report (Form 10-K), at 
38.
---------------------------------------------------------------------------

    Finance companies typically engage in underwriting that includes a 
monthly net income and expense budget, a review of the consumer's 
credit report,

[[Page 47890]]

and an assessment of monthly cash flow.\288\ One trade association 
representing traditional finance companies has described the 
underwriting process used by these lenders as evaluating the borrower's 
``stability, ability, and willingness'' to repay the loan.\289\ In 
addition to the typical underwriting described above, one finance 
company has publicized that it is now utilizing alternative sources of 
consumer data to assess creditworthiness, including the borrower's 
history of utility payments and returned checks, as well as 
nontraditional data (such as the type of personal device used when 
applying for the loan).\290\ Many finance companies report loan payment 
history to one or more of the nationwide consumer reporting 
agencies,\291\ and the Bureau believes from market outreach that these 
lenders generally furnish on a monthly basis.
---------------------------------------------------------------------------

    \288\ American Fin. Servs. Ass'n, Traditional Installment Loans, 
Still the Safest and Most Affordable Small Dollar Credit, available 
at https://www.afsaonline.org/Portals/0/Federal/White%20Papers/Small%20Dollar%20Credit%20TP.pdf; Loan FAQs, Sun Loan Company, 
http://www.sunloan.com/faq/ (last visited Apr. 29, 2016) (``We 
examine the borrower's stability, ability and willingness to repay 
the loan, which we attempt to assess using budgets and credit 
reports, among other things.'').
    \289\ Best Practices, Nat'l Installment Lenders Ass'n, http://nilaonline.org/best-practices/ (last visited Apr. 29, 2016).
    \290\ Bryan Yurcan, American Banker, Subprime Lender OneMain 
Using New Tools to Mind Old Data, (Mar. 2, 2016), http://www.americanbanker.com/news/bank-technology/subprime-lender-onemain-using-new-tools-to-mine-old-data-1079669-1.html.
    \291\ Best Practices, Nat'l Installment Lenders Ass'n, http://nilaonline.org/best-practices/ (last visited Apr. 29, 2014); 
American Fin. Servs. Ass'n, Traditional Installment Loans.
---------------------------------------------------------------------------

    From market monitoring activities, the Bureau is aware that there 
is an emerging group of online installment lenders entering the market 
with products that in some ways resemble the types of loans made by 
finance companies rather than payday installment loans. Some of these 
online installment lenders engage in sophisticated underwriting that 
involves substantial use of analytics and technology. These lenders 
utilize systems to verify application information including identity, 
bank account, and contact information focused on identifying fraud and 
borrowers intending to not repay. These lenders also review nationwide 
credit report information as well as data sources that provide payment 
and other information from wireless, cable, and utility company 
payments. The Bureau is aware that some online installment lenders 
obtain authorization to view borrowers' bank and credit card accounts 
to validate their reported income, assess income stability, and 
identify major recurring expenses.
    Business model. Although traditional finance companies share a 
similar storefront distribution channel with storefront payday and 
vehicle title lenders, other aspects of their business model differs 
markedly. The publicly traded finance companies are concentrated in 
Midwestern and Southern States, with a particularly large number of 
storefronts in Texas.\292\ A number of finance companies are located in 
rural areas.\293\ One of the publicly traded finance companies states 
it competes on price and product offerings while another states it 
emphasizes customer relationships, customer service, and 
reputation.\294\ Similarly, while the emerging online installment 
lenders share a similar distribution approach with online payday 
lenders, online hybrid payday installment lenders, and online payday 
installment lenders, their business models, particularly underwriting, 
are substantially different.
---------------------------------------------------------------------------

    \292\ World Acceptance Corp., June 2015 Investor Presentation, 
at 5; Regional Mgmt., Sept. 2015 Investor Presentation, at 5.
    \293\ Based on the Bureau's market outreach and World Acceptance 
Corp., June 2015 Investor Presentation, at 12.
    \294\ World Acceptance Corp., 2015 Annual Report (Form 10-K), at 
Part I, Item 1; Regional Mgmt. Corp., 2015 Annual Report (Form 10-
K), at 16.
---------------------------------------------------------------------------

    One of the indicators that underscores this contrast is default 
rates. In contrast to the high double digit charge-off rates discussed 
for some industry segments discussed above, reporting to a national 
consumer reporting agency indicates that during each quarter of 2015, 
between 2.9 and 3.4 percent of finance company loan balances were 
charged off. However, these figures include loans made to prime and 
superprime consumers that would likely not be covered loans under the 
total cost of credit threshold in proposed Sec.  1041.2(a)(18).\295\ In 
recent years, net charge-off rates at two publicly traded finance 
companies have ranged from 12 to 15 percent of average balances.\296\
---------------------------------------------------------------------------

    \295\ Experian & Oliver Wyman, 2015 Q4 Market Intelligence 
Report: Personal Loans, at 33, fig. 54. In contrast, the 2013 survey 
of six million finance company loans conducted on behalf of a trade 
association of storefront finance companies, referenced above, found 
that more than 38 percent of the loans were delinquent on the survey 
date, but the survey did not track whether these loans ultimately 
cured or were charged-off. Durkin, at 14.
    \296\ World Acceptance Corp., 2015 Annual Report (Form 10-K), at 
Part II, Item 6. World Acceptance calculated net charge-offs as a 
percentage of average loan receivables by averaging the month-end 
gross loan receivables less unearned interest and deferred fees over 
the time period under consideration. Regional Management lists net 
charge-offs as a percent of average finance receivables on small 
installment loans to be in this range. Regional Mgmt. Corp., 2015 
Annual Report (Form 10-K), at 26. OneMain Holdings charge-off rate 
is not included here as it does not separate out direct auto loans 
from personal loans.
---------------------------------------------------------------------------

    Reborrowing in this market is relatively common, but finance 
companies refinance many existing loans before the loan maturity date, 
in contrast to the payday lending practice of rolling over debt on the 
loan's due date. The three publicly traded finance companies refinance 
50 to 70 percent of all of their installment loans before the loan's 
due date.\297\ At least one finance company states it will not 
``encourage'' refinancing if the proceeds from the refinance (cash-out) 
are less than 10 percent of the refinanced loan amount.\298\ In the 
installment context, refinancing refers to the lender extinguishing the 
existing loan and may include providing additional funds to the 
borrower, having the effect of allowing the borrower to skip a payment 
or reducing the total cost of credit relative to the outstanding 
loan.\299\ The emerging online installment lenders also offer to 
refinance loans and some notify borrowers of their refinance options 
with email notifications and notices when they log in to their 
accounts.\300\ Finance companies notify borrowers of refinance options 
by mail, telephone, text messages, on written payment receipts, and in 
stores.\301\ State laws and company policies vary with respect to 
whether various loan

[[Page 47891]]

origination and add-on fees must be refunded upon refinancing and 
prepayment and, if so, the refund methodology used.
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    \297\ World Acceptance Corp. reports that 71.5 percent of its 
loans, measured by loan volume, were refinances, that the average 
loan is refinanced at month eight of a 13 month term, and that it 
used text messages to notify consumers that they may refinance 
existing loans, World Acceptance Corp., 2015 Annual Report (Form 10-
K), at Part I, Item 1 and Part II, Item 7; World Acceptance Corp., 
2015 Annual Report at 3, available at http://www.worldacceptance.com/wp-content/uploads/2015/07/2015-ANNUAL-REPORT_6-25-15.compressed.pdf. Regional Management reports that 58.8 
percent of 2015 loan originations were renewals. Regional Mgmt. 
Corp., 2015 Annual report (Form 10-K), at 15. About half of 
Springleaf's customers renew their loans. Springleaf Holdings, Inc., 
Springleaf ABS Overview, ABS East Conference, at 21 (Sept. 20015), 
available at http://files.shareholder.com/downloads/AMDA-28PMI5/456541976x0x850559/08A5B379-9475-4AD4-9037-B6AEC6D3EC6D/SL_2015.09_ABS_East_2015_vF.pdf.
    \298\ World Acceptance Corp., 2015 Annual Report (Form 10-K), at 
Part II, Item 7.
    \299\ Some installment lenders use the word ``renewal'' to 
describe this process, although it means satisfying the prior legal 
obligation in full rather than paying only the finance charge or a 
fee as occurs in the payday loan context.
    \300\ For example, Rise, offered by Elevate, notifies borrowers 
of refinance options that provide additional funds. Frequently Asked 
Questions, Rise, https://www.risecredit.com/frequently-asked-questions (last visited Mar. 10, 2016).
    \301\ World Acceptance Corp., 2015 Annual Report, at 3.
---------------------------------------------------------------------------

Personal Lending by Banks and Credit Unions
    Although as discussed above depository institutions over the last 
several decades have increasingly emphasized credit cards and overdraft 
services to meet customers short-term credit needs, they remain a major 
source of installment loans. According to an industry report, in 2015 
banks and credit unions originated 3.8 million unsecured installment 
loans totaling $22.3 billion to nonprime consumers (defined as near 
prime, subprime, and deep subprime consumers with VantageScores below 
660), with an average loan size of approximately $5,867.\302\ As of the 
end of 2015, there were approximately 6.1 million outstanding bank and 
credit union unsecured installment loans to these nonprime consumers, 
with $41.5 billion in outstanding loan balances.\303\ Approximately 29 
percent of the number of outstanding bank loans (representing 21 
percent of outstanding balances) and 49 percent of the credit union 
loans (representing 35 percent of balances) were to these nonprime 
consumers.\304\
---------------------------------------------------------------------------

    \302\ Experian & Oliver Wyman, 2015 Q4 Market Intelligence 
Report: Personal Loans Report, at 11-13 figs. 9, 10, 12, & 13; 
Experian & Oliver Wyman, 2015 Q3 Market Intelligence Report: 
Personal Loans Report, at 11-13 figs. 9, 10, 12 & 13, 2015 Q2 Market 
Intelligence Report: Personal Loans Report, at 11-13 figs. 9, 10, 
12, & 13; Experian & Oliver Wyman, 2015 Q1 Market Intelligence 
Report: Personal Loans Report, at 11-13 figs. 9, 10, 12, 13.
    \303\ Experian & Oliver Wyman, 2015 Q4 Market Intelligence 
Report: Personal Loans, at 20-22 figs. 27, 28, 30, & 31.
    \304\ Id. In contrast, prime and superprime consumers accounted 
for 70 percent of the number of outstanding loans and 79 percent of 
outstanding loan balances at banks, and 51 percent of the number of 
outstanding loans and 65 percent of outstanding balances at credit 
unions.
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    National banks, most State-chartered banks, and State credit unions 
are permitted under existing Federal law to charge interest on loans at 
the highest rate allowed by the laws of the State in which the lender 
is located (lender's home State).\305\ The bank or State-chartered 
credit union may then charge the interest rate of its home State on 
loans it makes to borrowers in other States without needing to comply 
with the usury limits of the States in which it makes the loans 
(borrower's home State). Federal credit unions must not charge more 
than 18 percent interest rate, with an exception for payday alternative 
loans described below.\306\ The laws applicable to Federal credit 
unions are discussed below.
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    \305\ See generally 12 U.S.C. 85 (governing national banks); 12 
U.S.C. 1463 (g) (governing savings associations); 12 U.S.C. 1785 (g) 
(governing credit unions); and 12 U.S.C. 1831d (governing State 
banks). Alternatively, these lenders may charge a rate that is no 
more than 1 percent above the 90-day commercial paper rate in effect 
at the Federal Reserve Bank in the Federal Reserve district in which 
the lender is located (whichever is higher). Id.
    \306\ Nat'l Credit Union Admin., Board Action Bulletin, Board 
Meeting Results for June 18, 2015, at 2-3, available at https://www.ncua.gov/about/Documents/Board%20Actions/BAB20150618.pdf 
(announcing the extension of the general 18 percent rate ceiling and 
the 28 percent rate ceiling on PALs through March 10, 2017); 12 
U.S.C. 1757(5)(A)(vi).
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    The Bureau believes that the vast majority of the personal loans 
made by banks and credit unions have a total cost of credit of 36 
percent or less, and thus would not be covered loans under the Bureau's 
proposal. However, through market outreach the Bureau is also aware 
that many community banks make small personal loans to existing 
customers who face liquidity shortfalls, at least on an ad hoc basis at 
relatively low interest rates but some with an origination fee that 
would bring the total cost of credit to more than 36 percent. These 
products are generally offered to existing customers as an 
accommodation and are not mass marketed.
    Two bank trade associations recently surveyed their members about 
their personal loan programs.\307\ Although the surveys were small and 
may not have been representative, both found that banks continue to 
make personal loans. One survey generated 93 responses with banks 
ranging in size from $37 million in assets to $48.6 billion, with a 
heavy concentration of community banks (all bank survey).\308\ The 
second survey was limited to community banks (community bank survey) 
and generated 132 responses.\309\ The surveys, though asking different 
questions and not necessarily nationally representative, found:
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    \307\ One association represents small, regional and large banks 
with $12 trillion in deposits and that extend more than $8 trillion 
in loans. The other represents more than 6,000 community banks with 
52,000 locations, holding $3.6 trillion in assets, $2.9 trillion in 
deposits, and $2.5 trillion in loans to consumers, small businesses 
and agricultural loans.
    \308\ American Bankers Association, Small Dollar Lending Survey 
(Dec. 2015) (on file); ABA Banking Journal, ABA Survey: Banks Are 
Making Effective Small Dollar Loans (Dec. 8, 2015), http://bankingjournal.aba.com/2015/12/aba-survey-banks-are-making-effective-small-dollar-loans/ and Letter from Virginia O'Neill, 
Senior Vice President, American Bankers Ass'n, to Richard Cordray, 
Director, Bureau of Consumer Fin. Prot. (Dec. 1, 2015) (re: ABA 
Small Dollar Lending Survey).
    \309\ Letter from Viveca Y. Ware, Executive Vice President, 
Independent Cmty. Bankers of America, to David Silberman, Associate 
Director, Bureau of Consumer Fin. Prot. (Oct. 6, 2015); Ryan Hadley 
[hereinafter ICBA Letter October 6, 2015], ICBA, 2015 ICBA Community 
Bank Personal Small Dollar Loan Survey (Oct. 29, 2015) (on file); 
Letter from Viveca Y. Ware, Executive Vice President, Independent 
Cmty. Bankers of America, to David Silberman, Associate Director, 
Consumer Financial Protection Bureau (Nov. 3, 2015) (on file).
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     Loan size and duration. In the community bank survey, 74 
percent of the respondents reported that they make loans under $1,000 
for durations longer than 45 days, with an average loan amount of $872. 
No average loan term was reported. Ninety-five percent reported making 
personal loans larger than $1,000, with an average loan size of under 
$4,000. In the all bank survey, 73 percent reported making loans of 
$5,000 or less for a term of less than one year, either as an 
accommodation for existing customers or as an established lending 
program. Slightly more than half of the respondents reported making 
more than 50 such loans in 2014.
     Cost. In the community bank survey the average of the 
``typical interest rate'' reported by the respondents was 12.1 percent 
for smaller dollar loans and the average maximum rate for such loans 
was 16.7 percent. Average interest rates for loans greater than $1,000 
were about 250 basis points lower. At the same time, two-thirds of the 
banks reported that they also charge loan fees for the smaller loans 
and 70 percent do so for the larger loans over $1,000, with fees almost 
equally divided between application fees and origination fees. For the 
smaller loans, the median fee when set as a fixed dollar amount was $50 
and the average fee $61.44 and when set as a percentage of the loan the 
average was 3 percent; average fees for loans above $1,000 were 
slightly higher and average percentage rates slightly lower. The all 
bank survey did not obtain data at this granular level but 53 percent 
of the respondents reported that the total cost of credit on at least 
some loans was above 36 percent.
    The community bank survey provided some information about the 
lending practices of banks that offer small-dollar loans.
     Underwriting. While the Bureau's outreach indicates that 
these loans are often thought of by the banks as ``relationship loans'' 
underwritten based on the bank's knowledge of the customer, in the 
community bank survey 93 percent reported that they also verified major 
financial obligations and debt and 78 percent reported that they 
verified income.
    The two bank trade association surveys also provided information 
relative to repeat use and losses.
     Rollovers. In the community bank survey 52 percent of 
respondents reported that they do not permit

[[Page 47892]]

rollovers and 26 percent reported that they allow only a single 
rollover. Repayment methods vary and include manual payments as well as 
automated payments. Financial institutions that make loans to account 
holders retain the contractual right to set off payments due from 
existing accounts in the event of nonpayment.
     Charge-offs. Both bank surveys reported low charge-off 
rates: in the community bank survey the average net charge-off rate for 
loans under $1,000 was 1 percent and for larger loans was less than 1 
percent (.86 percent). In the all bank survey, 34 percent reported no 
charge-offs and 61 percent reported charge-offs of 3 percent or less.
    There is little data available on the demographic characteristics 
of borrowers who take liquidity loans from banks. The Bureau's market 
monitoring indicates that a number of banks offering these loans are 
located in small towns and rural areas. Further, market outreach with 
bank trade associations indicates that it is not uncommon for borrowers 
to be in non-traditional employment and have seasonal or variable 
income.
    As noted above, Federal credit unions may not charge more than 18 
percent interest. However, as described below, they are authorized to 
make some small-dollar loans at rates up to 28 percent interest plus an 
applicable fee.
    Through market monitoring and outreach, the Bureau is aware that a 
significant number of credit unions, both Federal and State chartered, 
offer liquidity loans to their members, at least on an accommodation 
basis. As with banks, these are small programs and may not be widely 
advertised. The credit unions generally engage in some sort of 
underwriting for these loans, including verifying borrower income and 
its sufficiency to cover loan payments, reviewing past borrowing 
history with the institution, and verifying major financial 
obligations. Many credit unions report these loans to a consumer 
reporting agency. On a hypothetical $500, 6-month loan, many credit 
unions would charge a 36 percent or less total cost of credit.
    Some Federal credit unions offer small-dollar loans aimed at 
consumers with payday loan debt to pay off these loans at interest 
rates of 18 percent or less with application fees of $50 or less.\310\ 
Other Federal credit unions (and State credit unions) offer installment 
vehicle title loans with APRs below 36 percent.\311\ The total cost of 
credit, when application fees are included, may range from 
approximately 36 to 70 percent on a small loan of about $500, depending 
on the loan term.
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    \310\ See, for example, Nix Lending's Payday Payoff Loan offered 
through Kinecta Federal Credit Union at an 18 percent APR plus a 
$49.95 application fee. Payday Payoff[supreg] Loan, Nix Neighborhood 
Lending, http://nixlending.com/en/personal-loans/detail/payday-payoff-loan (last visited March 9, 2016). MariSol Federal Credit 
Union offers a Quick Loan of $500 or less at an 18 percent APR with 
a $50 application fee to be repaid over four months. Payment 
includes a $20 deposit into a savings account. Personal Loans, 
MariSol Federal Credit Union, https://marisolcu.org/loans_personal.html (last visited Apr. 29, 2016); Consumer Loan 
Rates, MariSol Federal; Credit Union, https://marisolcu.org/rates_loan_view.html (last visited Apr. 29, 2016).
    \311\ For a listing of several credit unions with rates below 25 
percent, see Pew, Auto Title Loans: Market Practices and Borrowers' 
Experience, at 24.
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    Federal credit unions are also authorized to offer ``payday 
alternative loans.'' In 2010, the NCUA adopted an exception to the 
interest rate limit under the Federal Credit Union Act that permitted 
Federal credit unions to make payday alternative loans at an interest 
rate of up to 28 percent plus an application fee, ``that reflects the 
actual costs associated with processing the application'' up to 
$20.\312\ PALs may be made in amounts of $200 to $1,000 to borrowers 
who have been members of the credit union for at least one month. PAL 
terms range from one to six months, may not be rolled over, and 
borrowers are limited one PAL at a time and no more than three PALs 
from the same credit union in a rolling six-month period. PALs must 
fully amortize and the credit union must establish underwriting 
guidelines such as verifying employment by requiring at least two pay 
stubs.\313\
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    \312\ 12 CFR 701.21(c)(7)(iii). Application fees charged to all 
applicants for credit are not part of the finance charge that must 
be disclosed under Regulation Z. 12 CFR 1026.4(c).
    \313\ 12 CFR 701.21(c)(7)(iii).
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    In 2015, over 700 Federal credit unions (nearly 20 percent of all 
Federal credit unions) offered PALs, with originations at $123.3 
million, representing a 7.2 percent increase from 2014.\314\ In 2014, 
the average PAL amount was about $678 and carried a median interest 
rate of 25 percent.\315\ The NCUA estimated that, based on the median 
PAL interest rate and loan size for 2013, the APR calculated by 
including all fees (total cost of credit) for a 30-day PAL was 
approximately 63 percent.\316\ However, the Bureau believes based on 
market outreach that the average PAL term is about 100 days, resulting 
in a total cost of credit of approximately 43 percent.\317\ Based on 
NCUA calculations, during 2014, annualized PAL charge-offs net of 
recoveries, as a percent of average PAL balances outstanding, were 7.5 
percent.\318\
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    \314\ Nat'l Credit Union Admin., Dec. 2015 FCU 5300 Call Report 
Aggregate Financial Performance Reports (FPRs), available at https://www.ncua.gov/analysis/Pages/call-report-data/aggregate-financial-performance-reports.aspx.
    \315\ NCUA estimates based on public Call Report data, available 
at https://www.ncua.gov/analysis/Pages/call-report-data.aspx.
    \316\ Based on a PAL of $630 for 30 days at a rate of 24.6 
percent with a $20 application fee, the 2014 terms provided in 
NCUA's comment letter to the Department of Defense. Letter from 
Debbie Matz, Chairman, NCUA, to Aaron Siegel, Alternate OSD Federal 
Register Liaison Officer, Dep't of Defense, at 5 (Dec. 16, 2014) 
[hereinafter NCUA Letter to Department of Defense (Dec. 16, 2014)] 
(re: Limitations on Terms of Consumer Credit Extended to Service 
Members and Dependents; Docket DOD-2013-OS-0133, RIN 0790-AJ10), 
available at https://www.regulations.gov/#!documentDetail;D=DOD-
2013-OS-0133-0171.
    \317\ Bureau staff calculations based on an average PAL of $678, 
the 2014 average amount, at a 25 percent interest rate with a $20 
application fee (figures based on NCUA calculations from call report 
data, as noted above), due in 3 months with 3 monthly payments.
    \318\ NCUA estimates based on public Call Report data, available 
at https://www.ncua.gov/analysis/Pages/call-report-data.aspx.
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D. Initiating Payment from Consumers' Accounts

    As discussed above, payday and payday installment lenders nearly 
universally obtain at origination one or more authorizations to 
initiate withdrawal of payment from the consumer's account. There are a 
variety of payment options or channels that they use to accomplish this 
goal, and lenders frequently obtain authorizations for multiple types. 
Different payment channels are subject to different laws and, in some 
cases, private network rules, leaving lenders with broad control over 
the parameters of how a particular payment will be pulled from a 
consumer's account, including the date, amount, and payment method.
Obtaining Payment Authorization
    A variety of payment methods enable lenders to use a previously-
obtained authorization to initiate a withdrawal from a consumer's 
account without further action from the consumer. These methods include 
paper signature checks, remotely created checks (RCCs) and remotely 
created payment orders (RCPOs),\319\ and electronic payments like ACH 
\320\ and debit and prepaid card

[[Page 47893]]

transactions. Payday and payday installment lenders--both online and in 
storefronts--typically obtain a post-dated check or electronic payment 
authorization from consumers for repayments of loans.\321\ For 
storefront payday loans, lenders typically obtain a post-dated check 
(or, where payday installment products are authorized, a series of 
postdated checks) that they can use to initiate a check or ACH 
transaction from a consumer's account.\322\ For an online loan, a 
consumer often provides bank account information to receive the loan 
funds, and the lender often uses that bank account information to 
obtain payment from the consumer.\323\ This account information can be 
used to initiate an ACH payment from a consumer's account. Typically, 
online lenders require consumers to authorize payments from their 
account as part of their agreement to receive the loan proceeds 
electronically.\324\ Some traditional installment lenders also obtain 
an electronic payment authorization from their customers.
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    \319\ A remotely created check or remotely created payment order 
is a type of check that is created by the payee--in this case, it 
would be created by the lender--and processed through the check 
clearing system. Given that the check is created by the lender, it 
does not bear the consumer's signature. See Regulation CC, 12 CFR 
229.2(fff) (defining remotely created check); Telemarketing Sales 
Rule, 16 CFR 310(cc) (defining ``remotely created payment order'' as 
a payment instrument that includes remotely created checks).
    \320\ In order to initiate an ACH payment from a consumer's 
account, a lender must send a request (also known as an ``entry'') 
through an originating depository financial institution (ODFI). An 
ODFI is a bank or other financial institution that the lender or the 
lender's payment processor has a relationship with. ODFIs aggregate 
and submit batches of entries for all of their originators to an ACH 
operator. The ACH operators sort the ACH entries and send them to 
the receiving depository financial institutions (RDFI) that hold the 
individual consumer accounts. The RDFI then decides whether to debit 
the consumer's account or to send it back unpaid. ACH debit 
transactions generally clear and settle in one business day after 
the payment is initiated by the lender. The private operating rules 
for the ACH network are administered by the National Automated 
Clearinghouse Association (NACHA), an industry trade organization.
    \321\ See, e.g., QC Holdings, Inc., 2014 Annual Report (Form 10-
K), at 6 (Mar. 12, 2015), available at https://www.sec.gov/Archives/edgar/data/1289505/000119312515088809/d854360d10k.htm (``Upon 
completion of a loan application, the customer signs a promissory 
note with a maturity of generally two to three weeks. The loan is 
collateralized by a check (for the principal amount of the loan plus 
a specified fee), ACH authorization or a debit card.''); see also 
Advance America, 2011 Annual Report (Form 10-K) at 45 (Mar. 15, 
2012), available at https://www.sec.gov/Archives/edgar/data/1299704/000104746912002758/a2208026z10-k.htm (``After the required documents 
presented by the customer have been reviewed for completeness and 
accuracy, copied for record-keeping purposes, and the cash advance 
has been approved, the customer enters into an agreement governing 
the terms of the cash advance. The customer then provides a personal 
check or an Automated Clearing House (``ACH'') authorization, which 
enables electronic payment from the customer's account, to cover the 
amount of the cash advance and charges for applicable fees and 
interest of the balance due under the agreement.''); ENOVA Int'l, 
Inc., 2014 Annual Report (Form 10-K), at 6 (Mar. 20, 2015), 
available at https://www.sec.gov/Archives/edgar/data/1529864/000156459015001871/enva-10k_20141231.htm (``When a customer takes 
out a new loan, loan proceeds are promptly deposited in the 
customer's bank account or onto a debit card in exchange for a 
preauthorized debit for repayment of the loan from the customer's 
account.'').
    \322\ Id.
    \323\ See, e.g., Frequently Asked Questions (FAQs), Great Plains 
Lending d/b/a Cash Advance Now, https://www.cashadvancenow.com/FAQ.aspx (last visited May 16, 2016) (``If we extend credit to a 
consumer, we will consider the bank account information provided by 
the consumer as eligible for us to process payments against. In 
addition, as part of our information collection process, we may 
detect additional bank accounts under the ownership of the consumer. 
We will consider these additional accounts to be part of the 
application process.'').
    \324\ See, e.g., One Click Cash and US Fast Cash, Authorization 
to Initiate ACH Debit and Credit Entries, Ex. 1 at 38, 55, Labajo v. 
First International Bank & Trust, No. 14-00627 (C.D. Cal. May 23, 
2014), ECF No. 26-3.
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    Payday and payday installment lenders often take authorization for 
multiple payment methods, such as taking a post-dated check along with 
the consumer's debit card information.\325\ Consumers usually provide 
the payment authorization as part of the loan origination process.\326\
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    \325\ See, e.g., Castle Payday Loan Agreement, Ex. A, Parm v. 
BMO Harris Bank, N.A., No. 13-03326 (N.D. Ga. Dec. 23, 2013), ECF 
No. 60-1 (``You may revoke this authorization by contacting us in 
writing at ach@castlepayday.com or by phone at 1-888-945-2727. You 
must contact us at least three (3) business days prior to when you 
wish the authorization to terminate. If you revoke your 
authorization, you authorize us to make your payments by remotely-
created checks as set forth below.''); Plain Green Loan Agreement, 
Ex. 5, Booth v. BMO Harris Bank, N.A., No. 13-5968 (E.D. Pa. Dec. 
13, 2013), ECF No. 41-8 (stating that in the event that the consumer 
terminates an ACH authorization, the lender would be authorized to 
initiated payment by remotely created check); Sandpoint Capital Loan 
Agreement, Ex. A, Labajo, No. 14-627 (May 23, 2014), ECF 25-1 
(taking ACH and remotely created check authorization).
    \326\ See, e.g., Advance America, 2011 Annual Report (Form 10-
K), at 10. (``To obtain a cash advance, a customer typically . . . 
enters into an agreement governing the terms of the cash advance, 
including the customer's agreement to repay the amount advanced in 
full on or before a specified due date (usually the customer's next 
payday), and our agreement to defer the presentment or deposit of 
the customer's check or ACH authorization until the due date.'').
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    For storefront payday loans, providing a post-dated check is 
typically a requirement to obtain a loan. Under the Electronic Fund 
Transfer Act (EFTA) lenders cannot condition credit on obtaining an 
authorization from the consumer for ``preauthorized'' (recurring) 
electronic fund transfers,\327\ but in practice online payday and 
payday installment lenders are able to obtain such authorizations from 
consumers for almost all loans. The EFTA provision concerning 
compulsory use does not apply to paper checks and one-time electronic 
fund transfers. Moreover, even for loans subject to the EFTA compulsory 
use provision, lenders use various methods to obtain electronic 
authorizations. For example, although some payday and payday 
installment lenders provide consumers with alternative methods to repay 
loans, these options may be burdensome and may significantly change the 
terms of the loan. For example, one lender increases its APR by an 
additional 61 percent or 260 percent, depending on the length of the 
loan, if a consumer elects a cash-only payment option for its 
installment loan product, resulting in a total APR of 462 percent (210 
day loan) to 780 percent (140 day loan).\328\ Other lenders change the 
origination process if consumers do not immediately provide account 
access. For example, some online payday lenders require prospective 
customers to contact them by phone if they do not want to provide a 
payment authorization and wish to pay by money order or check at a 
later time. Other lenders delay the disbursement of the loan proceeds 
if the consumer does not immediately provide a payment 
authorization.\329\
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    \327\ EFTA and its implementing regulation, Regulation E, 
prohibit the conditioning of credit on an authorization for a 
preauthorized recurring electronic fund transfer. See 12 CFR 
1005.10(e)(1) (``No financial institution or other person may 
condition an extension of credit to a consumer on the consumer's 
repayment by preauthorized electronic fund transfers, except for 
credit extended under an overdraft credit plan or extended to 
maintain a specified minimum balance in the consumer's account.'').
    \328\ Cash Store, Installment Loans Fee Schedule, New Mexico 
(last visited May 16, 2016), https://www.cashstore.com/-/media/cashstore/files/pdfs/nm%20ins%20552014.pdf.
    \329\ See, e.g., Mobiloans, Line of Credit Terms and Conditions, 
www.mobiloans.com/terms-and-conditions (last visited May 17, 2016) 
(``If you do not authorize electronic payments from your Demand 
Deposit Account and instead elect to make payments by mail, you will 
receive your Mobiloans Cash by check in the mail.'').
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    Banks and credit unions have additional payment channel options 
when they lend to consumers who have a deposit account at the same 
institution. As a condition of certain types of loans, many financial 
institutions require consumers to have a deposit account at that same 
institution.\330\ The loan contract often authorizes the financial 
institution to pull payment directly from the consumer's account. Since 
these payments can be processed through an internal transfer within the 
bank or credit union, these institutions do not typically use external 
payment channels

[[Page 47894]]

to complete an internal payment transfer.
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    \330\ See, e.g., Fifth Third Bank, Early Access Terms & 
Conditions, Important Changes to Fifth Third Early Access Terms & 
Conditions, at 3 (last visited May 17, 2016), available at https://www.53.com/doc/pe/pe-eax-tc.pdf (providing eligibility requirements 
including that the consumer ``must have a Fifth Third Bank checking 
deposit account that has been open for the past 90 (ninety) days and 
is in good standing'').
---------------------------------------------------------------------------

Exercising Payment Authorizations
    For different types of loans that would be covered under the 
proposed rule, lenders use their authorizations to collect payment 
differently. As discussed above, most storefront lenders encourage or 
require consumers to return to their stores to pay in cash, roll over, 
or otherwise renew their loans. The lender often will deposit a post-
dated check or initiate an electronic fund transfer only where the 
lender considers the consumer to be in ``default'' under the contract 
or where the consumer has not responded to the lender's 
communications.\331\ Bureau examiners have cited one or more payday 
lenders for threatening to initiate payments from consumer accounts 
that were contrary to the agreement, and that the lenders did not 
intend to initiate.\332\
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    \331\ Payday and payday installment lenders may contact 
consumers a few days before the payment is due to remind them of 
their upcoming payment. This is a common practice, with many lenders 
calling the consumer 1 to 3 days before the payment is due, and some 
providing reminders through text or email.
    \332\ Bureau of Consumer Fin. Prot., Supervisory Highlights, at 
20 (Spring 2014), available at http://files.consumerfinance.gov/f/201405_cfpb_supervisory-highlights-spring-2014.pdf.
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    In contrast, online lenders typically use the authorization to 
collect all payments, not just those initiated after there has been 
some indication of distress from the consumer. Moreover, as discussed 
above, online lenders offering ``hybrid'' payday loan products 
structure them so that the lender is authorized to collect a series of 
interest-only payments--the functional equivalent of paying finance 
charges to roll over the loan--before full payment or amortizing 
payments are due.\333\ The Bureau also is aware that some online 
lenders, although structuring their product as nominally a two-week 
loan, automatically roll over the loan every two weeks unless the 
consumer takes affirmative action to make full payment.\334\ The 
payments processed in such cases are for the cost of the rollover 
rather than the full balance due.
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    \333\ See, e.g., Integrity Advance Loan Agreement, CFPB Notice 
of Charges Against Integrity Advance, LLC, CFPB No. 2015-CFPB-0029, 
at 5 (Nov. 18, 2015), available at http://files.consumerfinance.gov/f/201511_cfpb_notice-of-charges-integrity-advance-llc-james-r-carnes.pdf (providing lender contract for loan beginning with four 
automatic interest-only rollover payments before converting to a 
series of amortizing payments).
    \334\ See, e.g., Cash Jar Loan Agreement, Exhibit A, Riley v. 
BMO Harris Bank, N.A., No. 13-1677 (D.D.C. Jan. 10, 2014), ECF No. 
33-2 (interpreting silence from consumer before the payment due date 
as a request for a loan extension; contract was for a 14 day single 
payment loan, loan amount financed was $700 for a total payment due 
of $875).
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    As a result of these distinctions, storefront and online lenders 
have different success rates in exercising such payment authorizations. 
Some large storefront lenders report that they initiate payment 
attempts in less than 10 percent of cases, and that 60 to 80 percent of 
those attempts are returned for non-sufficient funds.\335\ Bureau 
analysis of ACH payments by online payday and payday installment 
lenders, which typically collect all payments by initiating a transfer 
from consumers' accounts, indicates that for any given payment only 
about 6 percent fail on the first try. However, over an eighteen-month 
observation period, 50% of online borrowers were found to experience at 
least one payment attempt that failed or caused an overdraft and over-
third of the borrowers experienced more than one such incident.
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    \335\ One major lender with a predominantly storefront loan 
portfolio, QC Holdings, notes that in 2014, 91.5 percent of its 
payday and installment loans were repaid or renewed in cash. QC 
Holdings 2014 Annual Report (Form 10-K), at 7. For the remaining 8.5 
percent of loans for which QC Holdings initiated a payment attempt, 
78.5 percent were returned due to non-sufficient funds. Id. Advance 
America, which offers mostly storefront payday and installment 
loans, initiated check or ACH payments on approximately 6.7 and 6.5 
percent, respectively, of its loans in 2011; approximately 63 and 64 
percent, respectively, of those attempts failed. Advance America 
2011 Annual Report (Form 10-K), at 27.
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    Lenders typically charge fees for these returned payments, 
sometimes charging both a returned payment fee and a late fee.\336\ 
These fees are in addition to fees, such as NSF fees, that may be 
charged by the financial institution that holds the consumer's account.
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    \336\ See, Advance America 2011 Annual Report (Form 10-K), at 8 
(``We may charge and collect fees for returned checks, late fees, 
and other fees as permitted by applicable law. Fees for returned 
checks or electronic debits that are declined for non-sufficient 
funds (NSF) vary by State and range up to $30, and late fees vary by 
State and range up to $50. For each of the years ended December 31, 
2011 and 2010, total NSF fees collected were approximately $2.9 
million and total late fees collected were approximately $1 million 
and $0.9 million, respectively.''); Frequently Asked Questions, 
Mypaydayloan.com, https://www.mypaydayloan.com/faq#loancost (last 
visited May. 17, 2016) (``If your payment is returned due to NSF (or 
Account Frozen or Account Closed), our collections department will 
contact you to arrange a second attempt to debit the payment. A 
return item fee of $25 and a late fee of $50 will also be collected 
with the next debit.'').
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    The Bureau found that if an electronic payment attempt failed, 
online lenders try again three-quarters of the time. However, after an 
initial failure the lender's likelihood of failure jumps to 70 percent 
for the second attempt and 73 percent for the third. Of those that 
succeed, roughly a third result in an overdraft.
    Both storefront and online lenders also frequently change the ways 
in which they attempt to exercise authorizations after one attempt has 
failed. For example, many typically make additional attempts to collect 
initial payment due.\337\ Some lenders attempt to collect the entire 
payment amount once or twice within a few weeks of the initial failure. 
The Bureau, however, is aware of online and storefront lenders that use 
more aggressive and unpredictable payment collection practices, 
including breaking payments into multiple smaller payments and 
attempting to collect payment multiple times in one day or over a short 
period of time.\338\ The cost to lenders to repeatedly attempt payment 
depends on their contracts with payment processors and commercial 
banks, but is generally nominal; the Bureau estimates the cost is in a 
range of 5 to 15 cents for an ACH transaction.\339\ These practices are 
discussed in more detail in Market Concerns--Payments.
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    \337\ See CFPB Supervisory Highlights, at 20 (Spring 2014) 
(``Upon a borrower's default, payday lenders frequently will 
initiate one or more preauthorized ACH transactions pursuant to the 
loan agreement for repayment from the borrower's checking 
account.''); First Cash Fin. Servs., Inc. 2014 Annual Report (Form 
10-K) at 5 (Feb. 12, 2015) (``Banks return a significant number of 
ACH transactions and customer checks deposited into the Independent 
Lender's account due to insufficient funds in the customers' 
accounts . . . The Company subsequently collects a large percentage 
of these bad debts by redepositing the customers' checks, ACH 
collections or receiving subsequent cash repayments by the 
customers.''); Frequently Asked Questions, Advance America, https://www.onlineapplyadvance.com/faq (last visited May 17, 2016) (``Once 
we present your bank with your ACH authorization for payment, your 
bank will send the specified amount to CashNetUSA. If the payment is 
returned because of insufficient funds, CashNetUSA can and will re-
present the ACH Authorization to your bank.'').
    \338\ See, e.g., CFPB Online Payday Loan Payments.
    \339\ The Bureau reviewed publicly available litigation 
documents and fee schedules posted online by originating depository 
institutions to compile these estimates. However, because of the 
limited availability of private contracts and variability of 
commercial bank fees, these estimates are tentative. Originators 
typically also pay their commercial bank or payment processor fees 
for returned ACH and check payments. These fees appear to range 
widely, from 5 cents to several dollars.
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    As noted above, banks and credit unions that lend to their account 
holders can use their internal system to transfer funds from the 
consumer accounts and do not need to utilize the payment networks. 
Deposit advance products and their payment structures are discussed 
further in part II B. The Bureau believes that many small dollar loans 
with depository institutions are paid through internal transfers.
    Due to the fact that lenders obtain authorizations to use multiple 
payment

[[Page 47895]]

channels and benefit from flexibility in the underlying payment 
systems, lenders generally enjoy broad discretion over the parameters 
of how a particular payment will be pulled from a consumer's account, 
including the date, amount, and payment method. For example, although a 
check specifies a date, lenders may not present the check on that date. 
Under UCC Section 4-401, merchants can present checks for payment even 
if the check specifies a later date.\340\ Lenders sometimes attempt to 
collect payment on a different date from the one stated on a check or 
original authorization. They may shift the attempt date in order to 
maximize the likelihood that funds will be in the account; some use 
their own models to determine when to collect, while others use 
predictive payment products provided by third parties that estimate 
when funds are most likely to be in the account.\341\
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    \340\ UCC Section 4-401(c)(``A bank may charge against the 
account of a customer a check that is otherwise properly payable 
from the account, even though payment was made before the date of 
the check, unless the customer has given notice to the bank of the 
postdating describing the check with reasonable certainty.'').
    \341\ See, e.g., Press Release, Clarity Servs., Inc, ACH 
Presentment Will Help Lenders Reduce Failed ACH Pulls (Aug. 1, 
2013), https://www.clarityservices.com/clear-warning-ach-presentment-will-help-lenders-reduce-failed-ach-pulls/; Service 
Offerings, FactorTrust, http://ws.factortrust.com/products/ (last 
visited May 4, 2016); Bank Account Verify, Microbilt, http://www.microbilt.com/bank-account-verification.aspx (last visited May 
4, 2016); Sufficient Funds Assurance, DataX Lending Intelligence, 
http://www.dataxltd.com/ancillary-services/successful-collections/ 
(last visited May 4, 2016).
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    Moreover, the checks provided by consumers during origination often 
are not processed as checks. Rather than sending these payments through 
the check clearing network, lenders often process these payments 
through the ACH network. They are able to use the consumer account 
number and routing number on a check to initiate an ACH transaction. 
When lenders use the ACH network in a first attempt to collect payment, 
the lender has used the check as a source document and the payment is 
considered an electronic fund transfer under EFTA and Regulation 
E,\342\ which generally provide additional consumer protections--such 
as error resolution rights--beyond those applicable to checks. However, 
if a transaction is initially processed through the check system and 
then processed through the ACH network because the first attempt failed 
for insufficient funds, the subsequent ACH attempt is not considered an 
electronic fund transfer under current Regulation E.\343\ Similarly, 
consumers may provide their account and routing number to lenders for 
the purposes of an ACH payment, but the lender may use that information 
to initiate a remotely created check that is processed through the 
check system and thus may not receive Regulation E protections.\344\
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    \342\ 12 CFR 1005.3(b)(2)(i) (``This part applies where a check, 
draft, or similar paper instrument is used as a source of 
information to initiate a one-time electronic fund transfer from a 
consumer's account. The consumer must authorize the transfer.'').
    \343\ Supplement I, Official Staff Interpretations, 12 CFR 
1005.3(c)(1) (``The electronic re-presentment of a returned check is 
not covered by Regulation E because the transaction originated by 
check.'').
    \344\ Remotely created checks are particularly risky for 
consumers because they have been considered to fall outside of 
protections for electronic fund transfers under Regulation E. Also, 
unlike signature paper checks, they are created by the entity 
seeking payment (in this case, the lender)--making such payments 
particularly difficult to track and reverse in cases of error or 
fraud. Due to concerns about remotely created checks and remotely 
created payment orders, the FTC recently banned the use of these 
payment methods by telemarketers. See FTC Final Amendments to 
Telemarketing Sales Rule, 80 FR 77520 (Dec. 14, 2015).
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Payment System Regulation and Private Network Requirements
    Different payment mechanisms are subject to different laws and, in 
some cases, private network rules that affect how lenders can exercise 
their rights to initiate withdrawals from consumers' accounts and how 
consumers may attempt to limit or stop certain withdrawal activity 
after granting an initial authorization. Because ACH payments and post-
dated checks are the most common authorization mechanisms used by 
payday and payday installment lenders, this section briefly outlines 
applicable Federal laws and National Automated Clearinghouse 
Association (NACHA) rules concerning stop payment rights, prohibitions 
on unauthorized payments, notices where payment amounts vary, and rules 
governing failed withdrawal attempts.
    NACHA recently adopted several changes to the ACH network rules in 
response to complaints about problematic behavior by payday and payday 
installment lenders, including a rule that allows it to more closely 
scrutinize originators who have a high rate of returned payments.\345\ 
Issues around monitoring and enforcing those rules and their 
application to problems in the market for covered loans are discussed 
in more detail in Market Concerns--Payments.
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    \345\ See ACH Network Risk and Enforcement Topics, NACHA (Jan. 
1, 2015), https://www.nacha.org/rules/ach-network-risk-and-enforcement-topics-january-1-2015 (providing an overview of changes 
to the NACHA Rules); Operations Bulletin, NACHA, ACH Operations 
Bulletin #1-2014: Questionable ACH Debit Origination: Roles and 
Responsibilities of ODFIs and RDFIs (Sept. 30, 2014), https://www.nacha.org/news/ach-operations-bulletin-1-2014-questionable-ach-debit-origination-roles-and-responsibilities (``During 2013, the ACH 
Network and its financial institution participants came under 
scrutiny as a result of the origination practices of certain 
businesses, such as online payday lenders, in using the ACH Network 
to debit consumers' accounts.'').
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    Stop payment rights. For preauthorized (recurring) electronic fund 
transfers,\346\ EFTA grants consumers a right to stop payment by 
issuing a stop payment order through their depository institution.\347\ 
The NACHA private rules adopt this EFTA provision along with additional 
stop payment rights. In contrast to EFTA, NACHA provides consumers with 
a stop payment right for both one-time and preauthorized 
transfers.\348\ Specifically, for recurring transfers, NACHA Rules 
require financial institutions to honor a stop payment order as long as 
the consumer notifies the bank at least 3 banking days before the 
scheduled debit.\349\ For one-time transfers, NACHA Rules require 
financial institutions to honor the stop payment order as long as the 
notification provides them with a ``reasonable opportunity to act upon 
the order.'' \350\ Consumers may notify the bank or credit union 
verbally or in writing, but if the consumer does not provide written 
confirmation the oral stop payment order may not be binding beyond 14 
days. If a consumer wishes to stop all future payments from an 
originator, NACHA Rules allow a bank or credit union to require the 
consumer to confirm in writing that she has revoked authorization from 
the originator.
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    \346\ A preauthorized transfer is ``an electronic fund transfer 
authorized in advance to recur at substantially regular intervals.'' 
EFTA, 15 U.S.C. 1693a(10); Regulation E, 12 CFR 1005.2(k).
    \347\ ``A consumer may stop payment of a preauthorized 
electronic fund transfer by notifying the financial institution 
orally or in writing at any time up to three business days preceding 
the scheduled date of such transfer.'' EFTA, 15 U.S.C. 1693e(a); 
Regulation E, 12 CFR 1005.10(c).
    \348\ See NACHA Rule 3.7.1.2, RDFI Obligation to Stop Payment of 
Single Entries (``An RDFI must honor a stop payment order provided 
by a Receiver, either verbally or in writing, to the RDFI at such 
time and in such manner as to allow the RDFI a reasonable 
opportunity to act upon the order prior to acting on an ARC, BOC, 
POP, or RCK Entry, or a Single Entry IAT, PPD, TEL, or WEB Entry to 
a Consumer Account.'').
    \349\ NACHA Rule 3.7.1.1.
    \350\ NACHA Rule 3.7.1.2.
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    Checks are also subject to a stop payment right under the Uniform 
Commercial Code (UCC).\351\ Consumers have a right to stop-payment on 
any check by providing the bank with oral (valid for 14 days) or 
written (valid for 6 months) notice. To be effective, the stop payment 
must describe the check ``with reasonable certainty'' and give the

[[Page 47896]]

bank enough information to find the check under the technology then 
existing.\352\ The stop payment also must be given at a time that 
affords the bank a reasonable opportunity to act on the stop payment 
before it becomes liable for the check under U.C.C. 4-303.
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    \351\ U.C.C. 4-403.
    \352\ U.C.C. 4-403 cmt. 5.
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    Although EFTA, the UCC, and NACHA Rules provide consumers with stop 
payment rights, financial institutions typically charge a fee of 
approximately $32 for consumers to exercise those rights.\353\ Further, 
both lenders and financial institutions often impose a variety of 
requirements that make the process for stopping payments confusing and 
burdensome for consumers. See discussion in Market Concerns--Payments.
---------------------------------------------------------------------------

    \353\ Median stop payment fee for an individual stop payment 
order charged by the 50 largest financial institutions in 2015 based 
on information in the Informa Research Database. Informa Research 
Services, Inc. (Mar. 2016), www.informars.com. Although information 
has been obtained from the various financial institutions, the 
accuracy cannot be guaranteed.
---------------------------------------------------------------------------

    Protection from unauthorized payments. Regulation E and NACHA Rules 
both provide protections with respect to payments by a consumer's 
financial institution if the electronic transfer is unauthorized.\354\ 
Payments originally authorized by the consumer can become unauthorized 
under EFTA if the consumer notifies his or her financial institution 
that the originator's authorization has been revoked.\355\ NACHA has a 
specific threshold for unauthorized returns, which involve transactions 
that originally collected funds from a consumer's account but that the 
consumer is disputing as unauthorized. Under NACHA Rules, originators 
are required to operate with an unauthorized return rate below 0.5 
percent or they risk fines and loss of access to the ACH network.\356\
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    \354\ NACHA Rule 2.3.1, General Rule, Originator Must Obtain 
Authorization from Receiver.
    \355\ Electronic Fund Transfer Act, 15 U.S.C. 1693a(12) (``The 
term `unauthorized electronic fund transfer' means an electronic 
fund transfer from a consumer's account initiated by a person other 
than the consumer without actual authority to initiate such transfer 
and from which the consumer receives no benefit, but the term does 
not include any electronic fund transfer (A) initiated by a person 
other than the consumer who was furnished with the card, code, or 
other means of access to such consumer's account by such consumer, 
unless the consumer has notified the financial institution involved 
that transfers by such other person are no longer authorized. . . 
.''). Regulation E implements this provision at 12 CFR 1005.2(m).
    \356\ NACHA Rule 2.17.2.
---------------------------------------------------------------------------

    Notice of variable amounts. Regulation E and the NACHA Rules both 
provide that if the debit amount for a preauthorized transfer changes 
from the previous transfer or from the preauthorized amount, consumers 
must receive a notice 10 calendar days prior to the debit.\357\ 
However, both of these rules have an exception from this requirement if 
consumers have agreed to a range of debit amounts and the payment does 
not fall outside that range.\358\
---------------------------------------------------------------------------

    \357\ 12 CFR 1005.10(d)(1) (``When a preauthorized electronic 
fund transfer from the consumer's account will vary in amount from 
the previous transfer under the same authorization or from the 
preauthorized amount, the designated payee or the financial 
institution shall send the consumer written notice of the amount and 
date of the transfer at least 10 days before the scheduled date of 
transfer.''); NACHA Rule 2.3.2.6(a).
    \358\ 12 CFR 1005.10(d)(2) (``The designated payee or the 
institution shall inform the consumer of the right to receive notice 
of all varying transfers, but may give the consumer the option of 
receiving notice only when a transfer falls outside a specified 
range of amounts or only when a transfer differs from the most 
recent transfer by more than an agreed-upon amount.''); NACHA Rule 
2.3.2.6(b).
---------------------------------------------------------------------------

    Based on outreach and market research, the Bureau does not believe 
that most payday and payday installment lenders making loans that would 
be covered under the proposed rule are providing a notice of transfers 
varying in amount. However, the Bureau is aware that many of these 
lenders take authorizations for a range of amounts. As a result, 
lenders use these broad authorizations rather than fall under the 
Regulation E requirement to send a notice of transfers varying in 
amount even when collecting for an irregular amount (for example, by 
adding fees or a past due amount to a regularly-scheduled payment). 
Some of these contracts provide that the consumer is authorizing the 
lender to initiate payment for any amount up to the full amount due on 
the loan.\359\
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    \359\ For example, a 2013 One Click Cash Loan Contract states:
    The range of ACH debit entries will be from the amount applied 
to finance charge for the payment due on the payment date as 
detailed in the repayment schedule in your loan agreement to an 
amount equal to the entire balance due and payable if you default on 
your loan agreement, plus a return item fee you may owe as explained 
in your loan agreement. You further authorize us to vary the amount 
of any ACH debit entry we may initiate to your account as needed to 
pay the payment due on the payment date as detailed in the repayment 
schedule in your loan agreement as modified by any prepayment 
arrangements you may make, any modifications you and we agree to 
regarding your loan agreement, or to pay any return item fee you may 
owe as explained in your loan agreement.
    Ex. 1 at 38, Labajo v. First International Bank & Trust, No. 14-
00627 (C.D. Cal. May 23, 2014), ECF No. 26-3 (SFS Inc, dba One Click 
Cash, Authorization to Initiate ACH Debit and Credit Entries).
---------------------------------------------------------------------------

    Reinitiation Cap. After a payment attempt has failed, NACHA Rules 
allow an originator--in this case, the lender that is trying to collect 
payment--to attempt to collect that same payment no more than two 
additional times through the ACH network.\360\ NACHA Rules also require 
the ACH files \361\ for the two additional attempts to be labeled as 
``reinitiated'' transactions. Because the rule applies on a per-payment 
basis, for lenders with recurring payment authorizations, the count 
resets to zero when the next scheduled payment comes due.
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    \360\ NACHA Rule 2.12.4.
    \361\ ACH transactions are transferred in a standardized 
electronic file format between financial institutions and ACH 
network operators. These files contain information about the payment 
itself along with routing information for the applicable consumer 
account, originator (or in this case, the lender) account, and 
financial institution.
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III. Research, Outreach, and Consumer Testing

A. Research and Stakeholder Outreach

    The Bureau has undertaken extensive research and conducted broad 
outreach with a multitude of stakeholders in the years leading up to 
the release of this Notice of Proposed Rulemaking. All of the input and 
feedback the Bureau received from this outreach has assisted the Bureau 
in the development of this notice.
    That process began in January 2012 when the Bureau held its first 
public field hearing in Birmingham, Alabama, focused on small dollar 
lending. At the field hearing, the Bureau heard testimony and received 
input from consumers, civil rights groups, consumer advocates, 
religious leaders, industry and trade association representatives, 
academics, and elected representatives and other governmental officials 
about consumers' experiences with small dollar loan products. The 
Bureau transcribed that field hearing and posted the transcript on its 
Web site.\362\ Concurrently with doing this, the Bureau placed a notice 
in the Federal Register inviting public comment on the issues discussed 
in the field hearing.\363\ The Bureau received 664 public comments in 
response to that request.
---------------------------------------------------------------------------

    \362\ Bureau of Consumer Fin. Prot., In the Matter of: A Field 
Hearing on Payday Lending, Hearing Transcript, Jan. 19, 2012, 
available at http://files.consumerfinance.gov/f/201201_cfpb_transcript_payday-lending-field-hearing-alabama.pdf.
    \363\ 77 FR 16817 (March 22, 2012).
---------------------------------------------------------------------------

    At the Birmingham field hearing, the Bureau announced the launch of 
a program to conduct supervisory examinations of payday lenders 
pursuant to the Bureau's authority under Dodd-Frank Act section 1024. 
As part of the initial set of supervisory exams, the Bureau obtained 
loan-level records from a number of large payday lenders.
    In April 2013 and March 2014, the Bureau issued two research 
publications reporting on findings by Bureau staff

[[Page 47897]]

using the supervisory data. In conjunction with the second of these 
reports, the Bureau held a field hearing in Nashville, Tennessee, to 
gather further input from consumers, providers, and advocates alike. 
While the Bureau was working on these reports and in the period 
following their release, the Bureau held numerous meetings with 
stakeholders on small dollar lending in general and to hear their views 
on potential policy approaches.
    The Bureau has conducted extensive outreach to industry, including 
national trade associations and member businesses, to gain knowledge of 
small dollar lending operations, underwriting processes, State laws, 
and the anticipated regulatory impact of the approaches proposed in the 
Small Business Review Panel Outline. Industry meetings have included 
non-depository lenders of different sizes, publicly traded and 
privately held, that offer single-payment payday loans through 
storefronts and online, multi-payment payday loans, vehicle title 
loans, open-end credit, and installment loans. The Bureau's outreach 
with depository lenders has likewise been extensive and included 
meetings with retail banks, community banks, and credit unions of 
varying sizes, both Federally and State-chartered. In addition, the 
Bureau has held extensive outreach on multiple occasions with the trade 
associations that represent these lenders. The Bureau's outreach also 
extended to specialty consumer reporting agencies utilized by some of 
these lenders. On other occasions, Bureau staff met to hear 
recommendations on responsible lending practices from a voluntarily-
organized roundtable made up of lenders, advocates, and representatives 
of a specialty consumer reporting agency and a research organization.
    As part of the process under the Small Business Regulatory 
Enforcement and Fairness Act (SBREFA process), which is discussed in 
more detail below, the Bureau released in March 2015 a summary of the 
rulemaking proposals under consideration in the Small Business Review 
Panel Outline. At the same time that the Bureau published the Small 
Business Review Panel Outline, the Bureau held a field hearing in 
Richmond, Virginia, to begin the process of gathering feedback on the 
proposals under consideration from a broad range of stakeholders. 
Immediately after the Richmond field hearing, the Bureau held separate 
roundtable discussions with consumer advocates and with industry 
members and trade associations to hear feedback on the Small Business 
Review Panel Outline. On other occasions, the Bureau met with members 
of two trade associations representing storefront payday lenders to 
discuss their feedback on issues presented in the Small Business Review 
Panel Outline.
    At the Bureau's Consumer Advisory Board meeting in June 2015 in 
Omaha, Nebraska, a number of meetings and field events were held about 
payday, vehicle title, and similar loans. The Consumer Advisory Board 
advises and consults with the Bureau in the exercise of its functions 
under the Federal consumer financial laws, and provides information on 
emerging practices in the consumer financial products and services 
industry, including regional trends, concerns, and other relevant 
information. The Omaha events included a visit to a payday loan store 
and a day-long public session that focused on the Bureau's proposals in 
the Small Business Review Panel Outline and trends in payday and 
vehicle title lending. The Consumer Advisory Board has convened six 
other discussions on consumer lending. Two of the Bureau's other 
advisory bodies also discussed the proposals outlined in the Small 
Business Review Panel Outline: The Community Bank Advisory Council held 
two subcommittee discussions in March 2015 and November 2015, and the 
Credit Union Advisory Council conducted one Council discussion in March 
2016 and held two subcommittee discussions in April 2015 and October 
2015.
    Bureau leaders, including its director, and staff have also spoken 
at events and conferences throughout the country. These meetings have 
provided additional opportunities to gather insight and recommendations 
from both industry and consumer groups about how to formulate a 
proposed rule. In addition to gathering information from meetings with 
lenders and trade associations and through regular supervisory and 
enforcement activities, Bureau staff has made fact-finding visits to at 
least 12 non-depository payday and vehicle title lenders, including 
those that offer single-payment and installment loans.
    In conducting research, the Bureau has used not only the data 
obtained from the supervisory examinations previously described but 
also data obtained through orders issued by the Bureau pursuant to 
section 1022(c)(4) of the Dodd-Frank Act, data obtained through civil 
investigative demands made by the Bureau pursuant to section 1052 of 
the Dodd-Frank Act, and data voluntarily supplied to the Bureau by 
several lenders. Using these additional data sources, the Bureau in 
April and May 2016 published two research reports on how online payday 
lenders use access to consumers' bank accounts to collect loan payments 
and on consumer usage and default patterns on short-term vehicle title 
loans.
    The Bureau also has engaged in consultation with Indian tribes 
regarding this rulemaking. The Bureau's Policy for Consultation with 
Tribal Governments provides that the Bureau ``is committed to regular 
and meaningful consultation and collaboration with tribal officials, 
leading to meaningful dialogue with Indian tribes on Bureau policies 
that would be expressly directed to tribal governments or tribal 
members or that would have direct implications for Indian tribes.'' 
\364\ To date, the Bureau has held two formal consultation sessions 
related to this rulemaking. The first was held October 27, 2014, at the 
National Congress of American Indians 71st Annual Convention and 
Marketplace in Atlanta, Georgia, prior to the release of the SBREFA 
materials. At the first consultation session, tribal leaders provided 
input to the Bureau prior to the drafting of the proposals included in 
what would become the Small Business Review Panel Outline. A second 
consultation was held at the Bureau's headquarters on June 15, 2015, so 
that tribal leaders could respond to the proposals under consideration 
as set forth in the Small Business Review Panel Outline. All federally 
recognized tribes were invited to attend these consultations, which 
included open dialogue in which tribal leaders shared their views with 
senior Bureau leadership and staff about the potential impact of the 
rulemaking on tribes. The Bureau expects to engage in additional 
consultation following the release of the proposed rule, and 
specifically seeks comment on this Notice of Proposed Rulemaking from 
tribal governments.
---------------------------------------------------------------------------

    \364\ Bureau of Consumer Fin. Prot., Consumer Financial 
Protection Bureau Policy for Consultation with Tribal Governments, 
at 1, available at http://files.consumerfinance.gov/f/201304_cfpb_consultations.pdf.
---------------------------------------------------------------------------

    The Bureau's outreach also has included meetings and calls with 
individual State Attorneys General, State financial regulators, and 
municipal governments, and with the organizations representing the 
officials charged with enforcing applicable Federal, State, and local 
laws. In particular, the Bureau, in developing the proposed registered 
information system requirements, consulted with State agencies from 
States that require lenders to provide information about certain 
covered loans to statewide databases

[[Page 47898]]

and intends to continue to do so as appropriate.
    As discussed in connection with section 1022 of the Dodd-Frank Act 
below, the Bureau has consulted with other Federal consumer protection 
and also Federal prudential regulators about these issues. The Bureau 
has provided other regulators with information about the proposals 
under consideration, sought their input, and received feedback that has 
assisted the Bureau in preparing this proposed rule.
    In addition to these various forms of outreach, the Bureau's 
analysis has also been informed by supervisory examinations of a number 
of payday lenders, enforcement investigations of a number of different 
types of liquidity lenders, market monitoring activities, three 
additional research reports drawing on extensive loan-level data, and 
complaint information. Specifically, the Bureau has received, as of 
January 1, 2016, 36,200 consumer complaints relating to payday loans 
and approximately 10,000 more complaints relating to vehicle title and 
installment loan products that, in some cases, would be covered by the 
proposed rule.\365\ Of the 36,200 payday complaints, approximately 
12,200 were identified by the consumer as payday complaints and 24,000 
were identified as debt collection complaints related to a payday 
loan.\366\ The Bureau has also carefully reviewed the published 
literature with respect to small-dollar liquidity loans and a number of 
outside researchers have presented their research at seminars for 
Bureau staff.
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    \365\ The Bureau has received nearly 9,700 complaints on 
installment loans and nearly 500 complaints on vehicle title loans.
    \366\ The Bureau has taken a phased approach to accepting 
complaints from consumers. The Bureau began accepting installment 
loan complaints in March of 2012, payday loan complaints in November 
of 2013, and vehicle title loan complaints in July of 2014.
---------------------------------------------------------------------------

B. Small Business Review Panel

    In April 2015, the Bureau convened a Small Business Review Panel 
with the Chief Counsel for Advocacy of the SBA and the Administrator of 
the Office of Information and Regulatory Affairs within the Office of 
Management and Budget (OMB).\367\ As part of this process, the Bureau 
prepared an outline of the proposals then under consideration and the 
alternatives considered (referred to above as the Small Business Review 
Panel Outline), which it posted on its Web site for review and comment 
by the general public as well as the small entities participating in 
the panel process.\368\
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    \367\ The Small Business Regulatory Enforcement Fairness Act of 
1996 (SBREFA), as amended by section 1100G(a) of the Dodd-Frank Act, 
requires the Bureau to convene a Small Business Review Panel before 
proposing a rule that may have a substantial economic impact on a 
significant number of small entities. See Public Law 104-121, tit. 
II, 110 Stat. 847, 857 (1996) as amended by Public Law 110-28, sec. 
8302 (2007), and Public Law 111-203, sec. 1100G (2010).
    \368\ Bureau of Consumer Fin. Prot., Small Business Advisory 
Review Panel for Potential Rulemakings for Payday, Vehicle Title, 
And Similar Loans: Outline of Proposals under Consideration and 
Alternatives Considered, (Mar. 26, 2015) available at http://files.consumerfinance.gov/f/201503_cfpb_outline-of-the-proposals-from-small-business-review-panel.pdf.
---------------------------------------------------------------------------

    Prior to formally convening, the Panel participated in 
teleconferences with small groups of the small entity representatives 
(SERs) to introduce the Small Business Review Panel Outline and to 
obtain feedback. The Small Business Review Panel gathered information 
from representatives of 27 small entities, including small payday 
lenders, vehicle title lenders, installment lenders, banks, and credit 
unions. The meeting participants represented storefront and online 
lenders, in addition to State-licensed lenders and lenders affiliated 
with Indian tribes. The Small Business Review Panel held a full-day 
meeting on April 29, 2015, to discuss the proposals under 
consideration. The 27 small entities also were invited to submit 
written feedback, and 24 of them provided written comments. The Small 
Business Review Panel made findings and recommendations regarding the 
potential compliance costs and other impacts of those entities. These 
findings and recommendations are set forth in the Small Business Review 
Panel Report, which will be made part of the administrative record in 
this rulemaking.\369\ The Bureau has carefully considered these 
findings and recommendations in preparing this proposal as detailed 
below in the section-by-section analysis on various provisions and in 
parts VI and VII. The Bureau specifically seeks comment on this Notice 
of Proposed Rulemaking from small businesses.
---------------------------------------------------------------------------

    \369\ Bureau of Consumer Fin Prot., U.S. Small Bus. Admin., & 
Office of Mgmt. & Budget, Final Report of the Small Business Review 
Panel on CFPB's Rulemaking on Payday, Vehicle Title, and Similar 
Loans (June 25, 2015) (hereinafter Small Business Review Panel 
Report), available at http://files.consumerfinance.gov/f/documents/3a_-_SBREFA_Panel_-_CFPB_Payday_Rulemaking_-_Report.pdf.
---------------------------------------------------------------------------

    As discussed above, the Bureau has continued to conduct extensive 
outreach and engagement with stakeholders on all sides since the SBREFA 
process concluded.

C. Consumer Testing

    In developing this notice, the Bureau engaged a third-party vendor, 
Fors Marsh Group (FMG), to coordinate qualitative consumer testing for 
disclosures under consideration in this rulemaking. The Bureau 
developed several prototype disclosure forms to test with participants 
in one-on-one interviews. Three categories of forms were developed and 
tested: (1) Origination disclosures that informed consumers about 
limitations on their ability to receive additional short-term loans; 
(2) upcoming payment notices that alerted consumers about lenders' 
future attempts to withdraw money from consumers' accounts; and (3) 
expired authorization notices that alerted consumers that lenders would 
no longer be able to attempt to withdraw money from the consumers' 
accounts. Observations and feedback from the testing were incorporated 
into the model forms proposed by the Bureau.
    Through this testing, the Bureau sought to observe how consumers 
would interact with and understand prototype forms developed by the 
Bureau. In late 2015, FMG facilitated two rounds of one-on-one 
interviews. Each interview lasted 60 minutes and included fourteen 
participants. The first round was conducted in September 2015 in New 
Orleans, Louisiana, and the second round was conducted in October 2015 
in Kansas City, Missouri. In conjunction with the release of this 
notice, the Bureau is making available a report prepared by FMG on the 
consumer testing (``FMG Report'').\370\ The testing and focus groups 
were conducted in accordance with OMB Control Number 3170-0022.
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    \370\ For a detailed discussion of the Bureau's consumer 
testing, see Fors Marsh Group, Qualitative Testing of Small Dollar 
Loan Disclosures, Prepared for the Consumer Financial Protection 
Bureau (April 2016) (hereinafter FMG Report), available at http://files.consumerfinance.gov/f/documents/Disclosure_Testing_Report.pdf.
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    A total of 28 individuals participated in the interviews. Of these 
28 participants, 20 self-identified as having used a small dollar loan 
within the past two years.
    Highlights from individual interview findings. FMG asked 
participants questions to assess how well they understood the 
information on the forms.
    For the origination forms, the questions focused on whether 
participants understood that their ability to rollover this loan or 
take out additional loans may be limited. Each participant reviewed one 
of two different prototype forms: either one for loans that would 
require an ability-to-

[[Page 47899]]

repay determination (ATR Form) or one for loans that would be offered 
under the conditional exemption for covered short-term loans 
(Alternative Loan Form). During Round 1, many participants for both 
form types recognized and valued information about the loan amount and 
due date; accordingly, that information was moved to the beginning of 
all the origination forms for Round 2. For the ATR Forms, few 
participants in Round 1 understood that the ``30 days'' language was 
describing a period when future borrowing may be restricted. Instead, 
several read the language as describing the loan term. In contrast, 
nearly all participants reviewing the Alternative Loan Form understood 
that it was attempting to convey that each successive loan they took 
out after the first in this series had to be smaller than the previous 
loan, and that after taking out three loans they would not be able to 
take out another for 30 days. Some participants also reviewed a version 
of this Alternative Loan Form for when consumers are taking out their 
third loan in a sequence. The majority of participants who viewed this 
notice understood it, acknowledging that they would have to wait until 
30 days after the third loan was paid off to be considered for another 
similar loan.
    During Round 2, participants reviewed two new versions of the ATR 
Form. One adjusted the ``30 days'' phrasing and the other completely 
removed the ``30 days'' language, replacing it with the phrase 
``shortly after this one.'' The Alternative Loan Form was updated with 
similar rephrasing of the ``30 days'' language. To simplify the table, 
the ``loan date'' column was removed.
    The results in Round 2 were similar to Round 1. Participants 
reviewing the ATR forms focused on the language notifying them they 
should not take out this loan if they're unable to pay the full balance 
by the due date. Information about restrictions on future loans went 
largely unnoticed. The edits appeared to positively impact 
comprehension since no participants interpreted either form as 
providing information on their loan term. There did not seem to be a 
difference in comprehension between the group with the ``30 days'' 
version and the group with the ``shortly'' version. As in Round 1, 
participants who reviewed the Alternative Loan Form noticed and 
understood the schedule detailing maximum borrowable amounts. These 
participants understood that the purpose of the Alternative Loan Form 
was to inform them that any subsequent loans must be smaller.
    Questions for the payment notices focused on participants' ability 
to identify and understand information about the upcoming payment. 
Participants reviewed one of two payment notices: an Upcoming 
Withdrawal Notice or an Unusual Withdrawal Notice. Both forms provided 
details about the upcoming payment attempt and a payment breakdown 
table. The Unusual Withdrawal Notice also indicated that the withdrawal 
was unusual because the payment was higher than the previous withdrawal 
amount. To obtain feedback on participants' likelihood to open notices 
delivered in an electronic manner, these notices were presented as a 
sequence to simulate an email message.
    In Round 1, all participants, based on seeing the subject line in 
the email inbox, said that they would open the Upcoming Withdrawal 
email and read it. Nearly all participants said they would consider the 
email legitimate. They reported having no concerns about the email 
because they would have recognized the company name, and because it 
included details specific to their account along with the lender 
contact information. When shown the full Upcoming Withdrawal Notice, 
participants understood that the lender would be withdrawing $40 from 
their account on a particular date. Several participants also pointed 
out that the notice described an interest-only payment. Round 1 results 
were similar for the Unusual Withdrawal Notice; all participants who 
viewed this notice said they would open the email, and all but one 
participant--who was deterred due to concerns with the appearance of 
the link's URL--would click on the link leading to additional details. 
The majority of participants indicated that they would want to read the 
email right away, because the words ``alert'' and ``unusual'' would 
catch their attention, and would make them want to determine what was 
going on and why a different amount was being withdrawn.
    For Round 2, the payment amount was increased because some 
participants found it too low and would not directly answer questions 
about what they would do if they could not afford payment. The payment 
breakdown tables were also adjusted to address feedback about 
distinguishing between principal, finance charges, and loan balance. 
The results for both the Upcoming Payment and Unusual Payment Notices 
were similar to Round 1 in that the majority of participants would open 
the email, thought it was legitimate and from the lender, and 
understood the purpose.
    For the consumer rights notice (referred to an ``expired 
authorization notice'' in the report), FMG asked questions about 
participant reactions to the notice, participant understanding of why 
the notice was being sent, and what participants might do in response 
to the notice information. As with the payment notices, these notices 
were presented as a sequence to simulate an email message.
    In Round 1, participants generally understood that the lender had 
tried twice to withdraw money from their account and would not be able 
to make any additional attempts to withdraw payment. Most participants 
expressed disappointment with themselves for being in a position where 
they had two failed payments and interpreted the notice to be a 
reprimand from the lender.
    For Round 2, the notice was edited to clarify that the lender was 
prohibited by Federal law from making additional withdrawals. For 
example, the email subject line was changed from ``Willow Lending can 
no longer withdraw loan payments from your account'' to ``Willow 
Lending is no longer permitted to withdraw loan payments from your 
account.'' Instead of simply saying ``federal law prohibits us from 
trying to withdraw payment again,'' language was added to both the 
email message and the full notice saying, ``In order to protect your 
account, federal law prohibits us from trying to withdraw payment 
again.'' More information about consumer rights and the CFPB was also 
added. Some participants in Round 2 still reacted negatively to this 
notice and viewed it as reflective of something they did wrong. 
However, several reacted more positively to this prototype and viewed 
the notice as protection.
    To obtain feedback regarding consumer preferences on receiving 
notices through text message, participants were also presented with an 
image of a text of the consumer rights notice and asked how they would 
feel about getting this notice by text. Overall, the majority of 
participants in Round 1 (8 of 13) disliked the idea of receiving 
notices via text. One of the main concerns was privacy; many mentioned 
that they would be embarrassed if a text about their loan situation 
displayed on their phone screen while they were in a social setting. In 
Round 2, the text image was updated to match the new subject line of 
the consumer rights notice. The majority (10 of the 14) of participants 
had a negative reaction to the notification delivered via text message. 
Despite this, the majority of

[[Page 47900]]

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

IV. Legal Authority

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

A. Section 1031 of the Dodd-Frank Act

Section 1031(b)--The Bureau's Authority To Identify and Prevent UDAAPs
    Section 1031(b) of the Dodd-Frank Act provides the Bureau with 
authority to prescribe rules to identify and prevent unfair, deceptive, 
and abusive acts or practices, or UDAAPs. Specifically, Dodd-Frank Act 
section 1031(b) authorizes the Bureau to prescribe rules ``applicable 
to a covered person or service provider identifying as unlawful unfair, 
deceptive, or abusive acts or practices in connection with any 
transaction with a consumer for a consumer financial product or 
service, or the offering of a consumer financial product or service.'' 
Section 1031(b) of the Dodd-Frank Act further provides that, ``Rules 
under this section may include requirements for the purpose of 
preventing such acts or practice.''
    Given similarities between the Dodd-Frank Act and the Federal Trade 
Commission Act (FTC Act) provisions relating to unfair and deceptive 
acts or practices, case law and Federal agency rulemakings relying on 
the FTC Act provisions inform the scope and meaning of the Bureau's 
rulemaking authority with respect to unfair and deceptive acts or 
practices under section 1031(b) of the Dodd-Frank Act.\371\ Courts 
evaluating exercise of agency rulemaking authority under the FTC Act 
unfairness and deception standards have held that there must be a 
``reasonable relation'' between the act or practice identified as 
unlawful and the remedy chosen by the agency.\372\ The Bureau agrees 
with this approach and therefore believes that it is reasonable to 
interpret Dodd-Frank Act section 1031(b) to permit the imposition of 
requirements to prevent acts or practices that are identified by the 
Bureau as unfair or deceptive so long as the preventive requirements 
being imposed by the Bureau have a reasonable relation to the 
identified acts or practices. The Bureau likewise believes it is 
reasonable to interpret Dodd-Frank Act section 1031(b) to provide the 
same degree of discretion to the Bureau with respect to the imposition 
of requirements to prevent acts or practices that are identified by the 
Bureau as abusive. Throughout this proposal, the Bureau has relied on 
and applied this interpretation in proposing requirements to prevent 
acts or practices identified as unfair or abusive.
---------------------------------------------------------------------------

    \371\ Section 18 of the FTC Act similarly authorizes the FTC to 
prescribe ``rules which define with specificity acts or practices 
which are unfair or deceptive acts or practices in or affecting 
commerce'' and provides that such rules ``may include requirements 
prescribed for the purpose of preventing such acts or practices.'' 
15 U.S.C. 57a(a)(1)(B). As discussed below, the Dodd-Frank Act, 
unlike the FTC Act, also permits the Bureau to prescribe rules 
identifying and preventing ``abusive'' acts or practices.
    \372\ See Am. Fin. Servs. Ass'n v. FTC, 767 F.2d 957, 988 (D.C. 
Cir. 1985) (AFSA) (holding that the FTC ``has wide latitude for 
judgment and the courts will not interfere except where the remedy 
selected has no reasonable relation to the unlawful practices found 
to exist'' (citing Jacob Siegel Co. v. FTC, 327 U.S. 608, 612-13 
(1946)).
---------------------------------------------------------------------------

Section 1031(c)--Unfair Acts or Practices
    Section 1031(c)(1) of the Dodd-Frank Act provides that the Bureau 
``shall have no authority under this section to declare an act or 
practice in connection with a transaction with a consumer for a 
consumer financial product or service, or the offering of a consumer 
financial product or service, to be unlawful on the grounds that such 
act or practice is unfair,'' unless the Bureau ``has a reasonable 
basis'' to conclude that: ``(A) the act or practice causes or is likely 
to cause substantial injury to consumers which is not reasonably 
avoidable by consumers; and (B) such substantial injury is not 
outweighed by countervailing benefits to consumers or to competition.'' 
\373\ Section 1031(c)(2) of the Dodd-Frank Act provides that, ``In 
determining whether an act or practice is unfair, the Bureau may 
consider established public policies as evidence to be considered with 
all other evidence. Such public policy considerations may not serve as 
a primary basis for such determination.'' \374\
---------------------------------------------------------------------------

    \373\ 12 U.S.C. 5531(c)(1).
    \374\ 12 U.S.C. 5531(c)(2).
---------------------------------------------------------------------------

    The unfairness standard under section 1031(c) of the Dodd-Frank 
Act--requiring primary consideration of the three elements of 
substantial injury, not reasonably avoidable by consumers, and 
countervailing benefits to consumers or to competition, and permitting 
secondary consideration of public policy--reflects the unfairness 
standard under the FTC Act.\375\ Section 5(n) of the FTC Act was 
amended in 1994 to incorporate the principles set forth in the FTC's 
December 17, 1980 ``Commission Statement of Policy on the Scope of 
Consumer Unfairness Jurisdiction'' (the FTC Policy Statement on 
Unfairness).\376\ The FTC Act unfairness standard, the FTC Policy 
Statement on Unfairness, FTC and other Federal agency rulemakings,\377\ 
and related case law inform the scope and meaning of the Bureau's 
authority under Dodd-Frank Act section 1031(b) to issue rules that 
identify and prevent acts or practices that the Bureau determines are 
unfair pursuant to Dodd-Frank Act section 1031(c).
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    \375\ Section 5(n) of the FTC Act, as amended in 1994, provides 
that, ``The [FTC] shall have no authority . . . to declare unlawful 
an act or practice on the grounds that such act or practice is 
unfair unless the act or practice causes or is likely to cause 
substantial injury to consumers which is not reasonably avoidable by 
consumers themselves and not outweighed by countervailing benefits 
to consumers or to competition. In determining whether an act or 
practice is unfair, the [FTC] may consider established public 
policies as evidence to be considered with all other evidence. Such 
public policy considerations may not serve as a primary basis for 
such determination.'' 15 U.S.C. 45(n).
    \376\ Letter from the FTC to Hon. Wendell Ford and Hon. John 
Danforth, Committee on Commerce, Science and Transportation, United 
States Senate, Commission Statement of Policy on the Scope of 
Consumer Unfairness Jurisdiction (December 17, 1980), reprinted in 
In re Int'l Harvester Co., 104 F.T.C. 949, 1070 (1984) (Int'l 
Harvester). See also S. Rept. 103-130, at 12-13 (1993) (legislative 
history to FTC Act amendments indicating congressional intent to 
codify the principles of the FTC Policy Statement on Unfairness).
    \377\ In addition to the FTC's rulemakings under unfairness 
authority, certain Federal prudential regulators have prescribed 
rules prohibiting unfair practices under section 18(f)(1) of the FTC 
Act and, in doing so, they applied the statutory elements consistent 
with the standards articulated by the FTC. The Federal Reserve 
Board, FDIC, and the OCC also issued guidance generally adopting 
these standards for purposes of enforcing the FTC Act's prohibition 
on unfair and deceptive acts or practices. See 74 FR 5498, 5502 
(Jan. 29, 2009) (background discussion of legal authority for 
interagency Subprime Credit Card Practices rule).
---------------------------------------------------------------------------

Substantial Injury
    The first element for a determination of unfairness under section 
1031(c)(1) of the Dodd-Frank Act is that the act or practice causes or 
is likely to cause substantial injury to consumers. As discussed above, 
the FTC Act unfairness standard, the FTC Policy Statement on 
Unfairness, FTC and other Federal agency rulemakings, and related case 
law inform the meaning of the elements

[[Page 47901]]

of the unfairness standard under Dodd-Frank Act section 1031(c)(1). The 
FTC noted in the FTC Policy Statement on Unfairness that substantial 
injury ordinarily involves monetary harm.\378\ The FTC has stated that 
trivial or speculative harms are not cognizable under the test for 
substantial injury.\379\ The FTC also noted that an injury is 
``sufficiently substantial'' if it consists of a small amount of harm 
to a large number of individuals or if it raises a significant risk of 
harm.\380\ The FTC has found that substantial injury also may involve a 
large amount of harm experienced by a small number of individuals.\381\ 
The FTC has said that emotional impact and other more subjective types 
of harm ordinarily will not constitute substantial injury,\382\ but the 
D.C. Circuit held that psychological harm can form part of the 
substantial injury along with financial harm.\383\
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    \378\ See FTC Policy Statement on Unfairness, Int'l Harvester, 
104 F.T.C. at 1073. For example, in the Higher-Priced Mortgage Loan 
(HPML) Rule, the Federal Reserve Board concluded that a borrower who 
cannot afford to make the loan payments as well as payments for 
property taxes and homeowners insurance because the lender did not 
adequately assess the borrower's repayment ability suffers 
substantial injury, due to the various costs associated with missing 
mortgage payments (e.g., large late fees, impairment of credit 
records, foreclosure related costs). See 73 FR 44522, 44541-42 (July 
30, 2008).
    \379\ See FTC Policy Statement on Unfairness, Int'l Harvester, 
104 F.T.C. at 1073.
    \380\ See FTC Policy Statement on Unfairness, Int'l Harvester, 
104 F.T.C. at 1073 n.12.
    \381\ See Int'l Harvester, 104 F.T.C. at 1064.
    \382\ See FTC Policy Statement on Unfairness, Int'l Harvester, 
104 F.T.C. at 1073.
    \383\ See AFSA, 767 F.2d at 973-74, n.20 (discussing the 
potential psychological harm resulting from lenders' taking of non-
possessory security interests in household goods and associated 
threats of seizure, which was part of the FTC's rationale for 
intervention in the Credit Practices Rule).
---------------------------------------------------------------------------

Not Reasonably Avoidable
    The second element for a determination of unfairness under section 
1031(c)(1) of the Dodd-Frank Act is that the substantial injury is not 
reasonably avoidable by consumers. As discussed above, the FTC Act 
unfairness standard, the FTC Policy Statement on Unfairness, FTC and 
other Federal agency rulemakings, and related case law inform the 
meaning of the elements of the unfairness standard under Dodd-Frank Act 
section 1031(c)(1). The FTC has provided that knowing the steps for 
avoiding injury is not enough for the injury to be reasonably 
avoidable; rather, the consumer must also understand and appreciate the 
necessity of taking those steps.\384\ As the FTC explained in the FTC's 
Policy Statement on Unfairness, most unfairness matters are brought to 
``halt some form of seller behavior that unreasonably creates or takes 
advantage of an obstacle to the free exercise of consumer 
decisionmaking.'' \385\ The D.C. Circuit has noted that where such 
behavior exists, there is a ``market failure'' and the agency ``may be 
required to take corrective action.'' \386\ Reasonable avoidability 
also takes into account the costs of making a choice other than the one 
made and the availability of alternatives in the marketplace.\387\
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    \384\ See Int'l Harvester, 104 F.T.C. at 1066.
    \385\ FTC Policy Statement on Unfairness, Int'l Harvester, 104 
F.T.C. at 1074.
    \386\ AFSA, 767 F.2d at 976. The D.C. Circuit noted that 
Congress intended for the FTC to develop and refine the criteria for 
unfairness on a ``progressive, incremental'' basis. Id. at 978. The 
court upheld the FTC's Credit Practices Rule by reasoning in part 
that ``the fact that the [FTC's] analysis applies predominantly to 
certain creditors dealing with a certain class of consumers (lower-
income, higher-risk borrowers) does not, as the dissent suggests, 
undercut its validity. [There is] a market failure with respect to a 
particular category of credit transactions which is being exploited 
by the creditors involved to the detriment of the consumers 
involved.'' Id. at 982 n. 29.
    \387\ See FTC Policy Statement on Unfairness, Int'l Harvester, 
104 F.T.C. at 1074 n. 19 (``In some senses any injury can be 
avoided--for example, by hiring independent experts to test all 
products in advance, or by private legal actions for damages--but 
these courses may be too expensive to be practicable for individual 
consumers to pursue.''); AFSA, 767 F.2d at 976-77 (reasoning that 
because of factors such as substantial similarity of contracts, 
``consumers have little ability or incentive to shop for a better 
contract'').
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Countervailing Benefits to Consumers or Competition
    The third element for a determination of unfairness under section 
1031(c)(1) of the Dodd-Frank Act is that the act or practice's 
countervailing benefits to consumers or to competition do not outweigh 
the substantial consumer injury. As discussed above, the FTC Act 
unfairness standard, the FTC Policy Statement on Unfairness, FTC and 
other Federal agency rulemakings, and related case law inform the 
meaning of the elements of the unfairness standard under Dodd-Frank Act 
section 1031(c)(1). In applying the FTC Act's unfairness standard, the 
FTC has stated that generally it is important to consider both the 
costs of imposing a remedy and any benefits that consumers enjoy as a 
result of the practice.\388\ Authorities addressing the FTC Act's 
unfairness standard indicate that the countervailing benefits test does 
not require a precise quantitative analysis of benefits and costs, as 
such an analysis may be unnecessary or, in some cases, impossible; 
rather, the agency is expected to gather and consider reasonably 
available evidence.\389\
---------------------------------------------------------------------------

    \388\ See FTC Policy Statement on Unfairness, Int'l Harvester, 
104 F.T.C. at 1073-74 (noting that an unfair practice must be 
``injurious in its net effects'' and that ``[t]he Commission also 
takes account of the various costs that a remedy would entail. These 
include not only the costs to the parties directly before the 
agency, but also the burdens on society in general in the form of 
increased paperwork, increased regulatory burdens on the flow of 
information, reduced incentives to innovation and capital formation, 
and similar matters.'').
    \389\ See S. Rept. 103-130, at 13 (1994) (legislative history 
for the 1994 amendments to the FTC Act noting that, ``In determining 
whether a substantial consumer injury is outweighed by the 
countervailing benefits of a practice, the Committee does not intend 
that the FTC quantify the detrimental and beneficial effects of the 
practice in every case. In many instances, such a numerical benefit-
cost analysis would be unnecessary; in other cases, it may be 
impossible. This section would require, however, that the FTC 
carefully evaluate the benefits and costs of each exercise of its 
unfairness authority, gathering and considering reasonably available 
evidence.''); Pennsylvania Funeral Directors Ass'n, Inc. v. FTC, 41 
F.3d 81, 91 (3d Cir. 1994) (in upholding the FTC's amendments to the 
Funeral Industry Practices Rule, the Third Circuit noted that ``much 
of a cost-benefit analysis requires predictions and speculation''); 
Int'l Harvester, 104 F.T.C. at 1065 n. 59 (``In making these 
calculations we do not strive for an unrealistic degree of 
precision. . . . We assess the matter in a more general way, giving 
consumers the benefit of the doubt in close issues. . . . What t is 
important . . . is that we retain an overall sense of the 
relationship between costs and benefits. We would not want to impose 
compliance costs of millions of dollars in order to prevent a 
bruised elbow.'').
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Public Policy
    As noted above, section 1031(c)(2) of the Dodd-Frank Act provides 
that, ``In determining whether an act or practice is unfair, the Bureau 
may consider established public policies as evidence to be considered 
with all other evidence. Such public policy considerations may not 
serve as a primary basis for such determination.'' \390\
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    \390\ 12 U.S.C. 5531(c)(2).
---------------------------------------------------------------------------

Section 1031(d)--Abusive Acts or Practices
    The Dodd-Frank Act, in section 1031(b), authorizes the Bureau to 
identify and prevent abusive acts and practices. The Bureau believes 
that Congress intended for the statutory phrase ``abusive acts or 
practices'' to encompass conduct by covered persons that is beyond what 
would be prohibited as unfair or deceptive acts or practices, although 
such conduct could overlap and thus satisfy the elements for more than 
one of the standards.\391\
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    \391\ See, e.g., S. Rep. No. 111-176, at 172 (Apr. 30, 2010) 
(``Current law prohibits unfair or deceptive acts or practices. The 
addition of `abusive' will ensure that the Bureau is empowered to 
cover practices where providers unreasonably take advantage of 
consumers.''); Public Law 111-203, pmbl. (listing, in the preamble 
to the Dodd-Frank Act, one of the purposes of the Act as 
``protect[ing] consumers from abusive financial services 
practices'').
---------------------------------------------------------------------------

    Under Dodd-Frank Act section 1031(d), the Bureau ``shall have no

[[Page 47902]]

authority . . . to declare an act or practice abusive in connection 
with the provision of a consumer financial product or service'' unless 
the act or practice qualifies under at least one of several enumerated 
conditions. For example, under Dodd-Frank Act section 1031(d)(2)(A), an 
act or practice might ``take[] unreasonable advantage of'' a consumer's 
``lack of understanding . . . of the material risks, costs, or 
conditions of the [consumer financial] product or service'' (i.e., the 
lack of understanding prong).\392\ Under Dodd-Frank Act section 
1031(d)(2)(B), an act or practice might ``take[] unreasonable advantage 
of'' the ``inability of the consumer to protect the interests of the 
consumer in selecting or using a consumer financial product or 
service'' (i.e., the inability to protect prong).\393\ The Dodd-Frank 
Act does not further elaborate on the meaning of these terms. Rather, 
the statute left it to the Bureau to interpret and apply these 
standards.
---------------------------------------------------------------------------

    \392\ 12 U.S.C. 5531(d)(2)(A).
    \393\ 12 U.S.C. 5531(d)(2)(B). The Dodd-Frank Act abusiveness 
standard also permits the Bureau to intervene under section 
1031(d)(1) if the Bureau determines that an act or practice 
``materially interferes with a consumer's ability to understand a 
term or condition of a consumer financial product or service,'' 12 
U.S.C. 5531(d)(1), and under section 1031(d)(2)(C) if an act or 
practice ``takes unreasonable advantage of'' the consumer's 
``reasonable reliance'' on the covered person to act in the 
consumer's interests, 12 U.S.C. 5531(d)(2)(C).
---------------------------------------------------------------------------

    Although the legislative history on the meaning of the Dodd-Frank 
Act abusiveness standard is fairly limited, it suggests that Congress 
was particularly concerned about the widespread practice of lenders 
making unaffordable loans to consumers. A primary focus was on 
unaffordable home mortgages.\394\ However, there is some indication 
that Congress intended the Bureau to use the authority under Dodd-Frank 
Act section 1031(d) to address payday lending through the Bureau's 
rulemaking, supervisory, and enforcement authorities. For example, the 
Senate Committee on Banking, Housing, and Urban Affairs report on the 
Senate version of the legislation listed payday loans as one of several 
categories of consumer financial products and services other than 
mortgages where ``consumers have long faced problems'' because they 
lack ``adequate federal rules and enforcement,'' noting further that 
``[a]busive lending, high and hidden fees, unfair and deceptive 
practices, confusing disclosures, and other anti-consumer practices 
have been a widespread feature in commonly available consumer financial 
products such as credit cards.'' \395\ The same section of the Senate 
committee report included a description of the basic features of payday 
loans and the problems associated with them, specifically noting that 
many consumers are unable to repay the loans while meeting their other 
obligations and that many borrowers reborrow which results in a 
``perpetual debt treadmill.'' \396\
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    \394\ While Congress sometimes described other products as 
abusive, it frequently applied the term to unaffordable mortgages. 
See, e.g., S. Rept. No. 111-176, at 11 (noting that the ``financial 
crisis was precipitated by the proliferation of poorly underwritten 
mortgages with abusive terms'').
    \395\ See S. Rept. 111-176, at 17. In addition to credit cards, 
the Senate committee report listed overdraft, debt collection, 
payday loans, and auto dealer lending as the consumer financial 
products and services warranting concern. Id. at 17-23.
    \396\ Id. at 20-21. See also 155 Cong. Rec. 31250 (Dec. 10, 
2009) (during a colloquy on the House floor with the one of the 
authors of the Dodd-Frank Act, Representative Barney Frank, 
Representative Henry Waxman stated that ``authority to pursue 
abusive practices helps ensure that the agency can address payday 
lending and other practices that can result in pyramiding debt for 
low income families.'').
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B. Section 1032 of the Dodd-Frank Act

    Dodd-Frank Act section 1032(a) provides that the Bureau may 
prescribe rules to ensure that the features of any consumer financial 
product or service, ``both initially and over the term of the product 
or service,'' are ``fully, accurately, and effectively disclosed to 
consumers in a manner that permits consumers to understand the costs, 
benefits, and risks associated with the product or service, in light of 
the facts and circumstances.'' \397\ The authority granted to the 
Bureau in section 1032(a) of the Dodd-Frank Act is broad, and empowers 
the Bureau to prescribe rules regarding the disclosure of the 
``features'' of consumer financial products and services generally. 
Accordingly, the Bureau may prescribe rules containing disclosure 
requirements even if other Federal consumer financial laws do not 
specifically require disclosure of such features. Dodd-Frank Act 
section 1032(c) provides that, in prescribing rules pursuant to section 
1032 of the Dodd-Frank Act, the Bureau ``shall consider available 
evidence about consumer awareness, understanding of, and responses to 
disclosures or communications about the risks, costs, and benefits of 
consumer financial products or services.'' \398\
---------------------------------------------------------------------------

    \397\ 12 U.S.C. 5532(a).
    \398\ 12 U.S.C. 5532(c).
---------------------------------------------------------------------------

    Dodd-Frank Act section 1032(b)(1) provides that ``any final rule 
prescribed by the Bureau under this section requiring disclosures may 
include a model form that may be used at the option of the covered 
person for provision of the required disclosures.'' \399\ Dodd-Frank 
Act section 1032(b)(2) provides that such model form ``shall contain a 
clear and conspicuous disclosure that, at a minimum--(A) uses plain 
language comprehensible to consumers; (B) contains a clear format and 
design, such as an easily readable type font; and (C) succinctly 
explains the information that must be communicated to the consumer.'' 
\400\ Dodd-Frank Act section 1032(b)(3) provides that any such model 
form ``shall be validated through consumer testing.'' \401\ Dodd-Frank 
Act section 1032(d) provides that, ``Any covered person that uses a 
model form included with a rule issued under this section shall be 
deemed to be in compliance with the disclosure requirements of this 
section with respect to such model form.'' \402\
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    \399\ 12 U.S.C. 5532(b)(1).
    \400\ 12 U.S.C. 5532(b)(2).
    \401\ 12 U.S.C. 5532(b)(3).
    \402\ 12 U.S.C. 5532(d).
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C. Other Authorities Under the Dodd-Frank Act

    Section 1022(b)(1) of the Dodd-Frank Act provides that the Bureau's 
director ``may prescribe rules and issue orders and guidance, as may be 
necessary or appropriate to enable the Bureau to administer and carry 
out the purposes and objectives of the Federal consumer financial laws, 
and to prevent evasions thereof.'' \403\ ``Federal consumer financial 
law'' includes rules prescribed under Title X of the Dodd-Frank 
Act,\404\ including sections 1031(b) through (d) and 1032.
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    \403\ 12 U.S.C. 5512(b)(1).
    \404\ 12 U.S.C. 5481(14).
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    Section 1022(b)(2) of the Dodd-Frank Act prescribes certain 
standards for rulemaking that the Bureau must follow in exercising its 
authority under section 1022(b)(1) of the Dodd-Frank Act.\405\ See part 
VI below for a discussion of the Bureau's standards for rulemaking 
under Dodd-Frank Act section 1022(b)(2).
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    \405\ 12 U.S.C. 5512(b)(2).
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    Section 1022(b)(3)(A) of the Dodd-Frank Act authorizes the Bureau 
to, by rule, ``conditionally or unconditionally exempt any class of 
covered persons, service providers, or consumer financial products or 
services'' from any provision of Title X or from any rule issued under 
Title X as the Bureau determines ``necessary or appropriate to carry 
out the purposes and objectives'' of Title X, ``taking into 
consideration the factors'' set forth in section 1022(b)(3)(B) of the 
Dodd-Frank Act.\406\ Section 1022(b)(3)(B) of the Dodd-Frank Act 
specifies three factors that the

[[Page 47903]]

Bureau shall, as appropriate, take into consideration in issuing such 
an exemption.\407\
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    \406\ 12 U.S.C. 5512(b)(3)(A).
    \407\ 12 U.S.C. 5512(b)(3)(B) (``(B) Factors.--In issuing an 
exemption, as permitted under subparagraph (A), the Bureau shall, as 
appropriate, take into consideration--(i) the total assets of the 
class of covered persons; (ii) the volume of transactions involving 
consumer financial products or services in which the class of 
covered persons engages; and (iii) existing provisions of law which 
are applicable to the consumer financial product or service and the 
extent to which such provisions provide consumers with adequate 
protections.'').
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    Proposed Sec. Sec.  1041.16 and 1041.17 would also be authorized by 
additional Dodd-Frank Act authorities, such as Dodd-Frank Act sections 
1021(c)(3),\408\ 1022(c)(7),\409\ 1024(b)(1),\410\ and 1024(b)(7).\411\ 
Additional description of the Dodd-Frank Act authorities on which the 
Bureau is relying for proposed Sec. Sec.  1041.16 and 1041.17 is 
contained in the section-by-section analysis of proposed Sec. Sec.  
1041.16 and 1041.17.
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    \408\ 12 U.S.C. 5511(c)(3).
    \409\ 12 U.S.C. 5512(c)(7).
    \410\ 12 U.S.C. 5514(b)(1).
    \411\ 12 U.S.C. 5514(b)(7).
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D. Section 1041 of the Dodd-Frank Act

    Section 1041(a)(1) of the Dodd-Frank Act provides that Title X of 
the Dodd-Frank Act, other than sections 1044 through 1048, ``may not be 
construed as annulling, altering, or affecting, or exempting any person 
subject to the provisions of [Title X] from complying with,'' the 
statutes, regulations, orders, or interpretations in effect in any 
State (sometimes hereinafter, State laws), ``except to the extent that 
any such provision of law is inconsistent with the provisions of [Title 
X], and then only to the extent of the inconsistency.'' \412\ Section 
1041(a)(2) of the Dodd-Frank Act provides that, for purposes of section 
1041, a statute, regulation, order, or interpretation in effect in any 
State is not inconsistent with the Title X provisions ``if the 
protection that such statute, regulation, order, or interpretation 
affords to consumers is greater than the protection provided'' under 
Title X.\413\ Section 1041(a)(2) further provides that, ``A 
determination regarding whether a statute, regulation, order, or 
interpretation in effect in any State is inconsistent with the 
provisions of [Title X] may be made by the Bureau on its own motion or 
in response to a nonfrivolous petition initiated by any interested 
person.''
---------------------------------------------------------------------------

    \412\ 12 U.S.C. 5551(a)(1). Dodd-Frank Act section 1002(27) 
defines ``State'' to include any federally recognized Indian tribe. 
See 12 U.S.C. 5481(27).
    \413\ 12 U.S.C. 5551(a)(2).
---------------------------------------------------------------------------

    The requirements of the proposed rule would set minimum standards 
at the Federal level for regulation of covered loans. The Bureau 
believes that the requirements of the proposed rule would coexist with 
State laws that pertain to the making of loans that the proposed rule 
would treat as covered loans (hereinafter, applicable State laws). 
Consequently, any person subject to the proposed rule would be required 
to comply with both the requirements of the proposed rule and 
applicable State laws, except to the extent the applicable State laws 
are inconsistent with the requirements of the proposed rule.\414\ This 
is consistent with the established framework of Federal and State laws 
in many other substantive areas, such as securities law, antitrust law, 
environmental law and the like.
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    \414\ The Bureau also believes that the requirements of the 
proposed rule would coexist with applicable laws in cities and other 
localities, and the Bureau does not intend for the proposed rule to 
annul, alter, or affect, or exempt any person from complying with, 
the regulatory frameworks of cities and other localities to the 
extent those frameworks provide greater consumer protections or are 
otherwise not inconsistent with the requirements of the proposed 
rule.
---------------------------------------------------------------------------

    As noted above, Dodd-Frank Act section 1041(a)(2) provides that 
State laws that afford greater consumer protections than provisions 
under Title X are not inconsistent with the provisions under Title X. 
As discussed in part II, different States have taken different 
approaches to regulating loans that would be covered loans, with some 
States electing to permit the making of such loans and other States 
choosing not to do so. The Bureau believes that the requirements of the 
proposed rule would coexist with these different approaches, which are 
reflected in applicable State laws.\415\ The Bureau is aware of certain 
applicable State laws that the Bureau believes would afford greater 
protections to consumers than would the requirements of the proposed 
rule. For example, as described in part II, certain States have fee or 
interest rate caps (i.e., usury limits) that payday lenders apparently 
find too low to sustain their business models. The Bureau believes that 
the fee and interest rate caps in these States would provide greater 
consumer protections than, and would not be inconsistent with, the 
requirements of the proposed rule.
---------------------------------------------------------------------------

    \415\ States have expressed concern that the identification of 
unfair and abusive acts or practices in this rulemaking may be 
construed to affect or limit provisions in State statutes or State 
case law. The Bureau is proposing to identify unfair and abusive 
acts or practices under the statutory definitions in sections 
1031(c) and 1031(d) of the Dodd-Frank Act. This proposal and any 
rule that may be finalized are not intended to limit the further 
development of State laws protecting consumers from unfair or 
deceptive acts or practices as defined under State laws, or from 
similar conduct prohibited by State laws.
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V. Section-by-Section Analysis

Subpart A--General

Section 1041.1 Authority and Purpose
    Proposed Sec.  1041.1 provides that the rule is issued pursuant to 
Title X of the Dodd-Frank Act (12 U.S.C. 5481, et seq.). It also 
provides that the purpose of proposed part 1041 (also referred to as 
``this part'' or ``this proposed part'') is to identify certain unfair 
and abusive acts or practices in connection with certain consumer 
credit transactions and to set forth requirements for preventing such 
acts or practices and to prescribe requirements to ensure that the 
features of those consumer credit transactions are fully, accurately, 
and effectively disclosed to consumers. It also notes the proposed part 
also prescribes processes and criteria for registration of information 
systems.
Section 1041.2 Definitions
    Proposed Sec.  1041.2 contains definitions of terms that are used 
across a number of sections in this rule. There are additional 
definitions in proposed Sec. Sec.  1041.3, 1041.5, 1041.9, 1041.14, and 
1041.17 of terms used in those respective individual sections.
    In general, the Bureau is proposing to incorporate a number of 
defined terms under other statutes or regulations and related 
commentary, particularly Regulation Z and Regulation E as they 
implement TILA and EFTA, respectively. The Bureau believes that basing 
this proposal's definitions on previously defined terms may minimize 
regulatory uncertainty and facilitate compliance, particularly where 
the other regulations are likely to apply to the same transactions in 
their own right. However, as discussed further below, the Bureau is in 
certain definitions proposing to expand or modify the existing 
definitions or the concepts enshrined in such definitions for purposes 
of this proposal to ensure that the rule has its intended scope of 
effect particularly as industry practices may evolve. As reflected 
below with regard to individual definitions, the Bureau solicits 
comment on the appropriateness of this general approach and whether 
alternative definitions in statute or regulation would be more useful 
for these purposes.
2(a) Definitions
2(a)(1) Account
    Proposed Sec.  1041.2(a)(1) would define account by cross-
referencing the same term as defined in Regulation E, 12 CFR part 1005. 
Regulation E generally defines account to include demand deposit 
(checking), savings, or other

[[Page 47904]]

consumer asset accounts (other than an occasional or incidental credit 
balance in a credit plan) held directly or indirectly by a financial 
institution and established primarily for personal, family, or 
household purposes.\416\ The term account is used in proposed Sec.  
1041.3(c), which would provide that a loan is a covered loan if, among 
other requirements, the lender or service provider obtains repayment 
directly from a consumer's account. This term is also used in proposed 
Sec.  1041.14, which would impose certain requirements when a lender 
seeks to obtain repayment for a covered loan directly from a consumer's 
account, and in proposed Sec.  1041.15, which would require lenders to 
provide notices to consumers before attempting to withdraw payments 
from consumers' accounts. The Bureau believes that defining this term 
consistently with an existing regulation would reduce the risk of 
confusion among consumers, industry, and regulators. The Bureau 
believes the Regulation E definition is appropriate because that 
definition is broad enough to capture the types of transactions that 
may implicate the concerns addressed by this part. The Bureau solicits 
comment on whether the Regulation E definition of account is 
appropriate in the context of this part and whether any additional 
guidance on the definition is needed.
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    \416\ Regulation E also specifically includes payroll card 
accounts and certain government benefit card accounts. The Bureau 
has proposed in a separate rulemaking to enumerate rules for a 
broader category of prepaid accounts. See 79 FR 77101 (Dec. 23, 
2014).
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2(a)(2) Affiliate
    Proposed Sec.  1041.2(a)(2) would define affiliate by cross-
referencing the same term as defined in the Dodd-Frank Act, 12 U.S.C. 
5481(1). The Dodd-Frank Act defines affiliate as any person that 
controls, is controlled by, or is under common control with another 
person. Proposed Sec. Sec.  1041.6 and 1041.10 would impose certain 
limitations on lenders making loans to consumers who have outstanding 
covered loans with an affiliate of the lender. The section-by-section 
analyses of proposed Sec. Sec.  1041.6 and 1041.10 discuss in more 
detail the particular requirements related to affiliates.
    The Bureau believes that defining this term consistently with the 
Dodd-Frank Act would reduce the risk of confusion among consumers, 
industry, and regulators. The Bureau solicits comment on whether the 
Dodd-Frank Act definition of affiliate is appropriate in the context of 
this part and whether any additional guidance on the definition is 
needed.
2(a)(3) Closed-End Credit
    Proposed Sec.  1041.2(a)(3) would define closed-end credit as an 
extension of credit to a consumer that is not open-end credit under 
proposed Sec.  1041.2(a)(14). This term is used in various parts of the 
rule where the Bureau is proposing to tailor provisions specifically 
for closed-end and open-end credit in light of their different 
structures and durations. Most notably, proposed Sec.  1041.2(a)(18) 
would prescribe slightly different methods of calculating the total 
cost of credit of closed-end and open-end credit. Proposed Sec.  
1041.16(c) also would require lenders to report whether a covered loan 
is closed-end or open-end credit to registered information systems. The 
Bureau solicits comment on whether this definition of closed-end credit 
is appropriate in the context of proposed part 1041 and whether any 
additional guidance on the definition is needed.
2(a)(4) Consumer
    Proposed Sec.  1041.2(a)(4) would define consumer by cross-
referencing the same term as defined in in the Dodd-Frank Act, 12 
U.S.C. 5481(4). The Dodd-Frank Act defines consumer as an individual or 
an agent, trustee, or representative acting on behalf of an individual. 
The term is used in numerous provisions across proposed part 1041to 
refer to applicants for and borrowers of covered loans.
    The Bureau believes that this definition, rather than the arguably 
narrower Regulation Z definition of consumer--which defines consumer as 
``a cardholder or natural person to whom consumer credit is offered or 
extended''--is appropriate to capture the types of transactions that 
may implicate the concerns addressed by this proposal. In particular, 
the Dodd-Frank Act definition expressly defines the term consumer to 
include agents and representatives of individuals rather than just 
individuals themselves. The Bureau believes that this definition may 
more comprehensively foreclose possible evasion of the specific 
consumer protections imposed by proposed part 1041 than would the 
Regulation Z definition. The Bureau solicits comment on whether the 
Dodd-Frank Act definition of consumer is appropriate in the context of 
proposed part 1041 and whether any additional guidance on the 
definition is needed.
2(a)(5) Consummation
    Proposed Sec.  1041.2(a)(5) would define consummation as the time a 
consumer becomes contractually obligated on a new loan, which is 
consistent with the definition of the term in Regulation Z Sec.  
1026.2(a)(13), or the time a consumer becomes contractually obligated 
on a modification of an existing loan that increases the amount of the 
loan. The term is used both in defining certain categories of covered 
loans and in defining the timing of certain proposed requirements. The 
time of consummation is important for the purposes of several proposed 
provisions. For example, under proposed Sec.  1041.3(b)(1), whether a 
loan is a covered short-term loan would depend on whether the consumer 
is required to repay substantially all of the loan within 45 days of 
consummation. Under proposed Sec.  1041.3(b)(3), the determination of 
whether a loan is subject to a total cost of credit exceeding 36 
percent per annum would be made at the time of consummation. Pursuant 
to proposed Sec. Sec.  1041.6 and 1041.10, certain limitations would 
potentially apply to lenders making covered loans based on the 
consummation dates of those loans. Pursuant to Sec.  1041.15(f), 
lenders would have to furnish certain disclosures before a loan subject 
to the requirements of that section is consummated.
    The Bureau believes that defining the term consistently with 
Regulation Z with respect to new loans would reduce the risk of 
confusion among consumers, industry, and regulators. The Bureau 
believes it is also necessary to define the term, with respect to loan 
modifications, in a way that would further the intent of proposed 
Sec. Sec.  1041.3(b)(1), 1041.3(b)(2), 1041.5(b), and 1041.9(b), all of 
which would impose requirements on lenders at the time the loan amount 
increases. The Bureau believes defining these events as consummations 
would improve clarity for consumers, industry, and regulators. The 
above-referenced sections would impose no duties or limitations on 
lenders when a loan modification decreases the amount of the loan. 
Accordingly, in addition to incorporating Regulation Z commentary as to 
the general definition of consummation for new loans, proposed comment 
2(a)(5)-2 explains the time at which certain modifications of existing 
loans are consummated. Proposed comment 2(a)(5)-2 explains that a 
modification is consummated if the modification increases the amount of 
the loan. Proposed comment 2(a)(5)-2 also explains that a cost-free 
repayment plan, or ``off-ramp'' as it is commonly

[[Page 47905]]

known in the market, does not result in a consummation under proposed 
Sec.  1041.2(a)(5). The Bureau solicits comment on whether this 
definition is appropriate in the context of proposed part 1041 and 
whether any additional guidance on the definition is needed.
    The Bureau considered expressly defining the term ``new loan'' in 
order to clarify when lenders would need to make the ability-to-repay 
determinations prescribed in proposed Sec. Sec.  1041.5 and 1041.9. The 
definition that the Bureau considered would have defined a new loan as 
a consumer-purpose loan made to a consumer that (a) is made to a 
consumer who is not indebted on an outstanding loan, (b) replaces an 
outstanding loan, or (c) modifies an outstanding loan, except when a 
repayment plan, or ``off-ramp'' extends the term of the loan and 
imposes no additional fees. The Bureau solicits comment on whether this 
approach would provide additional clarification, and if so, whether 
this particular definition of ``new loan'' would be appropriate.
2(a)(6) Covered Short-Term Loan
    Proposed Sec.  1041.3(b)(1) would describe covered short-term loans 
as loans in which the consumer is required to repay substantially the 
entire amount due under the loan within 45 days of consummation. Some 
provisions in proposed part 1041 would apply only to covered short-term 
loans described in proposed Sec.  1041.3(b)(1). For example, proposed 
Sec.  1041.5 prescribes the ability-to-repay determination that lenders 
are required to perform when making covered short-term loans. Proposed 
Sec.  1041.6 imposes limitations on lenders making sequential covered 
short-term loans to consumers. The Bureau proposes to use a defined 
term for the loans described in Sec.  1041.3(b)(1) for clarity. The 
Bureau solicits comment on whether this definition is appropriate in 
the context of proposed part 1041 and whether any additional guidance 
on the definition is needed.
2(a)(7) Covered Longer-Term Balloon-Payment Loan
    Proposed Sec.  1041.2(a)(7) would define covered longer-term 
balloon-payment loan as a loan described in proposed Sec.  1041.3(b)(2) 
that requires the consumer to repay the loan in a single payment or 
repay the loan through at least one payment that is more than twice as 
large as any other payment under the loan. Proposed Sec.  1041.9(b)(2) 
contains certain rules that lenders would have to follow when 
determining whether a consumer has the ability to repay a covered 
longer-term balloon-payment loan. Moreover, some of the restrictions 
imposed in proposed Sec.  1041.10 would apply to covered longer-term 
balloon-payment loans in certain situations.
    The term covered longer-term balloon-payment loan would include 
loans that are repayable in a single payment notwithstanding the fact 
that a loan with a ``balloon'' payment is often understood in other 
contexts to mean a loan repayable in multiple payments with one payment 
substantially larger than the other payments. The Bureau believes that 
both structures pose similar risks to consumers, and is proposing to 
treat both longer-term single-payment loans and multi-payment loans 
with a balloon payment the same for the purposes of proposed Sec. Sec.  
1041.9 and 1041.10. Accordingly, the Bureau is proposing to use a 
single defined term for both loan types to improve the proposal's 
readability.
    Apart from including single-payment loans within the definition of 
covered longer-term balloon-payment loans, the term substantially 
tracks the definition of balloon payment contained in Regulation Z 
Sec.  1026.32(d)(1), with one additional proviso. The Regulation Z 
definition requires the larger loan payment to be compared to other 
``regular periodic payments,'' whereas proposed Sec.  1041.2(a)(7) 
requires the larger loan payment to be compared to any other payment(s) 
under the loan, regardless of whether the payment is a ``regular 
periodic payment.'' Proposed comments 2(a)(7)-2 and 2(a)(7)-3 explain 
that ``payment'' in this context means a payment of principal or 
interest, and excludes certain charges such as late fees and payments 
accelerated upon the consumer's default.
    The Bureau solicits comment on whether this definition is 
appropriate in the context of this proposal and whether any additional 
guidance on the definition is needed. As discussed further in proposed 
Sec.  1041.3(b)(2), the Bureau also seeks comment on whether longer-
term single-payment loans and longer-term loans with balloon payments 
should be covered regardless of whether the loans are subject to a 
total cost of credit exceeding a rate of 36 percent per annum, or 
regardless of whether the lender or service provider obtains a 
leveraged payment mechanism or vehicle security in connection with the 
loan.
2(a)(8) Covered Longer-Term Loan
    Some restrictions in proposed part 1041 would apply to covered 
longer-term loans described in proposed Sec.  1041.3(b)(2). Proposed 
Sec.  1041.3(b)(2) describes covered longer-term loans as loans with a 
term of longer than 45 days, which are subject to a total cost of 
credit exceeding a rate of 36 percent per annum, and in which the 
lender or service provider obtains a leveraged payment mechanism or 
vehicle title. Some provisions in proposed part 1041 would apply only 
to covered longer-term loans described in proposed Sec.  1041.3(b)(2). 
For example, proposed Sec.  1041.9 prescribes the ability to repay 
determination that lenders are required to perform when making covered 
longer-term loans. Proposed Sec.  1041.10 imposes limitations on 
lenders making covered longer-term loans to consumers in certain 
circumstances that may indicate the consumer lacks the ability to 
repay. The Bureau proposes to use a defined term for the loans 
described in proposed Sec.  1041.3(b)(2) for clarity. The Bureau 
solicits comment on whether this definition is appropriate in the 
context of proposed part 1041 and whether any additional guidance on 
the definition is needed.
2(a)(9) Credit
    Proposed Sec.  1041.2(a)(9) would define credit by cross-
referencing the same term as defined in Regulation Z, 12 CFR part 1026. 
Regulation Z defines credit as the right to defer payment of debt or to 
incur debt and defer its payment. This term is used in numerous places 
throughout this proposal to refer generically to the types of consumer 
financial products that would be subject to the requirements of 
proposed part 1041.
    The Bureau believes that defining this term consistently with an 
existing regulation would reduce the risk of confusion among consumers, 
industry, and regulators. The Bureau also believes that the Regulation 
Z definition is appropriately broad so as to capture the various types 
of transaction structures that implicate the concerns addressed by 
proposed part 1041. The Bureau solicits comment on whether the 
Regulation Z definition of credit is appropriate in the context of 
proposed part 1041 and whether any additional guidance on the 
definition is needed.
2(a)(10) Electronic Fund Transfer
    Proposed Sec.  1041.2(a)(10) would define electronic fund transfer 
by cross-referencing the same term as defined in Regulation E, 12 CFR 
part 1005. Proposed Sec.  1041.3(c) provides that a loan may be a 
covered longer-term loan if the lender or service provider obtains a 
leveraged payment mechanism, which can include the ability to withdraw 
payments from a consumer's account through an electronic fund transfer. 
Proposed Sec.  1041.14 would impose

[[Page 47906]]

limitations on lenders' use of various payment methods, including 
electronic fund transfers. The Bureau believes that defining this term 
consistently with an existing regulation would reduce the risk of 
confusion among consumers, industry, and regulators. The Bureau 
solicits comment on whether the Regulation E definition of electronic 
fund transfer is appropriate in the context of proposed part 1041 and 
whether any additional guidance on the definition is needed.
2(a)(11) Lender
    Proposed Sec.  1041.2(a)(11) would define lender as a person who 
regularly makes loans to consumers primarily for personal, family, or 
household purposes. This term is used throughout this proposal to refer 
to parties subject to the requirements of proposed part 1041. This 
proposed definition is broader than the general definition of creditor 
under Regulation Z in that, under this proposed definition, the credit 
that the lender extends need not be subject to a finance charge as that 
term is defined by Regulation Z, nor must it be payable by written 
agreement in more than four installments.
    The Bureau is proposing a broader definition than in Regulation Z 
for many of the same reasons discussed in the section-by-section 
analyses of proposed Sec. Sec.  1041.2(a)(14) and 1041.3(b)(2)(ii) for 
using the total cost of credit as a threshold for covering longer-term 
loans rather than the traditional definition of APR as defined by 
Regulation Z. In both cases, the Bureau is concerned that lenders might 
otherwise shift their fee structures to fall outside traditional 
Regulation Z concepts and thus outside the coverage of proposed part 
1041. For example, the Bureau believes that some loans that otherwise 
would meet the requirements for coverage under proposed Sec.  1041.3(b) 
could potentially be made without being subject to a finance charge as 
that term is defined by Regulation Z. If the Bureau adopted that 
particular Regulation Z requirement in the definition of lender, a 
person who regularly extended closed-end credit subject only to an 
application fee or open-end credit subject only to a participation fee 
would not be deemed to have imposed a finance charge. In addition, many 
of the loans that would be subject to coverage under proposed Sec.  
1041.3(b)(1) are repayable in a single payment, so those same lenders 
might also fall outside the Regulation Z trigger for loans payable in 
fewer than four installments. Thus, the Bureau is proposing to use a 
definition that is broader than the one contained in Regulation Z to 
ensure that proposed part 1041 applies as intended. The Bureau solicits 
comment on whether there are any alternative approaches that might be 
more appropriate given the concerns set forth above.
    At the same time, the Bureau recognizes that some newly formed 
companies are providing services that, in effect, allow consumers to 
draw on money they have earned but not yet been paid. Some of these 
services do not require the consumer to pay any fees or finance 
charges. Some rely instead on voluntary ``tips'' to sustain the 
business, while others are compensated through electronic fund 
transfers from the consumer's account. Some current or future services 
may use other business models. The Bureau is also aware of some newly 
formed companies providing financial management services to low- and 
moderate-income consumers which include features to smooth income. The 
Bureau solicits comments on whether such entities are, or should be, 
excluded from the definition of lender, and if so, whether the 
definition should be revised. For example, the Bureau solicits comment 
on whether companies that impose no charge on the consumer, or 
companies that charge a regular membership fee which is unrelated to 
the usage of credit, should be considered lenders under the rule.
    The Bureau proposes to carry over from the Regulation Z definition 
of creditor the requirement that a person ``regularly'' makes loans to 
a consumer primarily for personal, family, or household purposes in 
order to be considered a lender under proposed part 1041. As proposed 
comment 2(a)(11)-1 explains, the test for determining whether a person 
regularly makes loans is the same as in Regulation Z, and thus depends 
on the overall number of loans originated, not just covered loans. The 
Bureau believes it is appropriate to exclude from the definition of 
lender persons who make loans for personal, family, or household 
purposes on an infrequent basis so that persons who only occasionally 
make loans would not be subject to the requirements of proposed part 
1041. Such persons could include charitable, religious, or other 
community institutions that make loans very infrequently or individuals 
who occasionally make loans to family members.
    Some stakeholders have suggested to the Bureau that the definition 
of lender should be narrowed so as to exclude financial institutions 
that predominantly make loans that would not be covered loans under the 
proposed rule. These stakeholders have suggested that some financial 
institutions only make loans that would be covered loans as an 
accommodation to existing customers, and that providing such loans is 
such a small part of these institutions' overall business such that it 
would not be practical for the institutions to develop the required 
procedures for making covered loans. The Bureau solicits comment on 
whether to so narrow the definition of lender based on the quantity of 
covered loans an entity offers, and, if so, how to define such a de 
minimis test. The Bureau also solicits more general comment on whether 
this definition is appropriate in the context of proposed part 1041 and 
whether any additional guidance on the definition is needed.
2(a)(12) Loan Sequence or Sequence
    Proposed Sec.  1041.2(a)(12) would generally define a loan sequence 
or sequence as a series of consecutive or concurrent covered short-term 
loans in which each of the loans (other than the first loan) is made 
while the consumer currently has an outstanding covered short-term loan 
or within 30 days after the consumer ceased to have a covered short-
term loan outstanding. Proposed Sec.  1041.2(a)(12) defines both loan 
sequence and sequence the same because the terms are used 
interchangeably in various places throughout this proposal. Proposed 
Sec.  1041.2(a)(12) also sets forth how a lender must determine a given 
loan's place within a sequence (for example, whether a loan is a first, 
second, or third loan in a sequence). Proposed Sec.  1041.6 would also 
impose certain presumptions that lenders must take into account when 
making a second or third loan in a sequence, and would prohibit lenders 
from making a loan sequence with more than three covered short-term 
loans. Pursuant to proposed Sec.  1041.6, a lender's extension of a 
non-covered bridge loan as defined in proposed Sec.  1041.2(a)(13) 
could affect the calculation of time periods for purposes of 
determining whether a loan is within a loan sequence, as discussed in 
more detail in proposed comments 6(h)-1 and 6(h)-2.
    The Bureau's rationale for proposing to define loan sequence in 
this manner is discussed in more detail in the section-by-section 
analysis of proposed Sec. Sec.  1041.4 and 1041.6. The Bureau solicits 
comment on whether a definition of loan sequence or sequence based on a 
30-day period is appropriate or whether longer or shorter periods would 
better address the Bureau's concerns about a consumer's inability to 
repay a covered loan causing the need

[[Page 47907]]

for a successive covered loan. The Bureau solicits comment on whether 
this definition is appropriate in the context of proposed part 1041 and 
whether any additional guidance on the definition is needed.
2(a)(13) Non-Covered Bridge Loan
    Proposed Sec.  1041.2(a)(13) would define the term non-covered 
bridge loan as a non-recourse pawn loan described in proposed Sec.  
1041.3(e)(5) that (a) is made within 30 days of the consumer having an 
outstanding covered short-term loan or outstanding covered longer-term 
balloon-payment loan made by the same lender or affiliate; and (b) the 
consumer is required to repay substantially the entire amount due 
within 90 days of its consummation. Although non-recourse pawn loans 
would be excluded from coverage under proposed Sec.  1041.3(e)(5), the 
Bureau has provided rules in proposed Sec. Sec.  1041.6(h) and Sec.  
1041.10(f) to prevent this from becoming a route for evading the rule.
    Specifically, proposed Sec. Sec.  1041.6 and 1041.10 would impose 
certain limitations on lenders making covered short-term loans and 
covered longer-term balloon-payment in some circumstances. The Bureau 
is concerned that if a lender made a non-covered bridge loan between 
covered loans, the non-covered bridge loan could mask the fact that the 
consumer's need for a covered short-term loan or covered longer-term 
balloon-payment loan reflected the spillover effects of a prior such 
covered loan, suggesting that the consumer did not have the ability to 
repay the prior loan and that the consumer may not have the ability to 
repay the new covered loan. If the consumer took out a covered short-
term loan or covered longer-term balloon-payment loan immediately 
following the non-covered pawn loan, but more than 30 days after the 
last such covered loan, the pawn loan effectively would have 
``bridged'' the gap in what was functionally a sequence of covered 
loans. The Bureau is concerned that a lender might be able to use such 
a ``bridging'' arrangement to evade the requirements of proposed 
Sec. Sec.  1041.6 and 1041.10. To prevent evasions of this type, the 
Bureau is therefore proposing that the days on which a consumer has a 
non-covered bridge loan outstanding must not be considered in 
determining whether 30 days had elapsed between covered loans.
    Many lenders offer both loans that would be covered and pawn loans; 
thus, the Bureau believes that pawn loans are the type of non-covered 
loan that most likely could be used to bridge covered short-term loans 
or covered longer-term balloon-payment loans. Proposed Sec.  
1041.2(a)(13) would limit the definition of non-covered bridge loan to 
non-recourse pawn loans that consumers must repay within 90 days of 
consummation. The Bureau believes that loans with terms of longer than 
90 days are less likely to be used as a bridge between covered short-
term loans or covered longer-term balloon-payment loans.
    The Bureau solicits comment on whether pawn loans can be used as a 
bridge between covered loans, and further solicits comment on whether 
other types of loans--including, specifically, balloon-payment loans 
with terms of longer than 45 days but that do not meet the requirements 
to be covered longer-term loans under proposed section 1041.3(b)(2)--
are likely to be used as bridge loans and therefore should be added to 
the definition of ``non-covered bridge loan.'' The Bureau also solicits 
more general comment on whether this definition is appropriate in the 
context of proposed part 1041 and whether any additional guidance on 
the definition is needed.
2(a)(14) Open-End Credit
    Proposed Sec.  1041.2(a)(14) would define open-end credit by cross-
referencing the same term as defined in Regulation Z, 12 CFR part 1026, 
but without regard to whether the credit is consumer credit, as that 
term is defined in Regulation Z Sec.  1026.2(a)(12), is extended by a 
creditor, as that term is defined in Regulation Z Sec.  1026.2(a)(17), 
or is extended to a consumer, as that term is defined in Regulation Z 
Sec.  1026.2(a)(11). In general, Regulation Z Sec.  1026.2(a)(20) 
provides that open-end credit is consumer credit in which the creditor 
reasonably contemplates repeated transactions, the creditor may impose 
a finance charge from time to time on an outstanding unpaid balance, 
and the amount of credit that may be extended to the consumer during 
the term of the plan (up to any limit set by the creditor) is generally 
made available to the extent that any outstanding balance is repaid. 
For the purposes of defining open-end credit under proposed part 1041, 
the term credit, as defined in proposed Sec.  1041.2(a)(9), would be 
substituted for the term consumer credit in the Regulation Z definition 
of open-end credit; the term lender, as defined in proposed Sec.  
1041.2(a)(11), would be substituted for the term creditor in the 
Regulation Z definition of open-end credit; and the term consumer, as 
defined in proposed Sec.  1041 2(a)(4), would be substituted for the 
term consumer in the Regulation Z definition of open-end credit.
    The term open-end credit is used in various parts of the rule where 
the Bureau is proposing to tailor requirements separately for closed-
end and open-end credit in light of their different structures and 
durations. Most notably, proposed Sec.  1041.2(a)(18) would require 
lenders to employ slightly different methods when calculating the total 
cost of credit of closed-end versus open-end loans. Proposed Sec.  
1041.16(c) also would require lenders to report whether a covered loan 
is a closed-end or open-end loan.
    The Bureau believes that generally defining this term consistently 
across regulations would reduce the risk of confusion among consumers, 
industry, and regulators. With regard to the definition of 
``consumer,'' however, the Bureau believes that, for the reasons 
discussed above, it is more appropriate to incorporate the definition 
from the Dodd-Frank Act rather than the arguably narrower Regulation Z 
definition. Similarly, the Bureau believes that it is more appropriate 
to use the broader definition of ``lender'' contained in proposed Sec.  
2(a)(11) that the Regulation Z definition of ``creditor.''
    The Bureau solicits comment on whether the Regulation Z definition 
of account is appropriate in the context of proposed part 1041 and 
whether any additional guidance on the definition is needed, 
particularly as to the substitution of the definitions for ``consumer'' 
and ``lender'' as described above.
2(a)(15) Outstanding Loan
    Proposed Sec.  1041.2(a)(15) would define outstanding loan as a 
loan that the consumer is legally obligated to repay so long as the 
consumer has made at least one payment on the loan within the previous 
180 days. Under this proposed definition, a loan is an outstanding loan 
regardless of whether the loan is delinquent or the loan is subject to 
a repayment plan or other workout arrangement if the other elements of 
the definition are met. Under proposed Sec.  1041.2(a)(12), a covered 
short-term loan would be considered to be within the same loan sequence 
as a previous such loan if it is made within 30 days of the consumer 
having the previous outstanding loan. Proposed Sec. Sec.  1041.6 and 
1041.7 would impose certain limitations on lenders making covered 
short-term loans within loan sequences, including a prohibition on 
making additional covered short-term loans for 30 days after the third 
loan in a sequence.
    The Bureau believes that if the consumer has not made any payment 
on the loan for an extended period of time

[[Page 47908]]

it may be appropriate to stop considering the loan to be outstanding 
loan for the purposes of proposed Sec. Sec.  1041.2(a)(11), 1041.6, 
1041.7, 1041.10, 1041.11 and 1041.12. Because outstanding loans are 
counted as major financial obligations for purposes of underwriting and 
because treating a loan as outstanding would trigger certain 
restrictions on further borrowing by the consumer under the proposed 
rule, the Bureau has attempted to balance several considerations in 
crafting the proposed definition. One is whether it would be 
appropriate for very stale and effectively inactive debt to prevent the 
consumer from accessing credit, even if so much time has passed that it 
seems relatively unlikely that the new loan is a direct consequence of 
the unaffordability of the previous loan. Another is how to define very 
stale and effectively inactive debt for purposes of any cut-off, and to 
account for the risk that collections might later be revived or that 
lenders would intentionally exploit a cut-off in an attempt to 
encourage new borrowing by consumers.
    The Bureau is proposing a 180-day threshold as striking an 
appropriate balance. The Bureau notes that this would generally align 
with the policy of the Federal Financial Institutions Examination 
Council, which generally requires depository institutions to charge-off 
open-end credit at 180 days of delinquency. Although that policy also 
requires that closed-end loans be charged off after 120 days, the 
Bureau believes that a uniform 180-day rule for both closed- and open-
end loans may be more appropriate given the underlying policy 
considerations discussed above as well as for simplicity. Proposed 
comment 2(a)(15)-2 would clarify that a loan ceases to be an 
outstanding loan as of the earliest of the date the consumer repays the 
loan in full, the date the consumer is released from the legal 
obligation to repay, the date the loan is otherwise legally discharged, 
or the date that is 180 days following the last payment that the 
consumer has made on the loan. Additionally, proposed comment 2(a)(15)-
2 would explain that any payment the consumer makes restarts the 180-
day period, regardless of whether the payment is a scheduled payment or 
in a scheduled amount. Proposed comment 2(a)(15)-2 would further 
clarify that once a loan is no longer an outstanding loan, subsequent 
events cannot make the loan an outstanding loan. The Bureau is 
proposing this one-way valve to ease compliance burden on lenders and 
to reduce the risk of consumer confusion.
    The Bureau solicits comment on whether 180 days is the most 
appropriate period of time or whether a shorter or longer time period 
should be used. The Bureau solicits comment on whether a loan should be 
considered an outstanding loan if it has in fact been charged off by 
the lender prior to 180 days of delinquency. The Bureau solicits 
comment on whether a loan should be considered an outstanding loan if 
there has been activity on a loan more than 180 days after the consumer 
has made a payment, such as a collections lawsuit brought by the lender 
or a third-party. The Bureau also solicits comment on whether a loan 
should be considered an outstanding loan if there has been activity on 
the loan with the previous 180 days regardless of whether the consumer 
has made a payment on the loan within the previous 180 days. The Bureau 
further solicits comment on whether any additional guidance on this 
definition is needed.
2(a)(16) Prepayment Penalty
    Proposed Sec.  1041.2(a)(16) defines prepayment penalty as any 
charge imposed for paying all or part of the loan before the date on 
which the loan is due in full. Proposed Sec. Sec.  1041.11(e) and 
1041.12(f) would prohibit lenders from imposing prepayment penalties in 
connection with certain loans that are conditionally excluded from the 
ability-to-repay determination required under proposed Sec. Sec.  
1041.9 and 1041.10. This definition is similar to the definition of 
prepayment penalty in Regulation Z Sec.  1026.32(b)(6), which generally 
defines prepayment penalty for closed-end transactions as a charge 
imposed for paying all or part of the transaction's principal before 
the date on which the principal is due. However, the definition of 
prepayment penalty in proposed Sec.  1041.2(a)(16) does not restrict 
the definition of prepayment penalty to charges for paying down the 
loan principal early, but also includes charges for paying down non-
principal amounts due under the loan. The Bureau believes that this 
broad definition of prepayment penalty is necessary to capture all 
situations in which a lender may attempt to penalize a consumer for 
repaying a loan more quickly than a lender would prefer. As proposed 
comment 2(a)(16)-1 explains, whether a charge is a prepayment penalty 
depends on the circumstances around the assessment of the charge. The 
Bureau solicits comment on whether this definition is appropriate in 
the context of proposed part 1041 and whether any additional guidance 
on the definition is needed.
2(a)(17) Service Provider
    Proposed Sec.  1041.2(a)(17) would define service provider by 
cross-referencing the same term as defined in the Dodd-Frank Act, 12 
U.S.C. 5481(26). In general, the Dodd-Frank Act defines service 
provider as any person that provides a material service to a covered 
person in connection with the offering or provision of a consumer 
financial product or service. Proposed Sec.  1041.3(c) and (d) would 
provide that a loan is covered under proposed part 1041 if a service 
provider obtains a leveraged payment mechanism or vehicle title and the 
other coverage criteria are otherwise met.
    The definition of service provider and the provisions in proposed 
Sec.  1041.3(c) and (d) are designed to reflect the fact that in some 
States, covered short-term loans and covered longer-term loans are 
extended to consumers through a multi-party transaction. In these 
transactions, one entity will fund the loan, while a separate entity, 
often called a credit access business or a credit services 
organization, will interact directly with, and obtain a fee or fees 
from, the consumer. This separate entity will often service the loan 
and guarantee the loan's performance to the party funding the loan. In 
the context of covered longer-term loans, the credit access business or 
credit services organization, and not the party funding the loan, will 
in many cases obtain the leveraged payment mechanism or vehicle 
security. In these cases, the credit access business or credit services 
organization is performing the responsibilities normally performed by a 
party funding the loan in jurisdictions where this particular business 
arrangement is not used. Despite the formal division of functions 
between the nominal lender and the credit access business, the loans 
produced by such arrangement are functionally the same as those covered 
loans issued by a single entity and appear to present the same set of 
consumer protection concerns. Accordingly, the Bureau believes it is 
appropriate to bring loans made under these arrangements within the 
scope of coverage of proposed part 1041.
    The Bureau believes that defining the term service provider 
consistently with the Dodd-Frank Act would reduce the risk of confusion 
among consumers, industry, and regulators. The Bureau solicits comment 
on whether the Dodd-Frank Act definition of service provider is 
appropriate in the context of proposed part 1041 and whether any 
additional guidance on the definition is needed. More broadly, and as 
further discussed in proposed Sec.  1041.3(c) and

[[Page 47909]]

(d), the Bureau solicits comment on whether the definition of service 
provider is sufficient to bring these loans within the coverage of 
proposed part 1041, or whether loans made through this or similar 
business arrangements should be covered using a different definition.
2(a)(18) Total Cost of Credit
    Proposed Sec.  1041.2(a)(18) would set forth the method by which 
lenders would calculate the total cost of credit for determining 
whether a loan would be a covered loan under proposed Sec.  
1041.3(b)(2). Proposed Sec.  1041.2(a)(18) would generally define the 
total cost of credit as the total amount of charges associated with a 
loan expressed as a per annum rate, including various charges that do 
not meet the definition of finance charge under Regulation Z. The 
charges would be included even if they are paid to a party other than 
the lender. Under proposed Sec.  1041.3(b)(2), a loan with a term of 
longer than 45 days must have a total cost of credit exceeding a rate 
of 36 percent per annum in order to be a covered loan.
    The Bureau is proposing to use an all-in measure of the cost of 
credit rather than the definition of APR under Regulation Z for many of 
the same reasons discussed in Sec.  1041.2(a)(11) for proposing a 
broader definition of lender than Regulation Z uses in defining 
creditor. In both cases, the Bureau is concerned that lenders might 
otherwise shift their fee structures to fall outside traditional 
Regulation Z concepts and outside of this proposal. Specifically, 
lenders may impose a wide range of charges in connection with a loan 
that are not included in the calculation of APR under Regulation Z. If 
these charges were not included in the calculation of the total cost of 
credit threshold for determining coverage under proposed part 1041, a 
lender would be able to avoid the threshold by shifting the costs of a 
loan by lowering the interest rate and imposing (or increasing) one or 
more fees that are not included in the calculation of APR under 
Regulation Z. To prevent this result, and more accurately capture the 
full financial impact of the credit on the consumer's finances, the 
Bureau proposes to include any application fee, any participation fee, 
any charge imposed in connection with credit insurance, and any fee for 
a credit-related ancillary product as charges that lenders must include 
in the total cost of credit.
    Specifically, proposed Sec.  1041.2(a)(18) would define the total 
cost of credit as the total amount of charges associated with a loan 
expressed as a per annum rate, determined as specified in the 
regulation. Proposed Sec.  1041.2(a)(18)(i) and related commentary 
describes each of the charges that must be included in the total cost 
of credit calculation. Proposed Sec.  1041.2(a)(18)(ii) provides that, 
even if a charge set forth in proposed Sec.  1041.2(a)(18)(i)(A) 
through (E) would be excluded from the finance charge under Regulation 
Z, that charge must nonetheless be included in the total cost of credit 
calculation.
    Proposed Sec.  1041.2(a)(18)(i)(A) and (B) provide that charges the 
consumer pays in connection with credit insurance and credit-related 
ancillary products and services must be included in the total cost of 
credit calculation to the extent the charges are incurred (regardless 
of when the charge is actually paid) at the same time as the consumer 
receives the entire amount of funds that the consumer is entitled to 
receive under the loan or within 72 hours thereafter. Proposed Sec.  
1041.2(a)(18)(i)(A) and (B) would impose the 72-hour provision to 
ensure that lenders could not evade coverage under proposed Sec.  
1041.3(b)(2)(ii) conditioning the timing of loan proceeds disbursement 
on whether the consumer purchases credit insurance or other credit 
related ancillary products or services after consummation. The Bureau 
believes that the lender's leverage will have diminished by 72 hours 
after the consumer receives the entirety of the funds available under 
the loan, and thus it is less likely that any charge for credit 
insurance or other credit-related ancillary products and services that 
the consumer agrees to assume after that date is an attempt to avoid 
coverage under proposed Sec.  1041.3(b)(2)(ii).
    Proposed Sec.  1041.2(a)(18)(iii) and related commentary would 
prescribe the rules for computing the total cost of credit based on 
those charges. Proposed Sec.  1041.2(a)(18)(iii) contains two 
provisions for computing the total cost of credit, both of which track 
the methods already established in Regulation Z. First, for closed-end 
credit, proposed Sec.  1041.2(a)(18)(iii)(A) would require a lender to 
follow the rules for calculating and disclosing the APR under 
Regulation Z, based on the charges required for the total cost of 
credit, as set forth in proposed Sec.  1041.2(a)(18)(i). In general, 
the requirements for calculating the APR for closed-end credit under 
Regulation Z are found in Sec.  1026.22(a)(1), and include the 
explanations and instructions for computing the APR set forth in 
appendix J to 12 CFR part 1026.
    Second, for open-end credit, proposed Sec.  1041.2(a)(18)(iii)(B) 
generally would require a lender to calculate the total cost of credit 
using the methods prescribed in Sec.  1026.14(c) and (d) of Regulation 
Z, which describe an ``optional effective annual percentage rate'' for 
certain open-end credit products. While Regulation Z provides that 
these calculation methods are optional, these calculation methods would 
be required to determine coverage of loans under proposed Sec.  
1041.3(b)(2) (though a lender may still choose not to disclose the 
optional effective annual percentage rate in accordance with Regulation 
Z). Section 1026.14(c) of Regulation Z provides for the methods of 
computing the APR under three scenarios: (1) When the finance charge is 
determined solely by applying one or more periodic rates; (2) when the 
finance charge is or includes a minimum, fixed, or other charge that is 
not due to application of a periodic rate, other than a charge with 
respect to a specific transaction; and (3) when the finance charge is 
or includes a charge relating to a specific transaction during the 
billing cycle.
    This approach mirrors the approach taken by the Department of 
Defense in defining the MAPR in 32 CFR 232.4(c). The Bureau believes 
this measure both includes the necessary types of charges that reflect 
the actual cost of the loan to the consumer and is familiar to many 
lenders that must make the MAPR calculation, thus reducing the 
compliance challenges that would result from a new computation.
    At the same time, the Bureau recognizes that the total cost of 
credit or MAPR is a relatively unfamiliar concept for many lenders 
compared to the APR, which is built into many State laws and which is 
the cost that will be disclosed to consumers under Regulation Z. The 
Bureau solicits comment on whether the trigger for coverage should be 
based upon the total cost of credit rather than the APR. If so, the 
Bureau solicits comment on whether the elements listed in proposed 
Sec.  1041.2(a)(18) capture the total cost of credit to the consumer 
and should be included in the calculation required by proposed Sec.  
1041.2(a)(18) and whether there are any additional elements that should 
be included or any listed elements that should be excluded. For 
example, some stakeholders have suggested that the amounts paid for 
voluntary products purchased prior to consummation, or the portion of 
that amount paid to unaffiliated third parties, should be excluded from 
the definition of total cost of credit. The Bureau solicits comments on 
those suggestions.
    The Bureau also solicits comment on whether there are operational 
issues with the use of the total cost of credit

[[Page 47910]]

calculation methodology for closed- or open-end loans that the Bureau 
should consider, and if so, whether there are any alternative methods 
for calculating the total cost of credit for these products that would 
address the operational issues. The Bureau further solicits comment on 
whether any additional guidance on this definition is needed.
Section 1041.3 Scope of Coverage; Exclusions
    The primary purpose of proposed part 1041 is to identify and adopt 
rules to prevent unfair and abusive practices as defined in section 
1031 of the Dodd-Frank Act in connection with certain consumer credit 
transactions. Based upon its research, outreach, and analysis of 
available data, the Bureau is proposing to identify such practices with 
respect to two categories of loans to which the Bureau proposes to 
apply this rule: (1) Consumer loans that have a duration of 45 days or 
less; and (2) consumer loans that have a duration of more than 45 days 
that have a total cost of credit above a certain threshold and that are 
either secured by the consumer's motor vehicle, as set forth in 
proposed Sec.  1041.3(d), or are repayable directly from the consumer's 
income stream, as set forth in proposed Sec.  1041.3(c).
    As described below in the section-by-section analysis of proposed 
Sec.  1041.4, the Bureau tentatively concludes that it is an unfair and 
abusive practice for a lender to make a covered short-term loan without 
making a reasonable determination that the consumer has the ability to 
repay the loan. The Bureau likewise tentatively concludes that it is an 
unfair and abusive practice for a lender to make a covered longer-term 
loan without making a reasonable determination of the consumer's 
ability to repay the loan. Accordingly, the Bureau proposes to apply 
the protections of proposed part 1041 to both categories of loans.
    Proposed Sec. Sec.  1041.5 and 1041.9 would require that, before 
making a covered loan, a lender must determine that the consumer has 
the ability to repay the loan. Proposed Sec. Sec.  1041.6 and 1041.10 
would impose certain limitations on repeat borrowing, depending on the 
type of covered loan. Proposed Sec. Sec.  1041.7, 1041.11, and 1041.12 
would provide for alternative requirements that would allow lenders to 
make covered loans, in certain limited situations, without first 
determining that the consumer has the ability to repay the loan. 
Proposed Sec.  1041.14 would impose consumer protections related to 
repeated lender-initiated attempts to withdraw payments from consumers' 
accounts in connection with covered loans. Proposed Sec.  1041.15 would 
require lenders to provide notices to consumers before attempting to 
withdraw payments on covered loans from consumers' accounts. Proposed 
Sec. Sec.  1041.16 and 1041.17 would require lenders to check and 
report borrowing history and loan information to certain information 
systems with respect to most covered loans. Proposed Sec.  1041.18 
would require lenders to keep certain records on the covered loans that 
they make. Finally, proposed Sec.  1041.19 would prohibit actions taken 
to evade the requirements of proposed part 1041.
    The Bureau is not proposing to extend coverage to several other 
types of loans and is specifically proposing to exclude, to the extent 
they would otherwise be covered under proposed Sec.  1041.3, certain 
purchase money security interest loans, certain loans secured by real 
estate, credit cards, student loans, non-recourse pawn loans, and 
overdraft services and lines of credit. The Bureau likewise proposes 
not to cover loans that have a term of longer than 45 days if they are 
not secured by a leveraged payment mechanism or vehicle security, or 
loans that have a total cost of credit below a rate of 36 percent per 
annum.
    By focusing this proposed rule on the types of loans described 
above, and by proposing to exclude certain types of loans that might 
otherwise meet the definition of a covered loan from the reach of the 
proposed rule, the Bureau does not mean to signal any conclusions as to 
whether it is an unfair or abusive practice to make any other types of 
loans, such as loans that are not covered by proposed part 1041, 
without assessing a consumer's ability to repay. Moreover, the proposed 
rule is not intended to supersede or limit protections imposed by other 
laws, such as the Military Lending Act and implementing regulations. 
The coverage limits in this proposal reflect the fact that these are 
the types of loans the Bureau has studied in depth to date and has 
chosen to address within the scope of this proposal. Indeed, the Bureau 
is issuing concurrently with this proposal a Request for Information 
(the Accompanying RFI) which solicits information and evidence to help 
assess whether there are other categories of loans for which lenders do 
not determine the consumer's ability to repay that may pose risks to 
consumers. The Bureau is also seeking comment in response to the 
Accompanying RFI as to whether there are additional lender practices 
with regard to covered loans that may warrant further action by the 
Bureau.
    The Bureau notes that all ``covered persons'' within the meaning of 
the Dodd-Frank Act have a duty not to engage in unfair, deceptive, or 
abusive acts or practices. The Bureau may consider on a case-by-case 
basis, through its supervisory or enforcement activities, whether 
practices akin to those addressed here are unfair, deceptive, or 
abusive in connection with loans not covered by this proposal. The 
Bureau also may engage in future rulemaking with respect to other types 
of loans or practices on covered loans at a later date.
3(a) General
    Proposed Sec.  1041.3(a) would provide that proposed part 1041 
applies to a lender that makes covered loans.
3(b) Covered Loans
    Section 1031(b) of the Dodd-Frank Act empowers the Bureau to 
prescribe rules to identify and prevent unfair, deceptive, or abusive 
acts or practices associated with consumer financial products or 
services. Section 1002(5) of the Dodd-Frank Act defines such products 
or services as those offered or provided for use by consumers primarily 
for personal, family, or household purposes or, in certain 
circumstances, those delivered, offered, or provided in connection with 
a consumer financial product or service. Proposed Sec.  1041.3(b) would 
provide generally that a covered loan means closed-end or open-end 
credit that is extended to a consumer primarily for personal, family, 
or household purposes that is not excluded by Sec.  1041.3(e).
    By specifying that the rule would apply only to loans that are 
extended to consumers primarily for personal, family, or household 
purposes, the Bureau intends to exclude loans that are made primarily 
for a business, commercial, or agricultural purpose. But a lender would 
violate proposed part 1041 if it extended a loan ostensibly for a 
business purpose and failed to comply with the requirements of proposed 
part 1041 if the loan in fact is primarily for personal, family, or 
household purposes. See the section-by-section analysis of proposed 
Sec.  1041.19 for further discussion of evasion issues.
    Proposed comment 3(b)-1 would clarify that whether a loan is 
covered is generally based on the loan terms at the time of 
consummation. Proposed comment 3(b)-2 clarifies that a loan could be a 
covered loan regardless of whether it is structured as open-end or 
closed-end credit. Proposed comment 3(b)-3 explains that the test for 
determining the primary purpose of a loan is the same as the test 
prescribed

[[Page 47911]]

by Regulation Z Sec.  1026.3(a) and clarified by the related commentary 
in supplement I to part 1026. The Bureau believes that lenders are 
already familiar with the Regulation Z test and that it would be 
appropriate to apply that same test here to maintain consistency in 
interpretation across credit markets. Nevertheless, the related 
commentary in supplement I to part 1026, on which lenders are permitted 
to rely in interpreting proposed Sec.  1041.3(b), does not discuss 
particular situations that may arise in the markets that would be 
covered by proposed part 1041. The Bureau solicits comment on whether 
the test for determining the primary purpose of a loan presents a risk 
of lender evasion, and whether additional clarification is needed on 
how to determine the primary purpose of a covered loan.
3(b)(1)
    Proposed Sec.  1041.3(b)(1) would bring within the scope of 
proposed part 1041 loans in which the consumer is required to repay 
substantially the entire amount due under the loan within 45 days of 
either consummation or the advance of loan proceeds. Loans of this 
type, as they exist in the market today, typically take the form of 
single-payment loans, including ``payday'' loans, vehicle title loans, 
and deposit advance products. However, coverage under proposed Sec.  
1041.3(b)(1) would not be limited to single-payment products, but 
rather would include any single-advance loan with a term of 45 days or 
less and any multi-advance loan where repayment is required within 45 
days of a credit draw.\417\ Under proposed Sec.  1041.2(a)(6), this 
type of covered loan would be defined as a covered short-term loan.
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    \417\ While application of the 45-day duration limit for covered 
short-term loans varies based on whether the loan is a single- or 
multiple-advance loan, the Bureau often uses the phrase ``within 45 
days of consummation'' throughout this proposal as a short-hand way 
of referring to coverage criteria of both types of loans.
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    Specifically, proposed Sec.  1041.3(b)(1) prescribes different 
tests for determining whether a loan is a covered short-term loan based 
on whether or not the loan is closed-end credit that does not provide 
for multiple advances to consumers. For closed-end credit that does not 
provide for multiple advances to consumers, a loan would be a covered 
short-term loan if the consumer is required to repay substantially the 
entire amount of the loan within 45 days of consummation. For all other 
types of loans, a loan would not be a covered short-term loan if the 
consumer is required to repay substantially the entire amount of an 
advance within 45 days of the advance under the loan. As proposed 
comments 3(b)(1)-1 explains, a loan does not provide for multiple 
advances to a consumer if the loan provides for full disbursement of 
the loan proceeds only through disbursement on a single specific date. 
The Bureau believes that a different test to determine whether a loan 
is a covered short-term loan is appropriate for loans that provide for 
multiple advances to consumers because open-end credit and closed-end 
credit providing for multiple advances may be consummated long before 
the consumer incurs debt that must be repaid. If, for example, the 
consumer waited more than 45 days after consummation to draw on an 
open-end line, but the loan agreement required the consumer to repay 
the full amount of the draw within 45 days of the draw, the loan would 
not be practically different than a closed-end loan repayable within 45 
days of consummation. The Bureau believes it is appropriate to treat 
the loans the same for the purposes of proposed Sec.  1041.3(b)(1). The 
Bureau solicits comment on whether these differential coverage criteria 
for single-advance and multiple-advance loans are appropriate, 
particularly in light of unique or emerging loan structures that may 
pose special challenges or risks.
    As described in part II, the terms of short-term loans are often 
tied to the date the consumer receives his or her paycheck or benefits 
payment. While pay periods typically vary from one week to one month, 
and expense cycles are typically one month, the Bureau is proposing 45 
days as the upper bound for covered short-term loans in order to 
accommodate loans that are made shortly before a consumer's monthly 
income is received and that extend beyond the immediate income payment 
to the next income payment. These circumstances could result in loans 
that are somewhat longer than a month in duration but nonetheless pose 
similar risks of harm to consumers as loans with a duration of a month 
or less.
    The Bureau also considered proposing to define these short-term 
loans as loans that are substantially repayable within either 30 days 
of consummation or advance, 60 days of consummation or advance, or 90 
days of consummation or advance. The Bureau is not proposing the 30-day 
period because, as described above, some loans for some consumers who 
are paid on a monthly basis can be slightly longer than 30 days, and 
yet still essentially constitute a one-pay-cycle, one-expense-cycle 
loan. The Bureau is not proposing either the 60-day or 90-day period 
because loans with those terms encompass multiple income and expense 
cycles, and thus may present somewhat different risks to consumers, 
though such loans would be covered longer-term loans if they meet the 
criteria set forth in proposed Sec.  1041.3(b)(2). The Bureau solicits 
comment on whether covered short-term loans should be defined to 
include all loans in which the consumer is required to repay 
substantially the entire amount due under the loan within 45 days of 
consummation or advance, or whether another loan term is more 
appropriate.
    As discussed further below, the Bureau proposes to treat longer-
term loans, as defined in proposed Sec.  1041.3(b)(2), as covered loans 
only if the total cost of credit exceeds a rate of 36 percent per annum 
and if the lender or service provider obtains a leveraged payment 
mechanism or vehicle security as defined in proposed Sec.  1041.3(c) 
and (d). The Bureau is not proposing similar limitations with respect 
to the definition of covered short-term loans because the evidence 
available to the Bureau suggests that the structure and short-term 
nature of these loans give rise to consumer harm even in the absence of 
costs above the 36 percent threshold or particular means of repayment.
    Proposed comment 3(b)(1)-3 would explain that a determination of 
whether a loan is substantially repayable within 45 days requires 
assessment of the specific facts and circumstances of the loan. 
Proposed comment 3(b)(1)-4 provides guidance on determining whether 
loans that have alternative, ambiguous, or unusual payment schedules 
would fall within the definition. The key principle in determining 
whether a loan would be a covered short-term loan or a covered longer-
term loan is whether, under applicable law, the consumer would be 
considered to be in breach of the terms of the loan agreement if the 
consumer failed to repay substantially the entire amount of the loan 
within 45 days of consummation. The Bureau solicits comment on whether 
the approach explained in proposed comment 3(b)(1)-3 appropriately 
delineates the distinction between the types of covered loans.
3(b)(2)
    Proposed Sec.  1041.3(b)(2) would bring within the scope of 
proposed part 1041 several types of loans for which, in contrast to 
loans covered under proposed Sec.  1041.3(b)(1), the consumer is not 
required to repay substantially the entire amount of the loan or 
advance within 45 days of consummation or advance. Specifically, 
proposed Sec.  1041.3(b)(2) would extend coverage to

[[Page 47912]]

longer-term loans with a total cost of credit exceeding a rate of 36 
percent per annum if the lender or service provider also obtains a 
leveraged payment mechanism as defined in proposed Sec.  1041.3(c) or 
vehicle security as defined in proposed Sec.  1041.3(d) in connection 
with the loan before, at the same time, or within 72 hours after the 
consumer receives the entire amount of funds that the consumer is 
entitled to receive. Under proposed Sec.  1041.2(a)(8), this type of 
covered loan would be defined as a covered longer-term loan. Proposed 
Sec.  1041.2(a)(7) would specifically define covered longer-term 
balloon-payment loan for purposes of certain provisions in proposed 
Sec. Sec.  1041.6, 1041.9, and 1041.10.
    As described in more detail in proposed Sec.  1041.8, it appears to 
the Bureau to be an unfair and abusive practice for a lender to make 
covered longer-term loans without determining that the consumer has the 
ability to repay the loan. The Bureau discusses the thresholds that 
would trigger the definition of covered longer-term loan and seeks 
related comment below. The Bureau recognizes that the criteria set 
forth in proposed Sec.  1041.3(b)(2) may encompass some loans that are 
not used for the same types of liquidity needs that have been the 
primary focus of the Bureau's study. For example, some lenders make 
unsecured loans to finance purchases of household durable goods or to 
enable consumers to consolidate preexisting debt. Such loans are 
typically for larger amounts or longer terms than, for example, a 
typical payday loan. On the other hand, larger and longer-term loans 
that have a higher cost, if secured by a leveraged payment mechanism or 
vehicle security, may pose enhanced risk to consumers in their own 
right, and an exclusion for larger or longer-term loans could provide 
an avenue for lender evasion of the consumer protections imposed by 
proposed part 1041. The Bureau also solicits comment on whether 
coverage under proposed Sec.  1041.3(b)(2) should be limited by a 
maximum loan amount and, if so, what the appropriate amount would be. 
The Bureau further solicits comment on whether any such limitation 
should apply only with respect to fully amortizing loans in which 
payments are not timed to coincide with the consumer's paycheck or 
other expected receipt of income, and whether any other protective 
conditions, such as the absence of a prepayment penalty or restrictions 
on methods of collection in the event of a default, should accompany 
and such limitation.
    As noted above, the Bureau is publishing an Accompanying RFI 
concurrent with this notice of proposed rulemaking soliciting 
information and evidence to help assess whether there are other 
categories of loans that are generally made without underwriting and as 
to which the failure to assess the consumer's ability to repay is 
unfair or abusive. Further, as the Accompanying RFI indicates, the 
Bureau may, in an individual supervisory or enforcement action, assess 
whether a lender's failure to make such an assessment is unfair or 
abusive. As reflected in the Accompanying RFI, the Bureau is 
particularly interested to seek information to determine whether loans 
involving a non-purchase money security in personal property or holding 
consumers' personal identification documents create the same lender 
incentives and increased risk of consumer harms as described below with 
regard to leveraged payment mechanisms and vehicle security.
3(b)(2)(i)
    Proposed Sec.  1041.3(b)(2)(i) would bring within the scope of 
proposed part 1041 the above-described longer-term loans only to the 
extent that they are subject to a total cost of credit, as defined in 
proposed Sec.  1041.2(a)(18), exceeding a rate of 36 percent per annum. 
This total cost of credit demarcation would apply only to those types 
of loans listed in Sec.  1041.3(b)(2); the types of loans listed in 
proposed Sec.  1041.3(b)(1) would be covered even if their total cost 
of credit is below 36 percent per annum. The total cost of credit 
measure set forth in proposed Sec.  1041.2(a)(18) includes a number of 
charges that are not included in the APR measure set forth in 
Regulation Z, 12 CFR 1026.4 in order to more fully reflect the true 
cost of the loan to the consumer.
    Proposed Sec.  1041.3(b)(2)(i) would bring within the scope of 
proposed part 1041 only longer-term loans with a total cost of credit 
exceeding a rate of 36 percent per annum in order to focus regulatory 
treatment on the segment of the longer-term credit market on which the 
Bureau has significant evidence of consumer harm. As explained in 
proposed comment 3(b)(2)-1, using a cost threshold excludes certain 
loans with a term of longer than 45 days and for which lenders may 
obtain a leveraged payment mechanism or vehicle security, but which the 
Bureau is not proposing to cover in this rulemaking. For example, the 
cost threshold would exclude from the scope of coverage low-cost 
signature loans even if they are repaid through the lender's access to 
the consumer's deposit account.
    The Bureau's research has focused on loans that are typically 
priced with a total cost of credit exceeding a rate of 36 percent per 
annum. Further, the Bureau believes that as the cost of a loan 
increases, the risk to the consumer increases, especially where the 
lender obtains a leveraged payment mechanism or vehicle security. When 
higher-priced loans are coupled with the preferred payment position 
derived from a leveraged payment mechanism or vehicle security, the 
Bureau believes that lenders have a reduced incentive to underwrite 
carefully since the lender will have the ability to extract payments 
even from some consumers who cannot afford to repay and will in some 
instances be able to profit from the loan even if the consumer 
ultimately defaults. As discussed above in connection with proposed 
Sec.  1041.2(a)(18), the Bureau believes that it may be more 
appropriate to use a total cost of credit threshold rather than 
traditional APR.
    The Bureau recognizes that numerous State laws impose a 36 percent 
APR usury limit, meaning that it is illegal under those laws to charge 
an APR higher than 36 percent. That 36 percent APR ceiling reflects the 
judgment of those States that loans with rates above that limit are per 
se harmful to consumers and should be prohibited. Congress made a 
similar judgment in the Military Lending Act in creating a 36 percent 
all-in APR usury limit with respect to credit extended to 
servicemembers and their families. Congress, in section 1027(o) of the 
Dodd-Frank Act,\418\ has determined that the Bureau is not to 
``establish a usury limit,'' and the Bureau respects that 
determination. The Bureau is not proposing to prohibit lenders from 
charging interest rates, APRs, or all-in costs above the demarcation. 
Rather, the Bureau is proposing to require that lenders make a 
reasonable assessment of consumers' ability to repay certain loans 
above the 36 percent demarcation, in light of evidence of consumer 
harms in the market for loans with this characteristic.
---------------------------------------------------------------------------

    \418\ Section 1027(o) of the Dodd-Frank Act provides that ``No 
provision of this title shall be construed as conferring authority 
on the Bureau to establish a usury limit applicable to an extension 
of credit offered or made by a covered person to a consumer, unless 
explicitly authorized by law.'' 12 U.S.C. 5517(o).
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    The Bureau believes for the reasons set forth above and in the 
section-by-section analysis of proposed Sec.  1041.9, that it is 
appropriate to focus regulatory attention on the segment of longer-term 
lending that poses the greatest risk of causing the types of harms to 
consumers

[[Page 47913]]

that this proposal is meant to address, and that price is an element in 
defining that segment. The Bureau also believes that setting the line 
of demarcation at 36 percent would facilitate compliance given its use 
in other contexts, such as the Military Lending Act. Such differential 
regulation does not implicate section 1027(o) of the Dodd-Frank Act. 
The Bureau believes that the prohibition on the Bureau ``establish[ing] 
a usury limit'' is reasonably interpreted not to prohibit such 
differential regulation given that the Bureau is not proposing to 
prohibit lenders from charging interest rates above a specified limit.
    The Bureau recognizes that a number of States impose a usury 
threshold lower than 36 percent per annum for various types of covered 
loans. Like all State usury limits, and, indeed, like all State laws 
and regulations that provide additional protections to consumers over 
and above those contained in the proposed rule, those limits would not 
be affected by this rule. At the same time, the Bureau is conscious 
that other States have set other limits and notes that the total cost 
of credit threshold is not meant to restrict the ability of lenders to 
offer higher-cost loans. The total cost of credit threshold is intended 
solely to demarcate loans that--when they include certain other 
features such as a leveraged payment mechanism or vehicle security--
pose an increased risk of causing the type of harms to consumers that 
this proposal is meant to address. The protections imposed by this 
proposal would operate as a floor across the country, while leaving 
State and local jurisdictions to adopt additional regulatory 
requirements (whether a usury limit or another form of protection) 
above that floor as they judge appropriate to protect consumers in 
their respective jurisdictions.
    Thus, the Bureau believes that a total cost of credit exceeding 36 
percent per annum provides a useful line of demarcation. The Bureau 
solicits comment on whether a total cost of credit of 36 percent per 
annum is an appropriate measurement for the purposes of proposed Sec.  
1041.3(b)(2)(i) or whether a lower or higher measure would be more 
appropriate. In the discussion of proposed Sec.  1041.2(a)(18), the 
Bureau has solicited comment on the components of the total cost of 
credit metric and the tradeoffs involved in using this metric relative 
to annual percentage rate.
3(b)(2)(ii)
    Proposed Sec.  1041.3(b)(2)(ii) would bring within the scope of 
proposed part 1041 loans in which the lender or a service provider 
obtains a leveraged payment mechanism, as defined by proposed Sec.  
1041.3(c), or vehicle security, as defined by proposed Sec.  1041.3(d), 
before, at the same time, or within 72 hours after the consumer 
receives the entire amount of funds that the consumer is entitled to 
receive under the loan. A leveraged payment mechanism gives a lender 
the right to initiate a transfer of money from a consumer's account to 
satisfy an obligation. The Bureau believes that loans in which the 
lender obtains a leveraged payment mechanism may pose an increased risk 
of harm to consumers, especially where payment schedules are structured 
so that payments are timed to coincide with expected income flows into 
the consumer's account. As detailed in the section-by-section analyses 
of proposed Sec. Sec.  1041.9 and 1041.13, the Bureau believes that the 
practice of extending higher-cost credit that has a leveraged payment 
mechanism or vehicle security without reasonably determining the 
consumer's ability to repay the loan appears to constitute an unfair 
and abusive act or practice.
    The loans that would be covered under the proposal vary widely as 
to the basis for leveraged payment mechanism as well as cost, 
structure, and level of underwriting. Through its outreach, the Bureau 
is aware that some stakeholders have expressed concern that certain 
loans that might be considered less risky for consumers would be swept 
into coverage by virtue of a lien against the consumer's account 
granted to the depository lender by Federal statute. The Bureau is not 
proposing an exemption for select bases for leveraged payment mechanism 
but is proposing, as is set forth in Sec. Sec.  1041.11 and 1041.12, 
conditional exemptions from certain requirements for covered loans made 
by any lender, including depositories, with certain features that would 
present less risk to consumers.
    The proposed rule would not prevent a lender from obtaining a 
leveraged payment mechanism or vehicle security when originating a 
loan. The Bureau recognizes that consumers may find it a convenient or 
a useful form of financial management to authorize a lender to deduct 
loan payments automatically from a consumer's account or paycheck. The 
proposal would not prevent a consumer from doing so. The Bureau also 
recognizes that obtaining a leveraged payment mechanism or vehicle 
security generally reduces the lender's risk. The proposal would not 
prohibit a lender from doing so. Rather, the proposal would impose a 
duty on lenders to determine the consumer's ability to repay when a 
lender obtains a leveraged payment mechanism or vehicle security. As 
discussed above with regard to proposed Sec.  1041.2(a)(17), the 
requirement would apply where either the lender or its service provider 
obtains a leveraged payment mechanism or vehicle security in order to 
assure comprehensive coverage.
    The Bureau is not proposing to cover longer-term loans made without 
a leveraged payment mechanism or vehicle security in part because if a 
lender is not assured of obtaining a leveraged payment mechanism or 
vehicle security as of the time the lender makes the loan, the Bureau 
believes the lender has a greater incentive to determine the consumer's 
ability to repay. If, however, the lender is essentially assured of 
obtaining a leveraged payment mechanism or vehicle security as of the 
time the lender makes the loan, the Bureau believes the lender has less 
of an incentive to determine the consumer's ability to repay.
    For this reason, as proposed comment 3(b)(2)(ii)-1 explains, a 
lender or service provider obtaining a leveraged payment mechanism or 
vehicle security would trigger coverage under proposed part 1041 only 
if the lender or service provider obtains the leveraged payment 
mechanism or vehicle security before, at the same time as, or within 72 
hours after the consumer receives the entire amount of funds that the 
consumer is entitled to receive under the loan. A loan would not be 
covered under proposed Sec.  1041.3(b)(2)(ii) if the lender or service 
provider obtains a leveraged payment mechanism or vehicle security more 
than 72 hours after the consumer receives the entire amount of funds 
that the consumer is entitled to receive under the loan.
    The Bureau is proposing this 72-hour timeframe rather than focusing 
solely on obtaining leveraged payment mechanisms or vehicle security 
taken at consummation because the Bureau is concerned that lenders 
could otherwise consummate loans in reliance on the lenders' ability to 
exert influence over the customer and extract a leveraged payment 
mechanism or vehicle security while the funds are being disbursed and 
shortly thereafter. As discussed below, the Bureau is concerned that if 
the lender is confident it can obtain a leveraged payment mechanism or 
a vehicle security interest, the lender is less likely to evaluate 
carefully whether the consumer can afford the loan. The Bureau believes 
that the lender's leverage will ordinarily have diminished by 72 hours 
after the consumer receives the entirety of the

[[Page 47914]]

funds available under the loan and that the proposed 72-hour rule would 
help to ensure that the lender will engage in appropriate consideration 
of the consumer's ability to repay the loan. Accordingly, the Bureau 
believes that it is generally appropriate to use the relative timing of 
disbursement and leveraged payment mechanism or vehicle security 
authorization to determine whether a loan should be subject to the 
consumer protections imposed by proposed part 1041.
    However, even with this general approach, the Bureau is concerned 
that lenders might seek to evade the intended scope of the rule if they 
were free to offer incentives or impose penalties on consumers after 
the 72-hour period in an effort to secure a leveraged payment mechanism 
or vehicle security. Accordingly, as described below in connection with 
the anti-evasion provisions proposed in Sec.  1041.19, the Bureau is 
proposing comment 19(a)-2.i.B to state that it is potentially an 
evasion of proposed part 1041 for a lender to offer an incentive to a 
consumer or create a detriment for a consumer in order to induce the 
consumer to grant the lender a leveraged payment mechanism or vehicle 
title in connection with a longer-term loan with total cost of credit 
exceeding a rate of 36 percent per annum unless the lender determines 
that the consumer has the ability to repay.
    Proposed comment 3(b)(2)(ii)-2 further explains how to determine 
whether a consumer has received the entirety of the loan proceeds. For 
closed-end loans, a consumer receives the entirety of the loan proceeds 
if the consumer can receive no further funds without consummating 
another loan. For open-end loans, a consumer receives the entirety of 
the loan proceeds if the consumer fully draws down the entire credit 
plan and can receive no further funds without replenishing the credit 
plan, increasing the amount of the credit plan, repaying the balance, 
or consummating another loan. Proposed comment 3(b)(2)(ii)-3 explains 
that a contract provision granting the lender or service provider a 
leveraged payment mechanism or vehicle security contingent on some 
future event is sufficient to bring the loan within the scope of 
coverage.
    The approach taken in proposed Sec.  1041.3(b)(2)(ii) differs from 
the approach considered in the Small Business Review Panel Outline. 
Under the approach in the Small Business Review Panel Outline, a loan 
with a term of more than 45 days would be covered if a lender obtained 
a leveraged payment mechanism or vehicle security before the first 
payment was due on the loan. Upon further consideration, however, the 
Bureau believes that the approach in proposed Sec.  1041.3(b)(2)(ii) is 
appropriate to ensure coverage of situations in which lenders obtain a 
leveraged payment mechanism or vehicle security in connection with a 
new extension on an open-end credit plan that was not a covered loan at 
original consummation, or prior to a modification or refinancing of an 
existing open- or closed-end credit plan that was not a covered loan at 
original consummation. The Bureau believes that this approach has the 
benefit of ensuring adequate consumer protections in origination 
situations in which lenders may not have an incentive to determine the 
consumer's ability to repay, while at the same time allowing for 
consumers to set up automatic repayment as a matter of convenience at a 
later date.
    The Bureau solicits comment on the criteria for coverage set forth 
in proposed Sec.  1041.3(b)(2)(ii), including whether the criteria 
should be limited to cover loans where the scheduled payments are timed 
to coincide with the consumer's expected inflow of income. In addition, 
the Bureau seeks comment on the basis on which, and the timing at 
which, a determination should be made as to whether a lender has 
secured a leveraged payment mechanism or vehicle security. For example, 
in outreach, some consumer advocates have suggested that a loan should 
be treated as a covered loan if the lender reasonably anticipates that 
it will obtain a leveraged payment mechanism or vehicle security at any 
time while the loan is outstanding based on the lender's experience 
with similar loans. The Bureau invites comments on the workability of 
such a test and, if adopted, where to draw the line to define the point 
at which the lender's prior success in obtaining a leveraged payment 
mechanism or vehicle security would trigger coverage for future loans.
    The Bureau also notes that while consumers may elect to provide a 
leveraged payment mechanism post-consummation for their own 
convenience, it is more difficult to envision circumstances in which a 
consumer would choose to grant vehicle security post-consummation. One 
possible scenario would be that a consumer is having trouble repaying 
the loan and provides a security interest in the consumer's vehicle in 
exchange for a concession by the lender. The Bureau is concerned that a 
consumer who provides a vehicle security under such circumstances may 
face a significant risk of harm. The Bureau therefore solicits comment 
on whether a loan with an all-in cost of credit above 36 percent should 
be deemed a covered loan if, at any time, the lender obtains vehicle 
security. However, given the limited circumstances in which a consumer 
would grant vehicle security after consummation, the Bureau also seeks 
comment on whether, for a loan with an all-in cost of credit above 36 
percent, lenders should be prohibited from taking a security interest 
in a vehicle after consummation.
3(c) Leveraged Payment Mechanism
    Proposed Sec.  1041.3(c) would set forth three ways that a lender 
or a service provider could obtain a leveraged payment mechanism that 
would bring the loan within the proposed coverage of proposed part 
1041. A lender would obtain a leveraged payment mechanism if the lender 
has the right to initiate a transfer of money from the consumer's 
account to repay the loan, if the lender has the contractual right to 
obtain payment from the consumer's employer or other payor of expected 
income, or if the lender requires the consumer to repay the loan 
through payroll deduction or deduction from another source of income. 
In all three cases, the consumer is required, under the terms of an 
agreement with the lender, to cede autonomy over the consumer's account 
or income stream in a way that the Bureau believes changes that 
lender's incentives to determine the consumer's ability to repay the 
loan and can exacerbate the harms the consumer experiences if the 
consumer does not have the ability to repay the loan and still meet the 
consumer's major financial obligations and basic living expenses. As 
explained in the section-by-section analysis of proposed Sec. Sec.  
1041.8 and 1041.9, the Bureau believes that it is an unfair and abusive 
practice for a lender to make such a loan without determining that the 
consumer has the ability to repay.
3(c)(1)
    Proposed Sec.  1041.3(c)(1) would generally provide that a lender 
or a service provider obtains a leveraged payment mechanism if it has 
the right to initiate a transfer of money, through any means, from a 
consumer's account (as defined in proposed Sec.  1041.2(a)(1)) to 
satisfy an obligation on a loan. For example, this would occur with a 
post-dated check or preauthorization for recurring electronic fund 
transfers. However, the proposed regulation would not define leveraged 
payment mechanism to include situations in which the lender or service 
provider initiates a one-time electronic fund

[[Page 47915]]

transfer immediately after the consumer authorizes such transfer.
    As proposed comment 3(c)(1)-1 explains, the key principle that 
makes a payment mechanism ``leveraged'' is whether the lender has the 
ability to ``pull'' funds from a consumer's account without any 
intervening action or further assent by the consumer. In those cases, 
the lender's ability to pull payments from the consumer's account gives 
the lender the ability to time and initiate payments to coincide with 
expected income flows into the consumer's account. This means that the 
lender may be able to continue to obtain payment (as long as the 
consumer receives income and maintains the account) even if the 
consumer does not have the ability to repay the loan while meeting his 
or her major financial obligations and basic living expenses. In 
contrast, a payment mechanism in which the consumer ``pushes'' funds 
from his or her account to the lender does not provide the lender 
leverage over the account in a way that changes the lender's incentives 
to determine the consumer's ability to repay the loan or exacerbates 
the harms the consumer experiences if the consumer does not have the 
ability to repay the loan.
    Proposed comment 3(c)(1)-2 provides examples of the types of 
authorizations for lender-initiated transfers that constitute leveraged 
payment mechanisms. These include checks written by the consumer, 
authorizations for electronic fund transfers (other than immediate one-
time transfers as discussed further below), authorizations to create or 
present remotely created checks, and authorizations for certain 
transfers by account-holding institutions (including a right of set-
off). Proposed comment 3(c)(1)-3 explains that a lender does not obtain 
a leveraged payment mechanism if a consumer authorizes a third party to 
transfer money from the consumer's account to a lender as long as the 
transfer is not made pursuant to an incentive or instruction from, or 
duty to, a lender or service provider. The Bureau solicits comment on 
whether this definition of leveraged payment mechanism appropriately 
captures payment methods that are likely to produce the risks to 
consumers identified by the Bureau in the section-by-section analysis 
of proposed Sec.  1041.8.
    As noted above, proposed Sec.  1041.3(c)(1) would provide that a 
lender or service provider does not obtain a leveraged payment 
mechanism by initiating a one-time electronic fund transfer immediately 
after the consumer authorizes the transfer. This provision is similar 
to what the Bureau is proposing in Sec.  1041.15(b), which exempts 
lender from providing the payment notice when initiating a single 
immediate payment transfer at the consumer's request, as that term is 
defined in Sec.  1041.14(a)(2), and is also similar to what the Bureau 
is proposing in Sec.  1041.14(d), which permits lenders to initiate a 
single immediate payment transfer at the consumer's request even after 
the prohibition in proposed Sec.  1041.14(b) on initiating further 
payment transfers has been triggered.
    Accordingly, proposed comment 3(c)(1)-3 would clarify that if the 
loan agreement between the parties does not otherwise provide for the 
lender or service provider to initiate a transfer without further 
consumer action, the consumer may authorize a one-time transfer without 
causing the loan to be a covered loan. Proposed comment 3(c)(1)-3 
further clarifies that the phrase ``immediately'' means that the lender 
initiates the transfer after the authorization with as little delay as 
possible, which in most circumstances will be within a few minutes.
    The Bureau anticipates that scenarios involving authorizations for 
immediate one-time transfers will only arise in certain discrete 
situations. For closed-end loans, a lender is permitted to obtain a 
leveraged payment mechanism more than 72 hours after the consumer has 
received the entirety of the loan proceeds without the loan becoming a 
covered loan. Thus, in the closed-end context, this exception would 
only be relevant if the consumer was required to make a payment within 
72 hours of receiving the loan proceeds--a situation which is unlikely 
to occur. However, the situation may be more likely to occur with open-
end credit. Longer-term open-end can be covered loans if the lender 
obtains a leveraged payment mechanism within 72 hours of the consumer 
receiving the full amount of the funds which the consumer is entitled 
to receive under the loan. Thus, if a consumer only partially drew down 
the credit plan, but the consumer was required to make a payment, a 
one-time electronic fund transfer could trigger coverage without the 
one-time immediate transfer exception. The Bureau believes it is 
appropriate for these transfers not to trigger coverage because there 
is a reduced risk that such transfers will re-align lender incentives 
in a similar manner as other types of leveraged payment mechanisms.
    The Bureau solicits comment on whether this exclusion from the 
definition of leveraged payment mechanism is appropriate and whether 
additional guidance is needed. The Bureau also solicits comment on 
whether any additional exceptions to the general principle of proposed 
Sec.  1041.3(c)(1) are appropriate.
3(c)(2)
    Proposed Sec.  1041.3(c)(2) would provide that a lender or a 
service provider obtains a leveraged payment mechanism if it has the 
contractual right to obtain payment directly from the consumer's 
employer or other payor of income. This scenario typically involves a 
wage assignment, which, as described by the FTC, is ``a contractual 
transfer by a debtor to a creditor of the right to receive wages 
directly from the debtor's employer. To activate the assignment, the 
creditor simply submits it to the debtor's employer, who then pays all 
or a percentage of debtor's wages to the creditor.'' \419\ These 
arrangements are creatures of State law and can take various forms. For 
example, they can be used either as a method of making regular payments 
during the term of the loan or as a collections tool when borrowers 
default. Such arrangements are legal in some jurisdictions, but illegal 
in others.
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    \419\ 49 FR 7740, 7755 (Mar. 1, 1984).
---------------------------------------------------------------------------

    As discussed further in Market Concerns--Short-Term Loans, the 
Bureau is concerned that where loan agreements provide for assignments 
of income, the lender incentives and potential consumer risks can be 
very similar to those presented by other forms of leveraged payment 
mechanism defined in proposed Sec.  1041.3(c). In particular, a 
lender--as when it has the right to initiate transfers from a 
consumer's account--can continue to obtain payment as long as the 
consumer receives income, even if the consumer does not have the 
ability to repay the loan while meeting her major financial obligations 
and basic living expenses. And--as when a lender has the right to 
initiate transfers from a consumer's account--an assignment of income 
can change the lender's incentives to determine the consumer's ability 
to repay the loan and exacerbate the harms the consumer experiences if 
the consumer does not have the ability to repay the loan. Thus, the 
Bureau believes that loan agreements that provide for assignments of 
income may present the same risk of harm to consumers as other types of 
leveraged payment mechanisms. The Bureau seeks comment on the proposed 
definition and whether additional guidance is needed.
    The Bureau recognizes that some consumers may find it a convenient 
or useful form of financial management to

[[Page 47916]]

repay a loan through a revocable wage assignment. The proposed rule 
would not prevent a consumer from doing so. Rather, the proposed rule 
would impose a duty on lenders to determine the consumer's ability to 
repay when the lender or service provider has the right to obtain 
payment directly from the consumer's employer or other payor of income.
3(c)(3)
    Proposed Sec.  1041.3(c)(3) would provide that a lender or a 
service provider obtains a leveraged payment mechanism if the loan 
requires the consumer to repay through a payroll deduction or deduction 
from another source of income. As proposed comment 3(c)(3)-1 explains, 
a payroll deduction involves a direction by the consumer to the 
consumer's employer (or other payor of income) to pay a portion of the 
consumer's wages or other income to the lender or service provider, 
rather than a direction by the lender to the consumer's employer as in 
a wage assignment. The Bureau is concerned that if an agreement between 
the lender and consumer requires the consumer to have his or her 
employer or other payor of income pay the lender directly, the consumer 
would be in the same situation and face the same risk of harm as if the 
lender had the ability to initiate a transfer from the consumer's 
account or had a right to a wage assignment.
    The Bureau recognizes that just as some consumers may find it a 
convenient or useful form of financial management to authorize a lender 
to deduct loan payments automatically from a consumer's account, so, 
too, may some consumers find it a convenient or useful form of 
financial management to authorize their employer to deduct loan 
payments automatically from the consumer's paycheck and remit the money 
to the lender. The proposed rule would not prevent a consumer from 
doing so. Rather, the proposed rule would impose a duty on lenders to 
determine the consumer's ability to repay only when a lender requires 
the consumer to authorize such payroll deduction as a condition of the 
loan thereby imposing a contractual obligation on the consumer to 
continue such payroll deduction during the term of the loan. The Bureau 
solicits comment on whether a lender should have a duty to determine 
the consumer's ability to repay only when the lender requires payroll 
deduction, or whether such a duty should also apply when the lender 
incentivizes payroll deduction.
3(d) Vehicle Security
    Proposed Sec.  1041.3(d) would provide that a lender or service 
provider obtains vehicle security if the lender or service provider 
obtains an interest in a consumer's motor vehicle, regardless of how 
the transaction is characterized under State law. Under proposed Sec.  
1041.3(d), a lender or service provider could obtain vehicle security 
regardless of whether the lender or service provider has perfected or 
recorded the interest. A lender or service provider also would obtain 
vehicle security under proposed Sec.  1041.3(d) if the consumer pledges 
the vehicle to the lender or service provider in a pawn transaction and 
the consumer retains possession of the vehicle during the loan. In each 
case, a lender or service provider would obtain vehicle security under 
proposed Sec.  1041.3(d) if the consumer is required, under the terms 
of an agreement with the lender or service provider, to grant an 
interest in the consumer's vehicle to the lender in the event that the 
consumer does not repay the loan.
    However, as noted above and discussed further below, proposed Sec.  
1041.3(e) would exclude loans made solely and expressly for the purpose 
of financing a consumer's initial purchase of a motor vehicle in which 
the lender takes a security interest as a condition of the credit, as 
well as non-recourse pawn loans in which the lender has sole physical 
possession and use of the property for the entire term of the loan. 
Proposed comment 3(d)(1)-1 also clarifies that mechanic liens and other 
situations in which a party obtains a security interest in a consumer's 
motor vehicle for a reason that is unrelated to an extension of credit 
do not trigger coverage.
    The Bureau believes that when a lender obtains vehicle security in 
connection with the consummation of a loan, the lender effectively 
achieves a preferred payment position similar to the position that a 
lender obtains with a leveraged payment mechanism. If the loan is 
unaffordable, the consumer will face the difficult choice of either 
defaulting on the loan and putting the consumer's automobile (and 
potentially the consumer's livelihood) at risk or repaying the loan 
even if doing so means defaulting on major financial obligations or 
foregoing basic living needs. As a result, the lender has limited 
incentive to assure that the consumer has the ability to repay the 
loan. For these reasons, the Bureau believes that it is appropriate to 
include within the definition of covered longer-term loans those loans 
for which the lender or service provider obtains vehicle security 
before, at the same time as, or within 72 hours after the consumer 
receives all the funds the consumer is entitled to receive under the 
loan. However, as noted above, the Bureau solicits comment on whether a 
longer-term loan with an all-in cost of credit above 36% should be 
deemed a covered loan if, at any time, the lender obtains vehicle 
security.
3(d)(1)
    Proposed Sec.  1041.3(d)(1) would provide that any security 
interest that the lender or service provider obtains as a condition of 
the loan would constitute vehicle security for the purpose of 
determining coverage under proposed part 1041. The term security 
interest would include any security interest that the lender or service 
provider has in the consumer's vehicle, vehicle title, or vehicle 
registration. As proposed comment 3(d)(1)-1 clarifies, a party would 
not obtain vehicle security if that person obtains a security interest 
in the consumer's vehicle for a reason unrelated to the loan.
    The security interest would not need to be perfected or recorded in 
order to trigger coverage under proposed Sec.  1041.3(d)(1). The 
consumer may not be aware that the security interest is not perfected 
or recorded, nor would it matter in many cases. Perfection or 
recordation protects the lender's interest in the vehicle against 
claims asserted by other creditors, but does not necessarily affect 
whether the consumer's interest in the vehicle is at risk if the 
consumer does not have the ability to repay the loan. Even if the 
lender or service provider does not perfect or record its security 
interest, the security interest can still change a lender's incentives 
to determine the consumer's ability to repay the loan and exacerbate 
the harms the consumer experiences if the consumer does not have the 
ability to repay the loan.
3(d)(2)
    Proposed Sec.  1041.3(d)(2) would provide that pawn transactions 
generally would constitute vehicle security for the purpose of 
determining coverage under proposed part 1041 if the consumer pledges 
the vehicle in connection with the transaction and the consumer retains 
use of the vehicle during the term of the pawn agreement. However, pawn 
transactions would not trigger coverage if they fell within the scope 
of proposed Sec.  1041.3(e)(5), which would exclude bona fide non-
recourse pawn transactions where the lender obtains custody of the 
vehicle and there is no recourse against the consumer for

[[Page 47917]]

the balance due if the consumer is unable to repay the loan.
    The proposed language is designed to account for the fact that, in 
response to laws in several jurisdictions, lenders have structured 
higher-cost, vehicle-secured loans as pawn agreements,\420\ though 
these ``vehicle pawn'' or ``title pawn'' loans are the functional 
equivalent of loans covered by proposed Sec.  1041.3(d) in which the 
lender has vehicle security because the terms on which the loans are 
offered are similar. Further, the ramifications for both the lender and 
the consumer are similar in the event the consumer does not have the 
ability to repay the loan--the lender can repossess the consumer's 
vehicle and sell it. And, as also discussed in the section-by-section 
analysis for proposed Sec.  1041.3(e)(5), vehicle pawn and title pawn 
loans often do not require the consumer to relinquish physical control 
of the motor vehicle while the loan is outstanding, which is likely to 
make the threat of repossession a more powerful form of leverage should 
the consumer not repay the covered loan. Accordingly, the Bureau 
proposes to treat vehicle title pawn loans the same as vehicle security 
loans for the purposes of proposed part 1041.
---------------------------------------------------------------------------

    \420\ See, e.g., Ala. Code Sec.  5-19A-1 through 5-19A-20; Ga. 
Code Sec.  44-12-130 through 44-12-138.
---------------------------------------------------------------------------

3(e) Exclusions
    Proposed Sec.  1041.3(e) would exclude purchase money security 
interest loans extended solely for the purchase of a good, real estate 
secured loans, certain credit cards, student loans, non-recourse pawn 
loans in which the consumer does not possess the pledged collateral, 
and overdraft services and lines of credit. The Bureau believes that 
notwithstanding the potential term, cost of credit, repayment 
structure, or security of these loans, they arise in distinct markets 
that the Bureau believes may pose a somewhat different set of concerns 
for consumers. At the same time, as discussed further below, the Bureau 
is concerned that there may be a risk that these exclusions would 
create avenues for evasion of the proposed rule.
    The Bureau solicits comment on whether any of these excluded types 
of loans should also be covered under proposed part 1041. The Bureau 
further solicits comment on whether there are reasons for excluding 
other types of products from coverage under proposed part 1041. As 
noted above, the Bureau is also soliciting in the Accompanying RFI 
information and additional evidence to support in further assessment of 
whether there are other categories of loans for which lenders do not 
determine the consumer's ability to repay that may pose risks to 
consumers. The Bureau emphasizes that it may determine in a particular 
supervisory or enforcement matter or in a subsequent rulemaking in 
light of evidence available at the time that the failure to assess 
ability to repay when making a loan excluded from coverage here may 
nonetheless be an unfair or abusive act or practice.
3(e)(1) Certain Purchase Money Security Interest Loans
    Proposed Sec.  1041.3(e)(1) would exclude from coverage under 
proposed part 1041 loans extended for the sole and express purpose of 
financing a consumer's initial purchase of a good when the good being 
purchased secures the loan. Accordingly, loans made solely to finance 
the purchase of, for example, motor vehicles, televisions, household 
appliances, or furniture would not be subject to the consumer 
protections imposed by proposed part 1041 to the extent the loans are 
secured by the good being purchased. Proposed comment 3(e)(1)-1 
explains the test for determining whether a loan is made solely for the 
purpose of financing a consumer's initial purchase of a good. If the 
item financed is not a good or if the amount financed is greater than 
the cost of acquiring the good, the loan is not solely for the purpose 
of financing the initial purchase of the good. Proposed comment 
3(e)(1)-1 further explains that refinances of credit extended for the 
purchase of a good do not fall within this exclusion and may be subject 
to the requirements of proposed part 1041.
    Purchase money loans are typically treated differently than non-
purchase money loans under the law. The FTC's Credit Practices Rule 
generally prohibits consumer credit in which a lender takes a 
nonpossessory security interest in household goods but makes an 
exception for purchase money security interests.\421\ The Federal 
Bankruptcy Code, the UCC, and some other State laws apply different 
standards to purchase money security interests. This differential 
treatment facilitates the financing of the initial purchase of 
relatively expensive goods, which many consumers would not be able to 
afford without a purchase money loan. At this time, the Bureau has not 
determined that purchase money loans pose similar risks to consumers as 
the loans covered by proposed part 1041. Accordingly, the Bureau is 
proposing not to cover such loans at this time. The Bureau solicits 
comment on this exclusion and whether there are particular types of 
purchase money loans that pose sufficient risk to consumers to warrant 
coverage under this proposed rule.
---------------------------------------------------------------------------

    \421\ 16 CFR 444.2(a)(4).
---------------------------------------------------------------------------

3(e)(2) Real Estate Secured Credit
    Proposed Sec.  1041.3(e)(2) would exclude from coverage under 
proposed part 1041 loans that are secured by real property, or by 
personal property used as a dwelling, and in which the lender records 
or perfects the security interest. The Bureau believes that even 
without this exemption, very few real estate secured loans would meet 
the coverage criteria set forth in proposed Sec.  1041.3(b). 
Nonetheless, the Bureau believes a categorical exclusion is 
appropriate. For the most part, these loans are already subject to 
Federal consumer protection laws, including, for most closed-end loans, 
ability-to-repay requirements under Regulation Z Sec.  1026.43. The 
proposed requirement that the security interest in the real estate be 
recorded or perfected also strongly discourages attempts to use this 
exclusion for sham or evasive purposes. Recording or perfecting a 
security interest in real estate is not a cursory exercise for a 
lender--recording fees are often charged and documentation is required. 
As proposed comment 3(e)(2)-1 explains, if the lender does not record 
or otherwise perfect the security interest in the property during the 
term of the loan, the loan does not fall under this exclusion and may 
be subject to the requirements of proposed part 1041. The Bureau 
solicits comment on this exclusion and whether there are particular 
types of real-estate secured loans that pose sufficient risk to 
consumers to warrant coverage under the proposed rule.
3(e)(3) Credit Cards
    Proposed Sec.  1041.3(e)(3) would exclude from coverage under 
proposed part 1041 credit card accounts meeting the definition of 
``credit card account under an open-end (not home-secured) consumer 
credit plan'' in Regulation Z Sec.  1026.2(a)(15)(ii), rather than 
products meeting the more general definition of credit card accounts 
under Regulation Z Sec.  1026.2(a)(15). By focusing on the narrower 
category, the exemption would apply only to credit card accounts that 
are subject to the Credit CARD Act of 2009, Public Law 111-24, 123 
Stat. 1734 (2009) (CARD Act), which provides various heightened 
safeguards for consumers. These protections include a limitation that 
card issuers cannot open a credit card account or increase a credit 
line on a card account unless the card issuer considers the ability of 
the consumer to make the required payments under the terms of the

[[Page 47918]]

account, as well as other protections such as limitations on fees 
during the first year after account opening, late fee restrictions, and 
a requirement that card issuers give consumers ``a reasonable amount of 
time'' to pay their bill.\422\
---------------------------------------------------------------------------

    \422\ 15 U.S.C. 1665e; see also 12 CFR 1026.51(a); Supplement I 
to 12 CFR part 1026.
---------------------------------------------------------------------------

    The Bureau believes that, even without this exemption, few 
traditional credit card accounts would meet the coverage criteria set 
forth in proposed Sec.  1041.3(b) other than some secured credit card 
accounts which may have a total cost of credit above 36 percent and 
provide for a leveraged payment mechanism in the form of a right of 
set-off. These credit card accounts are subject to the CARD Act 
protections discussed above. The Bureau believes that potential 
consumer harms related to credit card accounts are more appropriately 
addressed by the CARD Act, implementing regulations, and other 
applicable law. At the same time, if the Bureau were to craft a broad 
general exemption for all credit cards as generally defined under 
Regulation Z, the Bureau would be concerned that a lender seeking to 
evade the requirements of the rule might seek to structure a product in 
a way designed to take advantage of this exclusion.
    The Bureau has therefore proposed a narrower definition focusing 
only on those credit cards accounts that are subject to the full range 
of protections under the CARD Act and its implementing regulations. 
Among other requirements, the regulations imposing the CARD Act 
prescribe a different ability-to-repay standard that lenders must 
follow, and the Bureau believes that the combined consumer protections 
governing credit card accounts subject to the CARD Act are sufficient 
for that type of credit. To further mitigate potential consumer risk, 
the Bureau considered adding a requirement that to be eligible for this 
exclusion, a credit card would have to be either (i) accepted upon 
presentation by multiple unaffiliated merchants that participate in a 
widely-accepted payment network, or (ii) accepted upon presentation 
solely for the bona fide purchase of goods or services at a particular 
retail merchant or group of merchants. The Bureau solicits comments on 
whether to exclude credit cards and, if so, whether the criteria 
proposed to define the exclusion are appropriate, or whether additional 
criteria should be added to limit the potential evasion risk identified 
above.
3(e)(4) Student Loans
    Proposed Sec.  1041.3(e)(4) would exclude from coverage under 
proposed part 1041 loans made, insured, or guaranteed pursuant to a 
Federal student loan program, and private education loans. The Bureau 
believes that even without this exemption, very few student loans would 
meet the coverage criteria set forth in proposed Sec.  1041.3(b). 
Nonetheless, the Bureau believes a categorical exclusion is 
appropriate. Federal student loans are provided to students or parents 
meeting eligibility criteria established by Federal law and regulation 
such that the protections afforded by this proposed rule would be 
unnecessary. Private student loans are sometimes made to students based 
upon their future potential ability to repay (as distinguished from 
their current ability), but are typically co-signed by a party with 
financial capacity. These loans raise discrete issues that may warrant 
Bureau attention at a future time, but the Bureau believes that they 
are not appropriately considered along with the types of loans at issue 
in this rulemaking. The Bureau continues to monitor the student loan 
servicing market for trends and developments, unfair, deceptive, or 
abusive practices, and to evaluate possible policy responses, including 
potential rulemaking. The Bureau solicits comment on whether this 
exclusion is appropriate.
3(e)(5) Non-Recourse Pawn Loans
    Proposed Sec.  1041.3(e)(5) generally would exclude from coverage 
under proposed part 1041 loans secured by pawned property in which the 
lender has sole physical possession and use of the pawned property for 
the entire term of loan, and for which the lender's sole recourse if 
the consumer does not redeem the pawned property is the retention and 
disposal of the property. Proposed comment 3(e)(5)-1 explains that if 
any consumer, including a co-signor or guarantor, is personally liable 
for the difference between the outstanding loan balance and the value 
of the pawned property, the loan does not fall under this exclusion and 
may be subject to the requirements of proposed part 1041. As discussed 
above in connection with proposed Sec.  1041.2(a)(13) and below in 
connection with proposed Sec. Sec.  1041.6, 1041.7, and 1041.10, 
however, a non-recourse pawn loan can, in certain circumstances, be a 
non-covered bridge loan that could impact restrictions on the lender 
with regard to a later covered short-term loans.
    The Bureau believes that bona fide, non-recourse pawn loans 
generally pose somewhat different risks to consumers than loans covered 
under proposed part 1041. As described in part II, non-recourse pawn 
loans involve the consumer physically relinquishing control of the item 
securing the loan during the term of the loan. The Bureau believes that 
consumers may be more likely to understand and appreciate the risks 
associated with physically turning over an item to the lender when they 
are required to do so at consummation. Moreover, in most situations, 
the loss of a non-recourse pawned item over which the lender has sole 
physical possession during the term of the loan is less likely to 
affect the rest of the consumer's finances than is either a leveraged 
payment mechanism or vehicle security. For instance, a pawned item of 
this nature may be valuable to the consumer, but the consumer most 
likely does not rely on the pawned item for transportation to work or 
to pay other obligations. Otherwise, the consumer likely would not have 
pawned the item under these terms. Finally, because the loans are non-
recourse, in the event that a consumer is unable to repay the loan, the 
lender must accept the pawned item as fully satisfying the debt, 
without further collections activity on any remaining debt obligation.
    In all of these ways, pawn transactions appear to differ 
significantly from the secured loans that would be covered under 
proposed part 1041. While the loans described in proposed Sec.  
1041.3(e)(5) would not be covered loans, lenders may, as described in 
proposed Sec. Sec.  1041.6, 1041.7, and 1041.10 be subject to 
restrictions on making covered loans shortly following certain non-
recourse pawn loans that meet certain conditions. The Bureau solicits 
comment on this exclusion and whether these types of pawn loans should 
be subject to the consumer protections imposed by proposed part 1041.
3(e)(6) Overdraft Services and Overdraft Lines of Credit
    Proposed Sec.  1041.3(e)(6) would exclude from coverage under 
proposed part 1041 overdraft services on deposit accounts as defined in 
12 CFR 1005.17(a), as well as payments of overdrafts pursuant to a line 
of credit subject to Regulation Z, 12 CFR part 1026. Overdraft services 
generally operate on a consumer's deposit account as a negative 
balance, where the consumer's bank processes and pays certain payment 
transactions for which the consumer lacks sufficient funds in the 
account and imposes a fee for the

[[Page 47919]]

service as an alternative to either refusing to authorize the payment 
(in the case of most debit and ATM transactions and ACH payments 
initiated from the consumer's account) or rejecting the payment and 
charging a non-sufficient funds fee (in the case of other ACH payments 
as well as paper checks). Overdraft services have been exempted from 
regulation under Regulation Z under certain circumstances, and are 
subject to specific rules under EFTA \423\ and the Truth in Savings 
Act, and their respective implementing regulations.\424\ In contrast, 
overdraft lines of credit are separate open-end lines of credit under 
Regulation Z that have been linked to a consumer's deposit account to 
provide automatic credit draws to cover the processing of payments for 
which there are not sufficient funds in the deposit account.
---------------------------------------------------------------------------

    \423\ 74 FR 59033 (Nov. 17, 2009).
    \424\ 70 FR 29582 (May 24, 2005).
---------------------------------------------------------------------------

    As discussed above in part II, the Bureau is engaged in research 
and other activity in anticipation of a separate rulemaking regarding 
overdraft products and practices.\425\ Given that overdraft services 
and overdraft lines of credit involve complex overlays with rules 
regarding payment processing, deposit accounts, set-off rights, and 
other forms of depository account access, the Bureau believes that any 
discussion of whether additional regulatory protections are warranted 
for those two products should be reserved for that rulemaking. 
Accordingly, the Bureau is proposing to exempt both types of overdraft 
products from the scope of this rule, using definitional language in 
Regulation E to distinguish both overdraft services and overdraft lines 
of credit from other types of depository credit products. The Bureau 
solicits comment on whether additional guidance would be helpful to 
distinguish overdraft services and overdraft lines of credit from other 
products, whether that distinction is appropriate for purposes of this 
rulemaking, and whether the Bureau should factor particular product 
features or safeguards into the way it differentiates between 
depository credit products.
---------------------------------------------------------------------------

    \425\ CFPB Study of Overdraft Programs White Paper; CFPB Data 
Point: Checking Account Overdraft.
---------------------------------------------------------------------------

Subpart B--Short-Term Loans

    In proposed Sec.  1041.4, the Bureau proposes to identify an unfair 
and abusive act or practice with respect to the making of covered 
short-term loans pursuant to its authority to ``prescribe rules . . . 
identifying as unlawful unfair, deceptive, or abusive acts or 
practices.'' \426\ In the Bureau's view, it appears to be both unfair 
and abusive for a lender to make such a loan without reasonably 
determining that the consumer has the ability to repay the loan. To 
avoid committing this unfair and abusive practice, a lender would have 
to reasonably determine that the consumer has the ability to repay the 
loan. Proposed Sec. Sec.  1041.5 and 1041.6 would establish a set of 
requirements to prevent the unlawful practice by reasonably determining 
that the consumer has the ability to repay the loan. The Bureau is 
proposing the ability-to-repay requirements under its authority to 
prescribe rules for ``the purpose of preventing [unfair and abusive] 
acts or practices.'' \427\ Proposed Sec.  1041.7 would rely on section 
1022(b)(3) of the Dodd-Frank Act to exempt from the ability-to-repay 
requirements in proposed Sec. Sec.  1041.5 and 1041.6, as well as from 
the prohibition in Sec.  1041.4 certain covered short-term loans which 
satisfy a set of conditions designed to avoid the harms that can result 
from unaffordable loans. Accordingly, lenders seeking to make covered 
short-term loans would have the choice, on a case by case basis, either 
to follow proposed Sec. Sec.  1041.5 and 1041.6, or proposed Sec.  
1041.7.
---------------------------------------------------------------------------

    \426\ 12 U.S.C. 5531(b).
    \427\ Id.
---------------------------------------------------------------------------

    The predicate for the proposed identification of an unfair and 
abusive act or practice in proposed Sec.  1041.4--and thus for the 
prevention requirements contained in proposed Sec. Sec.  1041.5 and 
1041.6--is a set of preliminary findings with respect to the consumers 
who use storefront and online payday loans, single-payment auto title 
loans, and other short-term loans, and the impact on those consumers of 
the practice of making such loans without assessing the consumers' 
ability to repay.\428\ Those preliminary findings are set forth in the 
discussion below, hereinafter referred to as Market Concerns--Short-
Term Loans. After laying out these preliminary findings, the Bureau 
sets forth, in the section-by-section analysis of proposed Sec.  
1041.4, its reasons for proposing to identify as unfair and abusive the 
practice described in proposed Sec.  1041.4. The Bureau seeks comment 
on all aspects of this subpart, including the intersection of the 
proposed interventions with existing State, tribal, and local laws and 
whether additional or alternative protections should be considered to 
address the core harms discussed below.
---------------------------------------------------------------------------

    \428\ The Bureau's analysis of this market is based primarily on 
research regarding payday loans, single-payment auto title loans, 
and deposit advance products. The Bureau is not aware of other 
substantial product offerings that would meet the definition of 
covered short-term loans, but as discussed below, believes any 
product structure involving a similarly short repayment term may 
pose similar risks to consumers.
    .
---------------------------------------------------------------------------

Market Concerns--Short-Term Loans
    The Bureau is concerned that lending practices in the markets for 
storefront and online payday lending, single-payment vehicle title, and 
other short-term loans are causing harm to many consumers who use these 
products, including extended sequences of reborrowing, delinquency and 
defaults, and certain collateral harms from making unaffordable 
payments. This section reviews the available evidence with respect to 
the consumers who use payday and short-term auto title loans, their 
reasons for doing so, and the outcomes they experience. It also reviews 
the lender practices that cause these outcomes. The Bureau 
preliminarily finds:
     Lower-income, lower-savings consumers. Consumers who use 
these products tend to come from lower or moderate income households. 
They generally do not have any savings to fall back on, and they have 
very limited access to other sources of credit; indeed, typically they 
have sought unsuccessfully to obtain other, lower cost, credit before 
turning to a short-term loan.
     Consumers in financial difficulty. Some consumers turn to 
these products because they have experienced a sudden drop in income 
(``income shock'') or a large unexpected expense (``expense shock''). 
Other borrowers are in circumstances in which their expenses 
consistently outstrip their income. A sizable percentage of users 
report that they would have taken a loan on any terms offered.
     Loans do not function as marketed. Lenders market single-
payment products as short-term loans designed to provide a bridge to 
the consumer's next payday or other income receipt. In practice, 
however, the amounts due consume such a large portion of the consumer's 
paycheck or other periodic income source as to be unaffordable for most 
consumers seeking to recover from an income or expense shock and even 
more so for consumers with a chronic income shortfall. Lenders actively 
encourage consumers either simply to pay the finance charges due and 
roll over the loan instead of repaying the loan in full (or effectively 
roll over the loan by returning to reborrow in the days after repaying 
the loan). Indeed, lenders are dependent upon such

[[Page 47920]]

reborrowing for a substantial portion of their revenue and would lose 
money if each borrower repaid the loan when due without reborrowing.
     Very high reborrowing rates. Not surprisingly, most 
borrowers find it necessary to reborrow when their loan comes due or 
shortly after repaying their loan, as other expenses come due. This 
reborrowing occurs both with payday loans and single-payment vehicle 
title loans. Fifty percent of all new storefront payday loans are 
followed by at least three more loans and 33 percent are followed by 
six more loans. For single-payment vehicle title loans over half (56 
percent) of all new loans are followed by at least three more loans, 
and more than a third (36 percent) are followed by six or more loans. 
Twenty-one percent of payday loans made to borrowers paid weekly, bi-
weekly, or semi-monthly are in loan sequences of 20 loans or more and 
over forty percent of loans made to borrowers paid monthly are in loan 
sequences of comparable durations (i.e., 10 or more monthly loans).
     Consumers do not expect lengthy loan sequences. Consumers 
who take out a payday loan do not expect to reborrow to the extent that 
they do. This is especially true of those consumers who end up in 
extended cycles of indebtedness. Research shows that when taking out 
loans consumers are unable accurately to predict how long it will take 
them to get out of debt, and that this is even truer of consumers who 
have borrowed heavily in the recent past. Consumers' difficulty in this 
regard is based, in part, on the fact that such loans involve a basic 
mismatch between how they appear to function as short-term credit and 
how they are actually designed to function in long sequences of 
reborrowing. This disparity creates difficulties for consumers in 
estimating with any accuracy how long they will remain in debt and how 
much they will ultimately pay for the initial extension of credit. 
Research regarding consumer decision-making also helps explain why 
consumers end up reborrowing more than they expect. People under 
stress, including consumers in financial crisis, tend to become very 
focused on their immediate problems and think less about the future. 
Consumers also tend to underestimate their future expenses, and may be 
overly optimistic about their ability to recover from the shock they 
have experienced or to bring their expenses in line with their incomes.
     Very high default rates. Some consumers do succeed in 
repaying short-term loans without reborrowing, and others eventually 
repay the loan after reborrowing multiple times. But research shows 
that approximately 20 percent of payday loan sequences and 33 percent 
of single-payment vehicle title loan sequences end up with the consumer 
defaulting. Consumers who are delinquent or who default can become 
subject to often aggressive and psychologically harmful debt collection 
efforts. In addition, 20 percent of single-payment vehicle title loan 
sequences end with borrowers losing their cars or trucks to 
repossession. Even borrowers who eventually pay off their loans may 
incur penalty fees, late fees, or overdraft fees along the way, and 
after repaying may find themselves struggling to pay other bills or 
meet their basic living expenses.
     Harms occur despite existing regulation. The research 
indicates that these harms from payday loans and other short-term loans 
persist despite existing regulatory frameworks. In particular, the 
Bureau is concerned that caps on the amount that a consumer can borrow, 
rollover limitations, and short cooling-off periods still appear to 
leave many consumers vulnerable to the specific harms discussed above 
relating to reborrowing, default, and collateral harms from making 
unaffordable payments.
    The following discussion reviews the evidence underlying each of 
these preliminary findings.
a. Borrower Characteristics and Circumstances of Borrowing
    Borrowers who take out payday and single-payment vehicle title 
loans are typically low-to-moderate income consumers who are looking 
for quick access to cash, who have little to no savings, who often have 
poor credit histories, and who have limited access to other forms of 
credit. The desire for immediate cash may be the result of an emergency 
expense or an unanticipated drop in income, but many who take out 
payday or vehicle title loans are consumers whose living expenses 
routinely exceed their income.
1. Borrower Characteristics
    A number of studies have focused on the characteristics of payday 
borrowers. For instance, the FDIC and the U.S. Census Bureau have 
undertaken several special supplements to the Current Population Survey 
(CPS Supplement); the most recent available data come from 2013.\429\ 
The CPS supplement found that 46 percent of payday borrowers (including 
storefront and online borrowers) have a family income of under 
$30,000.\430\ A study covering a mix of storefront and online payday 
borrowers similarly found that 49 percent had income of $25,000 or 
less.\431\ Other analyses of administrative data that include the 
income that borrowers reported to lenders are broadly consistent.\432\ 
Additionally, the Bureau found in its analysis of confidential 
supervisory data that 18 percent of storefront borrowers relied on 
Social Security or some other form of government benefits or public 
assistance.\433\ The FDIC study further found that payday borrowers are 
disproportionately Hispanic or African-American (with borrowing rates 
two to three times higher respectively than for non-Hispanic whites). 
Female-headed households are more than twice as likely as married 
couples to be payday borrowers.\434\
---------------------------------------------------------------------------

    \429\ 2013 FDIC National Survey of Unbanked and Underbanked 
Households: Appendices, at 83.
    \430\ Id., at Appx. D-12a.
    \431\ Pew Charitable Trusts, Payday Lending in America: Who 
Borrows, Where They Borrow, and Why, at 35 (2012), http://
www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/
pewpaydaylendingreportpdf.pdf; see also Gregory Elliehausen, An 
Analysis of Consumers' Use of Payday Loans, at 27 (2009), available 
at http://www.cfsaa.com/portals/0/RelatedContent/Attachments/GWUAnalysis_01-2009.pdf (61 percent of borrowers have household 
income under $40,000); Jonathan Zinman, Restricting Consumer Credit 
Access: Household Survey Evidence on Effects Around the Oregon Rate 
Cap, at 5 (2008), available at http://www.dartmouth.edu/~jzinman/
Papers/Zinman_RestrictingAccess_oct08.pdf.
    \432\ Bureau of Consumer Fin. Prot., Payday Loans and Deposit 
Advance Products: A White Paper of Initial Data Findings, at 18 
(2013) [hereinafter CFPB Payday Loans and Deposit Advance Products 
White Paper], http://files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf (reporting that based on confidential supervisory 
data of a number of storefront payday lenders, borrowers had a 
reported median annual income of $22,476 at the time of application 
(not necessarily household income)). Similarly, data from several 
State regulatory agencies indicate that average incomes range from 
about $31,000 (Delaware) to slightly over $36,000 (Washington). For 
Washington, see Wash. Dep't of Fin. Insts., 2014 Payday Lending 
Report, at 6 (2014), available at http://www.dfi.wa.gov/sites/default/files/reports/2014-payday-lending-report.pdf; for Delaware, 
see Veritec Solutions, State of Delaware Short-term Consumer Loan 
Program, Report on Delaware Short-term Consumer Loan Activity For 
the Year Ending December 31, 2014, at 6 (2015), available at http://banking.delaware.gov/pdfs/annual/Short_Term_Consumer_Loan_Database_2014_Operations_Report.pdf. 
Research by nonPrime 101 found the median income for online payday 
borrowers to be $30,000. nonPrime101, Profiling Internet Small-
Dollar Lending, at 7 (2014), https://www.nonprime101.com/wp-content/uploads/2013/10/Clarity-Services-Profiling-Internet-Small-Dollar-Lending.pdf.
    \433\ CFPB Payday Loans and Deposit Advance Products White 
Paper, at 18.
    \434\ 2013 FDIC National Survey of Unbanked and Underbanked 
Households: Appendices, at Appx. D-12a.
---------------------------------------------------------------------------

    The demographic profiles of vehicle title loan borrowers appear to 
be roughly comparable to the

[[Page 47921]]

demographics of payday borrowers.\435\ Calculations from the CPS 
Supplement indicate that 40 percent of vehicle title borrowers have 
annual family incomes under $30,000.\436\ Another survey likewise found 
that 56 percent of title borrowers reported incomes below $30,000, 
compared with 60 percent for payday borrowers.\437\ As with payday 
borrowers, data from the CPS Supplement show vehicle title borrowers to 
be disproportionately African-American or Hispanic, and more likely to 
live in female-headed households.
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    \435\ None of the sources of information on the characteristics 
of vehicle title borrowers that the Bureau is aware of distinguish 
between borrowers taking out single-payment and installment vehicle 
title loans. The statistics provided here are for borrowers taking 
out either type of vehicle title loan.
    \436\ FDIC National Survey of Unbanked and Underbanked 
Households: Appendices, at Appx. D-16a.
    \437\ Pew Charitable Trusts, Auto Title Loans: Market Practices 
and Borrowers' Experiences, at 1 (2015), http://www.pewtrusts.org/~/
media/assets/2015/03/autotitleloansreport.pdf.
---------------------------------------------------------------------------

    Similarly, a survey of borrowers in three States conducted by 
academic researchers found that vehicle title borrowers were 
disproportionately female and minority. Over 58 percent of title 
borrowers were female. African-Americans were over-represented among 
borrowers compared to their share of the States' population at large. 
Hispanic borrowers were over-represented in two of the three states; 
however, these borrowers were underrepresented in Texas, the State with 
the highest proportion of Hispanic residents in the study.\438\
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    \438\ Kathryn Fritzdixon, Jim Hawkins, & Paige Marta Skiba, 
Dude, Where's My Car Title?: The Law, Behavior, and Economics of 
Title Lending Markets, 2014 U. Ill. L. Rev. 1013, 1029-1030 (2014), 
available at https://illinoislawreview.org/wp-content/ilr-content/articles/2014/4/Hawkins,Skiba,&Fritzdixon.pdf.
---------------------------------------------------------------------------

    Studies of payday borrowers' credit histories show both poor credit 
histories and recent credit-seeking activity. An academic paper that 
matched administrative data from one storefront payday lender to credit 
bureau data found that the median credit score for a payday applicant 
was in the bottom 15 percent of credit scores overall.\439\ The median 
applicant had one open credit card, but 80 percent of applicants had 
either no credit card or no credit available on a card. The average 
borrower had 5.2 credit inquiries on her credit report over the 
preceding 12 months before her initial application for a payday loan 
(three times the number for the general population), but obtained only 
1.4 accounts on average. This suggests that borrowers made repeated but 
generally unsuccessful efforts to obtain additional other forms of 
credit first, and sought the payday loan as a ``last resort.'' They may 
have credit cards but likely do not have unused credit, are often 
delinquent on one or more cards, and have often experienced multiple 
overdrafts and/or NSFs on their checking accounts.\440\ A recent report 
analyzing credit scores of borrowers from five large storefront payday 
lenders provides corroborative support, finding that the average 
borrower had a VantageScore 3.0 \441\ score of 532 and that over 85 
percent of borrowers had a score below 600, indicating high credit 
risk.\442\ By way of comparison, the national average Vantage Score is 
669 and only 30 percent of consumers have a Vantage Score below 
600.\443\
---------------------------------------------------------------------------

    \439\ Bhutta, Skiba, & Tobacman, at 231-33. Note that the credit 
score used in this analysis was the Equifax Risk Score which ranges 
from 280-850. Frederic Huynh, FICO Score Distribution, FICO Blog 
(Apr. 15, 2013), http://www.fico.com/en/blogs/risk-compliance/fico-score-distribution-remains-mixed/.
    \440\ Bhutta, Skiba, & Tobacman, at 231-33.
    \441\ A VantageScore 3.0 score is a credit score created by an 
eponymous joint venture of the three major credit reporting 
companies; scores lie on the range 300-850.
    \442\ nonprime 101, Can Storefront Payday Borrowers Become 
Installment loan Borrowers?, at 5 (2015), https://www.nonprime101.com/blog/can-storefront-payday-borrowers-become-installment-loan-borrowers/.
    \443\ Experian, State of Credit (2015), http://www.experian.com/live-credit-smart/state-of-credit-2015.html.
---------------------------------------------------------------------------

    Reports using data from a specialty consumer reporting agency 
indicate that online borrowers have comparable credit scores to 
storefront borrowers (a mean VantageScore 3.0 score of 525 versus 532 
for storefront).\444\ Another study based on the data from the same 
specialty consumer reporting agency and an accompanying survey of 
online small-dollar credit borrowers reports that 79 percent of those 
surveyed had been denied traditional credit in the past year due to 
having a low or no credit score, 62 percent had already sought 
assistance from family and friends, and 24 percent reported having 
negotiated with a creditor to whom they owed money.\445\ Moreover, 
heavy use of online payday loans correlated with more strenuous credit-
seeking: Compared to light (bottom quartile) users of online loans, 
heavy (top quartile) users were more likely to have been denied credit 
in the past year (87 percent of heavy users compared to 68 percent of 
light users).\446\
---------------------------------------------------------------------------

    \444\ nonPrime101, Can Storefront Payday Borrowers Become 
Installment Loan Borrowers?, at 6. Twenty percent of online 
borrowers are unable to be scored; for storefront borrowers the 
percentage of unscorable consumers is negligible. However, this may 
partly reflect the limited quality of the data online lenders obtain 
and/or report about their customers and resulting inability to 
obtain a credit report match.
    \445\ Richard Hendra & Stephen Nunez, MDRC, The Subprime Lending 
Database Exploration Study: Initial Findings, at table 11 (2015) 
(pre-publication copy on file with authors and available upon 
request; final version anticipated to be published and posted on 
MDRC Web site in June 2016 at http://www.mdrc.org/publication/online-payday-and-installment-loans).
    \446\ Id. at tables 5-7.
---------------------------------------------------------------------------

    Other surveys of payday borrowers add to the picture of consumers 
in financial distress. For example, in a survey of payday borrowers 
published in 2009, fewer than half reported having any savings or 
reserve funds. Almost a third of borrowers (31.8 percent) reported 
monthly debt to income payments of 30 percent or higher, and more than 
a third (36.4 percent) of borrowers reported that they regularly spend 
all the income they receive.\447\
---------------------------------------------------------------------------

    \447\ Elliehausen, An Analysis of Consumers' Use of Payday 
Loans, at 29-32.
---------------------------------------------------------------------------

    Similarly, a 2010 survey found that over 80 percent of payday 
borrowers reported making at least one late payment on a bill in the 
preceding three months, and approximately one quarter reported 
frequently paying bills late. Approximately half reported bouncing at 
least one check in the previous three months, and 30 percent reported 
doing so more than once.\448\
---------------------------------------------------------------------------

    \448\ Zinman, Restricting Consumer Credit Access: Household 
Survey Evidence on Effects Around the Oregon Rate Cap, at 550.
---------------------------------------------------------------------------

    Likewise, a 2012 survey found that 58 percent of payday borrowers 
report that they struggled to pay their bills on time. More than a 
third (37 percent) said they would have taken out a loan on any terms 
offered. This figure rises to 46 percent when the respondent rated his 
or her financial situation as particularly poor.\449\
---------------------------------------------------------------------------

    \449\ See Pew Charitable Trusts, Payday Lending in America: How 
Borrowers Choose and Repay Payday Loans, at 20 (2013), http://www.pewtrusts.org/en/research-and-analysis/reports/2013/02/19/how-borrowers-choose-and-repay-payday-loans.
---------------------------------------------------------------------------

2. Circumstances of Borrowing
    Several surveys have asked borrowers why they took out their loans 
or for what purpose they used the loan proceeds. These are challenging 
questions to study. Any survey that asks about past behavior or events 
runs some risk of recall errors. In addition, the fungibility of money 
makes this question more complicated. For example, a consumer who has 
an unexpected expense may not feel the effect fully until weeks later, 
depending on the timing of the unexpected expense relative to other 
expenses and the receipt of income. In that circumstance, a borrower 
may say either that she took

[[Page 47922]]

out the loan because of the unexpected expense, or that she took out 
the loan to cover regular expenses. Perhaps because of this difficulty, 
results across surveys are somewhat inconsistent, with one finding high 
levels of unexpected expenses, while others find that payday loans are 
used primarily to pay for regular expenses.
    In a 2007 survey of payday borrowers, the most common reason cited 
for taking out a loan was ``an unexpected expense that could not be 
postponed,'' with 71 percent of respondents strongly agreeing with this 
reason and 16 percent somewhat agreeing.\450\
---------------------------------------------------------------------------

    \450\ Elliehausen, An Analysis of Consumers' Use of Payday 
Loans, at 35.
---------------------------------------------------------------------------

    A 2012 survey of payday loan borrowers, on the other hand, found 
that 69 percent of respondents took their first payday loan to cover a 
recurring expense, such as utilities, rent, or credit card bills, and 
only 16 percent took their first loan for an unexpected expense.\451\
---------------------------------------------------------------------------

    \451\ Pew Charitable Trusts, Payday Lending in America: Who 
Borrows, Where They Borrow, and Why, at 14-16 (2012), http://
www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/
pewpaydaylendingreportpdf.pdf.
---------------------------------------------------------------------------

    Another 2012 survey of over 1,100 users of alternative small-dollar 
credit products, including pawn, payday, auto title, deposit advance 
products, and non-bank installment loans, asked separate questions 
about what borrowers used the loan proceeds for and what precipitated 
the loan. Responses were reported for ``very short term'' and ``short 
term'' credit; very short term referred to payday, pawn, and deposit 
advance products. Respondents could report up to three reasons for what 
precipitated the loan; the most common reason given for very short term 
borrowing (approximately 37 percent of respondents) was ``I had a bill 
or payment due before my paycheck arrived,'' which the authors of the 
report on the survey results interpret as a mismatch in the timing of 
income and expenses. Unexpected expenses were cited by 30 percent of 
very short term borrowers, and approximately 27 percent reported 
unexpected drops in income. Approximately 34 percent reported that 
their general living expenses were consistently more than their income. 
Respondents could also report up to three uses for the funds; the most 
common answers related to paying for routine expenses, with over 40 
percent reporting the funds were used to ``pay utility bills,'' over 40 
percent reporting the funds were used to pay ``general living 
expenses,'' and over 20 percent saying the funds were used to pay rent. 
Of all the reasons for borrowing, consistent shortfalls in income 
relative to expenses was the response most highly correlated with 
consumers reporting repeated usage or rollovers.\452\
---------------------------------------------------------------------------

    \452\ Id. at 18-20.
---------------------------------------------------------------------------

    A recent survey of 768 online payday users drawn from a large 
administrative database of payday borrowers looked at similar 
questions, and compared the answers of heavy and light users of online 
loans.\453\ Based on borrowers' self-reported borrowing history, 
borrowers were segmented into heavy users (users with borrowing 
frequency in the top quartile of the dataset) and light users (bottom 
quartile). Heavy users were much more likely to report that they ``[i]n 
past three months, often or always ran out of money before the end of 
the month'' (60 percent versus 34 percent). In addition, heavy users 
were nearly twice as likely as light users to state their primary 
reason for seeking their most recent payday loan as being to pay for 
``regular expenses such as utilities, car payment, credit card bill, or 
prescriptions'' (49 percent versus 28 percent). Heavy users were less 
than half as likely as light users to state their reason as being to 
pay for an ``unexpected expense or emergency'' (21 percent versus 43 
percent). Notably, 18 percent of heavy users gave as their primary 
reason for seeking a payday loan online that they ``had a storefront 
loan, needed another [loan]'' as compared to just over 1 percent of 
light users.
---------------------------------------------------------------------------

    \453\ Hendra & Nunez.
---------------------------------------------------------------------------

b. Lender Practices
    The business model of lenders who make payday and single-payment 
vehicle title loans is predicated on the lenders' ability to secure 
extensive reborrowing. As described in the Background section, the 
typical storefront payday loan has a principal amount of $350, and the 
consumer pays a typical fee of 15 percent of the principal amount. That 
means that if a consumer takes out such a loan and repays the loan when 
it is due without reborrowing, the typical loan would produce roughly 
$50 in revenue to the lender. Lenders would thus require a large number 
of ``one-and-done'' consumers to cover their overhead and acquisition 
costs and generate profits. However, because lenders are able to induce 
a large percentage of borrowers to repeatedly reborrow, lenders have 
built a model in which the typical store has, as discussed in part II, 
two or three employees serving around 500 customers per year. Online 
lenders do not have the same overhead costs, but they have been willing 
to pay substantial acquisition costs to lead generators and to incur 
substantial fraud losses because of their ability to secure more than a 
single fee from their borrowers.
    The Bureau uses the term ``reborrow'' to refer to situations in 
which consumers either roll over a loan (which means they pay a fee to 
defer payment of the principal for an additional period of time), or 
take out a new loan within a short period time following a previous 
loan. Reborrowing can occur concurrently with repayment in back-to-back 
transactions or can occur shortly thereafter. The Bureau believes that 
reborrowing often indicates that the previous loan was beyond the 
consumer's ability to repay and meet the consumer's other major 
financial obligations and basic living expenses. As discussed in more 
detail in the section-by-section analysis of proposed Sec.  1041.6, the 
Bureau believes it is appropriate to consider loans to be reborrowings 
when the second loan is taken out within 30 days of the consumer being 
indebted on a previous loan. While the Bureau's 2014 Data Point used a 
14-day period and the Small Business Review Panel Outline used a 60-day 
period, the Bureau is using a 30-day period in this proposal to align 
with consumer expense cycles, which are typically a month in length. 
This is designed to account for the fact that where repaying a loan 
causes a shortfall, the consumer may seek to return during the same 
expense cycle to get funds to cover downstream expenses. Unless 
otherwise noted, this section, Market Concerns--Short-Term Loans, uses 
a 30-day period to determine whether a loan is part of a loan sequence.
    The majority of lending revenue earned by storefront payday lenders 
and lenders that make single-payment vehicle title loans comes from 
borrowers who reborrow multiple times and become enmeshed in long loan 
sequences. Based on the Bureau's data analysis, more than half of 
payday loans are in sequences that contain 10 loans or more.\454\ 
Looking just at loans made to borrowers who are paid weekly, bi-weekly, 
or semi-monthly, approximately 21 percent of loans are in sequences 
that are 20 loans or longer.
---------------------------------------------------------------------------

    \454\ This is true regardless of whether sequence is defined 
using either a 14-day, 30-day, or 60-day period to determine whether 
loans are within the same loan sequence.
---------------------------------------------------------------------------

    As discussed below, the Bureau believes that both the short term 
and the single-payment structure of these loans contributes to the long 
sequences the

[[Page 47923]]

borrowers take out. Various lender practices exacerbate the problem by 
marketing to borrowers who are particularly likely to wind up in long 
sequences of loans, by failing to screen out borrowers likely to wind 
up in long-term debt or to establish guardrails to avoid long-term 
indebtedness, and by actively encouraging borrowers to continue to roll 
over or reborrow.
1. Loan Structure
    The single-payment structure and short duration of these loans 
makes them difficult to repay: within the space of a single income or 
expense cycle, a consumer with little to no savings cushion and who has 
borrowed to meet an unexpected expense or income shortfall, or who 
chronically runs short of funds, is unlikely to have the available cash 
needed to repay the full amount borrowed plus the finance charge on the 
loan when it is due and to cover other ongoing expenses. This is true 
for loans of a very short duration regardless of how the loan may be 
categorized. Loans of this type, as they exist in the market today, 
typically take the form of single-payment loans, including payday 
loans, and vehicle title loans, though other types of credit products 
are possible.\455\ The focus of the Bureau's research has been on 
payday and vehicle title loans, so the discussion in Market Concerns--
Short-Term Loans centers on those types of products.
---------------------------------------------------------------------------

    \455\ In the past, a number of depository institutions have also 
offered deposit advance products. A small number of institutions 
still offer similar products. Like payday loans, deposit advances 
are typically structured as short-term loans. However, deposit 
advances do not have a pre-determined repayment date. Instead, 
deposit advance agreements typically stipulate that repayment will 
automatically be taken out of the borrower's next qualifying 
electronic deposit. Deposit advances are typically requested through 
online banking or over the phone, although at some institutions they 
may be requested at a branch. As described in more detail in the 
CFPB Payday Loans and Deposit Advance Products White Paper, the 
Bureau's research demonstrated similar borrowing patterns in both 
deposit advance products and payday loans. See CFPB Payday Loans and 
Deposit Advance Products White Paper, at 32-42.
---------------------------------------------------------------------------

    The size of single-payment loan repayment amounts (measured as loan 
principal plus finance charges owed) relative to the borrower's next 
paycheck gives some sense of how difficult repayment may be. The 
Bureau's storefront payday loan data shows that the average borrower 
being paid on a bi-weekly basis would need to devote 37 percent of her 
bi-weekly paycheck to repaying the loan. Single-payment vehicle title 
borrowers face an even greater challenge. In the data analyzed by the 
Bureau, the median borrower's payment on a 30-day loan is equal to 49 
percent of monthly income.\456\
---------------------------------------------------------------------------

    \456\ The data used for this calculation is described in CFPB 
Data Point: Payday Lending, at 10-15 and in CFPB Report on 
Supplemental Findings.
---------------------------------------------------------------------------

2. Marketing
    The general positioning of short-term products in marketing and 
advertising materials as a solution to an immediate liquidity challenge 
attracts consumers facing these problems, encouraging them to focus on 
short-term relief rather than the likelihood that they are taking on a 
new longer-term debt. Lenders position the purpose of the loan as being 
for use ``until next payday'' or to ``tide over'' the consumer until 
she receives her next paycheck.\457\ These types of product 
characterizations encourage unrealistic, overly optimistic thinking 
that repaying the loan will be easy, that the cash short-fall will not 
recur at the time the loan is due or shortly thereafter, and that the 
typical payday loan is experienced by consumers as a short-term 
obligation, all of which lessen the risk in the consumer's mind that 
the loan will become a long-term debt cycle. Indeed, one study 
reporting consumer focus group feedback noted that some participants 
reported that the marketing made it seem like payday loans were ``a way 
to get a cash infusion without creating an additional bill.'' \458\
---------------------------------------------------------------------------

    \457\ See, e.g., Speedy Cash, Can Anyone Get a Payday Loan?, 
https://www.speedycash.com/faqs/payday-loans/can-anyone-get-a-payday-loan/ (last visited May 18, 2016) (``Payday loans may be able 
to help you bridge the gap to your next pay day.''); Check Into 
Cash, FAQs & Policies, https://checkintocash.com/faqs/in-store-cash-advance/ (last visited May 18, 2016) (``A cash advance is a short-
term, small dollar advance that covers unexpected expenses until 
your next payday.''); Cash America, Cash Advance/Short-term Loans, 
http://www.cashamerica.com/LoanOptions/CashAdvances.aspx (last 
visited May 18, 2016) (noting that ``a short-term loan, payday 
advance or a deferred deposit transaction--can help tide you over 
until your next payday'' and that ``A single payday advance is 
typically for two to four weeks. However, borrowers often use these 
loans over a period of months, which can be expensive. Payday 
advances are not recommended as long-term financial solutions.''); 
Cmty. Fin. Servcs. Ass'n of Am., Is A Payday Advance Appropriate For 
You?, http://cfsaa.com/what-is-a-payday-advance/is-a-payday-advance-appropriate-for-you.aspx (last visited May 18, 2016) (The national 
trade association representing storefront payday lenders analogizes 
a payday loan to ``a cost-efficient `financial taxi' to get from one 
payday to another when a consumer is faced with a small, short-term 
cash need.'' The Web site elaborates that, ``Just as a taxi is a 
convenient and valuable service for short distance transportation, a 
payday advance is a convenient and reasonably-priced service that 
should be used to meet small-dollar, short-term needs. A taxi 
service, however, is not economical for long-distance travel, and a 
payday advance is inappropriate when used as a long-term credit 
solution for ongoing budget management.'').
    \458\ Pew Charitable Trusts, Payday Lending in America: How 
Borrowers Choose and Repay Payday Loans, at 22 (2013), http://www.pewtrusts.org/en/research-and-analysis/reports/2013/02/19/how-borrowers-choose-and-repay-payday-loans (``To some focus group 
respondents, a payday loan, as marketed, did not seem as if it would 
add to their recurring debt, because it was a short-term loan to 
provide quick cash rather than an additional obligation. They were 
already in debt and struggling with regular expenses, and a payday 
loan seemed like a way to get a cash infusion without creating an 
additional bill.'').
---------------------------------------------------------------------------

    In addition to presenting loans as short-term solutions, rather 
than potentially long-term obligations, lender advertising often 
focuses on how quickly and easily consumers can obtain a loan. A recent 
academic paper reviewing the advertisements of Texas storefront and 
online payday and vehicle title lenders found that speed of getting a 
loan is the most frequently advertised feature in both online (100 
percent) and storefront (50 percent) payday and title loans.\459\ 
Advertising that focuses on immediacy and speed may exploit borrowers' 
sense of urgency. Indeed, the names of many payday and vehicle title 
lenders include the words (in different spellings) ``speedy,'' 
``cash,'' ``easy,'' and ``quick,'' emphasizing their rapid and simple 
loan funding.
---------------------------------------------------------------------------

    \459\ Jim Hawkins, Using Advertisements to Diagnose Behavioral 
Market Failure in Payday Lending Markets, 51 Wake Forest L. Rev. 57, 
71 (2016). The next most advertised features in online content are 
simple application process and no credit check/bad credit OK (both 
at 97 percent). For storefront lenders, the ability to get a high 
loan amount was the second most highly advertised content.
---------------------------------------------------------------------------

3. Failure To Assess Ability To Repay
    As discussed in part II, storefront payday, online payday, and 
vehicle title lenders generally gather some basic information about 
borrowers before making a loan. They normally collect income 
information, although that may just be self-reported or ``stated'' 
income. Payday lenders collect information to ensure the borrower has a 
checking account, and vehicle title lenders need information about the 
vehicle that will provide the security for the loan. Some lenders 
access consumer reports prepared by specialty consumer reporting 
agencies and engage in sophisticated screening of applicants, and at 
least some lenders turn down the majority of applicants to whom they 
have not previously made loans.
    One of the primary purposes of this screening, however, is to avoid 
fraud and other ``first payment defaults,'' not to ensure that 
borrowers will be able to repay the loan without reborrowing. These 
lenders generally do not obtain information about the borrower's 
existing obligations or living expenses and do not prevent those with 
expenses chronically exceeding income, or those

[[Page 47924]]

who have suffered from an income or expense shock from which they need 
substantially more time to recover than the term of the loan, from 
taking on additional obligations in the form of payday or similar 
loans. Thus, lenders' failure to assess the borrower's ability to repay 
the loan permits those consumers who have the least ability to repay 
the loans, and consequently are the most likely to reborrow, to obtain 
them. Lending to borrowers who cannot repay their loans would generally 
not be profitable in a traditional lending market, but as described 
elsewhere in this section, the factors that funnel consumers into 
cycles of repeat reborrowing turn the traditional model on its head by 
creating incentives for lenders to actually want borrowers who cannot 
afford to repay and instead reborrow repeatedly. Although industry 
stakeholders have argued that lenders making short-term loans already 
take steps to assess ``ability to repay'' and will always do so out of 
economic self-interest, the Bureau believes that this refers narrowly 
to whether the consumer will default up front on the loan, rather than 
whether the consumer has the capacity to repay the loan without 
reborrowing and while meeting other financial obligations and basic 
living expenses. The fact that lenders often do not perform additional 
underwriting when borrowers are rolling over a loan or are returning to 
borrow again soon after repaying a prior loan further evidences that 
lenders do not see reborrowing as a sign of borrowers' financial 
distress or as an outcome to be avoided.
4. Encouraging Long Loan Sequences
    After lenders attract borrowers in financial crisis, encourage them 
to think of the loans as a short-term solution, and fail to screen out 
those for whom the loans are likely to become a long-term debt cycle, 
lenders then actively encourage borrowers to reborrow and continue to 
be indebted rather than pay down or pay off their loans. Although 
storefront payday lenders typically take a post-dated check which could 
be presented in a manner timed to coincide with deposit of the 
borrower's paycheck or government benefits, lenders usually encourage 
or even require borrowers to come back to the store to redeem the check 
and pay in cash.\460\ When the borrowers return, they are typically 
presented by lender employees with two salient options: Repay the loan 
in full, or pay a fee to roll over the loan (where permitted under 
State law). If the consumer does not return, the lender will proceed to 
attempt to collect by cashing the check. On a $300 loan at a typical 
charge of $15 per $100 borrowed, the cost to defer the due date for 
another 14 days until the next payday is $45, while repaying in full 
would cost $345, which may leave the borrower with insufficient 
remaining income to cover expenses over the ensuing month and therefore 
prompt reborrowing. Requiring repayment in person gives staff at the 
stores the opportunity to frame for borrowers a choice between repaying 
in full or just paying the finance charge and to encourage them to 
choose the less immediately painful option of paying just the finance 
charge. Based on its experience from supervising payday lenders, the 
Bureau believes that store employees are generally incentivized to 
maximize a store's loan volume and understand that reborrowing is 
crucial to achieving that goal.\461\
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    \460\ The Bureau believes from its experience in conducting 
examinations of storefront payday lenders and its outreach that cash 
repayments on payday and vehicle title loans are prevalent, even 
when borrowers provide post-dated checks or ACH authorizations for 
repayment. The Bureau has developed evidence from reviewing a number 
of payday lenders subject to supervisory examination in 2014 that 
the majority of them call each borrower a few days before payment is 
due to remind them to come to the store and pay the loan in cash. As 
an example, one storefront lender requires borrowers to come in to 
the store to repay. Its Web site states: ``All payday loans must be 
repaid with either cash or money order. Upon payment, we will return 
your original check to you.'' Others give borrowers ``appointment'' 
or ``reminder'' cards to return to make a cash payment. In addition, 
vehicle title loans do not require a bank account as a condition of 
the loan, and borrowers without a checking account must return to 
storefront title locations to make payments.
    \461\ Most storefront lenders examined by the Bureau employ 
simple incentives that reward employees and store managers for loan 
volumes.
---------------------------------------------------------------------------

    The Bureau's research shows that payday borrowers rarely reborrow a 
smaller amount than the initial loan, which would effectively amortize 
their loans by reducing the principal amount owed over time, thereby 
reducing their costs and the likelihood that they will need to take 
seven or ten loans out in a loan sequence. Lenders contribute to this 
outcome when they encourage borrowers to pay the minimum amount and 
roll over or reborrow the full amount of the earlier loan. In fact, as 
discussed in part II, some online payday loans automatically roll over 
at the end of the loan term unless the consumer takes affirmative 
action in advance of the due date such as notifying the lender in 
writing at least 3 days before the due date. Single-payment vehicle 
title borrowers, or at least those who ultimately repay rather than 
default, are more likely than payday borrowers to reduce the size of 
loans taken out in quick succession.\462\ This may reflect the effects 
of State laws regulating vehicle title loans that require some 
reduction in loan size across a loan sequence. It may also be 
influenced by the larger median size of vehicle title loans, which is 
$694, as compared to $350 median loan size of payday loans.
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    \462\ See CFPB Single-Payment Vehicle Title Lending, at 18.
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    Lenders also actively encourage borrowers who they know are 
struggling to repay their loans to roll over and continue to borrow. In 
supervisory examinations and in an enforcement action, the Bureau has 
found evidence that lenders maintain training materials that promote 
borrowing by struggling borrowers.\463\ In the enforcement matter, the 
Bureau found that if a borrower did not repay in full or pay to roll 
over the loan on time, personnel would initiate collections. Store 
personnel or collectors would then offer new loans as a source of 
relief from the collections activities. This ``cycle of debt'' was 
depicted graphically as part of the standard ``loan process'' in the 
company's new hire training manual. The Bureau is aware of similar 
practices in the vehicle title lending market, where store employees 
offer borrowers additional cash during courtesy calls and when calling 
about past-due accounts, and company training materials instruct 
employees to ``turn collections calls into sales calls'' and encourage 
delinquent borrowers to refinance to avoid default and repossession of 
their vehicles.
---------------------------------------------------------------------------

    \463\ Press Release, Bureau of Consumer Fin. Prot., CFPB Takes 
Action Against Ace Cash Express for Pushing Payday Borrowers Into 
Cycle of Debt (July 10, 2014), http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-ace-cash-express-for-pushing-payday-borrowers-into-cycle-of-debt/.
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    It also appears that lenders do little to affirmatively promote the 
use of ``off ramps'' or other alternative repayment options, when those 
are required by law to be available. Such alternative repayment plans 
could help at least some borrowers avoid lengthy cycles of reborrowing. 
By discouraging the use of repayment plans, lenders can make it more 
likely that such consumers will instead reborrow. Lenders that are 
members of one of the two national trade associations for storefront 
payday lenders have agreed to offer an extended payment plan to 
borrowers but only if the borrower makes a request at least one day 
prior to the date on which the loan is due.\464\ (The second national

[[Page 47925]]

trade association reports that its members provide an extended payment 
plan option but details on that option are not available.) In addition, 
about 20 States require payday lenders to offer repayment plans to 
borrowers who encounter difficulty in repaying payday loans. The usage 
rate of these repayment plans varies widely but in all cases is 
relatively low.\465\ One explanation for the low take-up rate on these 
repayment plans may be lender disparagement of the plans or lenders' 
failure to promote their availability.\466\ The Bureau's supervisory 
examinations uncovered evidence that one or more payday lenders train 
employees not to mention repayment plans until after the employees have 
offered renewals, and only then to mention repayment plans if borrowers 
specifically ask about them.
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    \464\ Cmty. Fin. Srvcs. Ass'n of Am., CFSA Member Best 
Practices, http://cfsaa.com/cfsa-member-best-practices.aspx (last 
visited May 18, 2016); Cmty. Fin. Srvcs. Ass'n of Am., What Is an 
Extended Payment Plan?, http://cfsaa.com/cfsa-member-best-practices/what-is-an-extended-payment-plan.aspx (last visited May 18, 2016); 
Fin. Srvc. Ctrs. of Am., Inc., FiSCA Best Practices, http://www.fisca.org/Content/NavigationMenu/AboutFISCA/CodesofConduct/default.htm (last visited May 18, 2016).
    \465\ Washington permits borrowers to request a no-cost 
installment repayment schedule prior to default. In 2014, 14 percent 
of payday loans were converted to installment loans. Wash. Dep't of 
Fin. Insts., 2014 Payday Lending Report, at 7 (2014), available at 
http://www.dfi.wa.gov/sites/default/files/reports/2014-payday-lending-report.pdf. Illinois allows payday loan borrowers to request 
a repayment plan with 26 days after default. Between 2006 and 2013, 
the total number of repayment plans requested was less than 1 
percent of the total number of loans made in the same period. Ill. 
Dep't of Fin. & Prof'l Regulation, Illinois Trends Report All 
Consumer Loan Products Through December 2013, at 19, available at 
https://www.idfpr.com/dfi/ccd/pdfs/IL_Trends_Report%202013.pdf. In 
Colorado, in 2009, 21 percent of eligible loans were converted to 
repayment plans before statutory changes repealed the repayment 
plan. State of Colorado, 2009 Deferred Deposit Lenders Annual 
Report, at 2 (2009) (hereinafter Colorado 2009 Deferred Deposit 
Lenders Annual Report), available at http://www.coloradoattorneygeneral.gov/sites/default/files/contentuploads/cp/ConsumerCreditUnit/UCCC/AnnualReportComposites/2009_ddl_composite.pdf (last visited May 25, 2016). In Utah, six 
percent of borrowers entered into an extended payment plan. Utah 
Dep't of Fin. Insts., Report of the Commissioner of Financial 
Institutions, at 135, (2015) available at http://dfi.utah.gov/wp-content/uploads/sites/29/2015/06/Annual1.pdf. Florida law also 
requires lenders to extend the loan term on the outstanding loan by 
sixty days at no additional cost for borrowers who indicate that 
they are unable to repay the loan when due and agree to attend 
credit counseling. Although 84 percent of loans were made to 
borrowers with seven or more loans in 2014, fewer than 0.5 percent 
of all loans were granted a cost-free term extension. See Brandon 
Coleman & Delvin Davis, Perfect Storm: Payday Lenders Harm Florida 
Consumers Despite State Law, Center for Responsible Lending, at 4 
(2016), http://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/crl_perfect_storm_florida_mar2016_0.pdf.
    \466\ Colorado's 2009 annual report of payday loan activity 
noted lenders' self-reporting of practices to restrict borrowers 
from obtaining the number of loans needed to be eligible for a 
repayment plan or imposing cooling-off periods on borrowers who 
elect to take a repayment plan. Colorado 2009 Deferred Deposit 
Lenders Annual Report. This evidence was from Colorado under the 
state's 2007 statute which required lenders to offer borrowers a no-
cost repayment plan after the third balloon loan. The law was 
changed in 2010 to prohibit balloon loans, as discussed in part II.
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5. Payment Mechanisms and Vehicle Title
    Where lenders collect payments through post-dated checks, ACH 
authorizations, and/or obtain security interests in borrowers' 
vehicles, these mechanisms also can be used to encourage borrowers to 
reborrow to avoid negative consequences for their transportation or 
bank account. For example, consumers may feel significantly increased 
pressure to return to a storefront to roll over a payday or vehicle 
title loan that includes such features rather than risk suffering 
vehicle repossession or fees in connection with an attempt to deposit 
the consumer's post-dated check, such as an overdraft fee or an NSF 
fees from the bank and returned item fee from the lender if the check 
were to bounce. The pressure can be especially acute when the lender 
obtains vehicle security.
    And in cases in which consumers do ultimately default on their 
loans, these mechanisms often increase the degree of harm suffered due 
to consumers losing their transportation, from account and lender fees, 
and sometimes from closure of their bank accounts. As discussed in more 
detail below in Market Concerns--Payments, in its research the Bureau 
has found that 36 percent of borrowers who took out online payday or 
payday installment loans and had at least one failed payment during an 
eighteen-month period had their checking accounts closed by the bank by 
the end of that period.\467\
---------------------------------------------------------------------------

    \467\ CFPB Online Payday Loan Payments, at 12.
---------------------------------------------------------------------------

c. Patterns of Lending and Extended Loan Sequences
    The characteristics of the borrowers, the circumstances of 
borrowing, the structure of the short-term loans, and the practices of 
the lenders together lead to dramatic negative outcomes for many payday 
and vehicle title borrowers. There is strong evidence that a meaningful 
share of borrowers who take out payday and single-payment vehicle title 
loans end up with very long sequences of loans, and the loans made to 
borrowers with these negative outcomes make up a majority of all the 
loans made by these lenders.\468\
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    \468\ In addition to the array of empirical evidence 
demonstrating this finding, industry stakeholders themselves have 
expressly or implicitly acknowledged the dependency of most 
storefront payday lenders' business models on repeat borrowing. A 
June 20, 2013 letter to the Bureau from an attorney for a national 
trade association representing storefront payday lenders asserted 
that, ``[i]n any large, mature payday loan portfolio, loans to 
repeat borrowers generally constitute between 70 and 90 percent of 
the portfolio, and for some lenders, even more,'' and that ``[t]he 
borrowers most likely to roll over a payday loan are, first, those 
who have already done so, and second, those who have had un-rolled-
over loans in the immediately preceding loan period.'' Letter from 
Hilary B. Miller to Bureau of Consumer Fin. Prot. (June 20, 2013), 
available at http://files.consumerfinance.gov/f/201308_cfpb_cfsa-information-quality-act-petition-to-CFPB.pdf. The letter asserted 
challenges under the Information Quality Act to the Bureau's 
published White Paper (2013); see also Letter from Ron Borzekowski & 
B. Corey Stone, Jr., Bureau of Consumer Fin. Prot., to Hilary B. 
Miller (Aug. 19, 2013) (Bureau's response to the challenge).
---------------------------------------------------------------------------

    Long loan sequences lead to very high total costs of borrowing. 
Each single-payment loan carries the same cost as the initial loan that 
the borrower took out. For a storefront borrower who takes out the 
average-sized payday loan of $350 with a typical fee of $15 per $100, 
each reborrowing means paying fees of $45. After just three 
reborrowings, the borrower will have paid $140 simply to defer payment 
of the original principal amount by an additional six weeks to three 
months.
    The cost of reborrowing for auto title borrowers is even more 
dramatic given the higher price and larger size of those loans. The 
Bureau's data indicates that the median loan size for single-payment 
vehicle title loans is $694. One study found that the most common APR 
charged on the typical 30-day title loan is 300 percent, which equates 
to a rate $25 per $100 borrowed, which is a common State limit.\469\ A 
typical reborrowing thus means that the consumer pays a fee of around 
$175. After just three reborrowings, a consumer will typically have 
paid about $525 simply to defer payment of the original principal 
amount by three additional months.
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    \469\ Pew Charitable Trusts, Auto Title Loans: Market Practices 
and Borrower Experiences (2015), at 3, http://www.pewtrusts.org/~/
media/assets/2015/03/autotitleloansreport.pdf.
---------------------------------------------------------------------------

    Evidence for the prevalence of long sequences of payday and auto 
title loans comes from the Bureau's own work, from analysis by 
independent researchers and analysts commissioned by industry, and from 
statements by industry stakeholders. The Bureau has published several 
analyses of storefront payday loan borrowing.\470\ Two of these have 
focused on the length of loan sequences that borrowers take out. In 
these publications, the Bureau defined a loan sequence as a series of 
loans where each loan was taken out either on the day the prior loan 
was repaid or within

[[Page 47926]]

some number of days from when the loan was repaid. The Bureau's 2014 
Data Point used a 14-day window to define a sequence of loans. That 
data has been further refined in the CFPB Report on Supplemental 
Findings and shows that when a borrower who is not currently in a loan 
sequence takes out a payday loan, borrowers wind up taking out at least 
four loans in a row before repaying 43 percent of the time, take out at 
least seven loans in a row before repaying 27 percent of the time, and 
take out at least 10 loans in a row before repaying 19 percent of the 
time.\471\ In the CFPB Report on Supplemental Findings, the Bureau re-
analyzed the data using 30-day and 60-day definitions of sequences. The 
results are similar, although using longer windows leads to longer 
sequences of more loans. Using the 30-day definition of a sequence, 50 
percent of loan sequences contain at least four loans, 33 percent of 
sequences contain at least seven loans, and 24 percent of sequences 
contain at least 10 loans.\472\ A borrower who takes out a fourth loan 
in a sequence has a 66 percent likelihood of taking out at least three 
more loans, of a total sequence length of seven loans, a 48 percent 
likelihood of taking out at least 6 more loans, for a total sequence 
length of 10 loans.\473\
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    \470\ See generally CFPB Data Point: Payday Lending; CFPB Payday 
Loans and Deposit Advance Products White Paper.
    \471\ Bureau of Consumer Fin. Prot., Supplemental Findings on 
Payday Loans, Deposit Advance Products, and Vehicle Title Loans 
(2016) (hereinafter CFPB Report on Supplemental Findings), available 
at http://files.consumerfinance.gov/f/documents/Supplemental_Report_060116.pdf.
    \472\ Id. In proposed Sec.  1041.6 the Bureau is proposing some 
limitations on loans made within a sequence, and in proposed Sec.  
1041.2(a)(12), the Bureau is proposing to define a sequence to 
include loans made within 30 days of one another. The Bureau 
believes that this is a more appropriate definition of sequence than 
using either a shorter or longer time horizon for the reasons set 
forth in the section-by-section analyses of proposed Sec. Sec.  
1041.2(a)(12) and 1041.6. For these same reasons, the Bureau 
believes that the findings contained in the CFPB Report on 
Supplemental Findings and cited in text provide the most accurate 
quantification of the degree of harm resulting from cycles of 
indebtedness.
    \473\ These figures are calculated simply by taking the share of 
sequences that are at least seven (or ten) loans long and diving by 
the share of sequences that are at least four loans long.
---------------------------------------------------------------------------

    These findings are mirrored in other analyses. During the SBREFA 
process, a SER submitted an analysis prepared by Charles River 
Associates (CRA) of loan data from several small storefront payday 
lenders.\474\ Using a 60-day sequence definition, CRA found patterns of 
borrowing very similar to those the Bureau found. Compared to the 
Bureau's results using a 60-day sequence definition, in the CRA 
analysis there were more loans where the borrower defaulted on the 
first loan or repaid without reborrowing (roughly 44 percent versus 25 
percent), and fewer loans that had 11 or more loans in the sequence, 
but otherwise the patterns were nearly identical.\475\
---------------------------------------------------------------------------

    \474\ Charles River Associates, Economic Impact on Small Lenders 
of the Payday Lending Rules Under Consideration by the CFPB (2015), 
http://www.crai.com/publication/economic-impact-small-lenders-payday-lending-rules-under-consideration-cfpb. The CRA analysis 
states that it used the same methodology as the Bureau.
    \475\ See generally CFPB Report on Supplemental Findings.
---------------------------------------------------------------------------

    Similarly, in an analysis funded by an industry research 
organization, researchers found a mean sequence length, using a 30-day 
sequence definition, of nearly seven loans.\476\ This is slightly 
higher than the mean 30-day sequence length in the Bureau's analysis 
(5.9 loans).
---------------------------------------------------------------------------

    \476\ Marc Anthony Fusaro & Patricia J. Cirillo, Do Payday Loans 
Trap Consumers in a Cycle of Debt?, at 23 (2011), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1960776.
---------------------------------------------------------------------------

    Analysis of a multi-lender, multi-year dataset by a research group 
affiliated with a specialty consumer reporting agency found that over a 
period of approximately four years the average borrower had at least 
one sequence of 9 loans; that 25 percent of borrowers had at least one 
loan sequence of 11 loans; and that 10 percent of borrowers had at 
least one loan sequence of 22 loans.\477\ Looking at these same 
borrowers for a period of 11 months--one month longer than the duration 
analyzed by the Bureau--the researchers found that on average the 
longest sequence these borrowers experienced over the 11 months was 5.3 
loans, that 25 percent of borrowers had a sequence of at least 7 loans, 
and that 10 percent of borrowers had a sequence of at least 12 
loans.\478\ This research group also identified a core of users with 
extremely persistent borrowing. They found that 30 percent of borrowers 
who took out a loan in the first month of the four-year period also 
took out a loan in the last month.\479\ The median time in debt for 
this group of extremely persistent borrowers was over 1,000 days, more 
than half of the four-year period. The median borrower in this group of 
extremely persistent borrowers had at least one loan sequence of 23 
loans long or longer (nearly two years for borrowers paid monthly). 
Perhaps most alarming, nine percent of this group borrowed continuously 
for the entire period.\480\
---------------------------------------------------------------------------

    \477\ nonPrime 101, Report 7B: Searching for Harm in Storefront 
Payday Lending, at 22 (2016), https://www.nonprime101.com/wp-content/uploads/2016/02/Report-7-B-Searching-for-Harm-in-Storefront-Payday-Lending-nonPrime101.pdf. Sequences are defined based on the 
borrower pay period, with a loan taken out before a pay period has 
elapsed since the last loan was repaid being considered part of the 
same loan sequence.
    \478\ Id. The researchers were able to link borrowers across the 
five lenders in their dataset and include within a sequence loans 
taking out from different lenders. Following borrowers across 
multiple lenders did not materially increase the average length of 
the longest sequence but did increase the length of sequences for 
the top decile by one to two loans. Compare id. at Table C-2 with 
id. at Table C-1. The author of the report focus on loan sequences 
where a borrower pays more in fees than the principal amount of the 
loan as sequences that cause consumer harm. The Bureau does not 
believe that this is the correct metric for determining whether a 
borrower has suffered harm.
    \479\ nonprime 101, Report 7C: A Balanced View of Storefront 
Payday Lending (2016), https://www.nonprime101.com/data-findings/.
    \480\ Id. at Table 2. A study of borrowers in Florida claims 
that almost 80 percent of borrowers use payday loans longer than a 
year, and 50 percent use payday loans longer than two years. 
Floridians for Financial Choice, The Florida Model: Baseless and 
Biased Attacks are Dangerously Wrong on Florida Payday Lending, at 5 
(2016), http://financialchoicefl.com/wp-content/uploads/2016/05/FloridaModelReport.pdf (last visited May 29, 2016).
---------------------------------------------------------------------------

    The Bureau has also analyzed single-payment vehicle title loans 
using the same basic methodology.\481\ Using a 30-day definition of 
loan sequences, the Bureau found that short-term (30-day) single-
payment vehicle title loans had loan sequences that were similar to 
payday loans. More than half, 56 percent, of single-payment vehicle 
title sequences contained at least four loans; 36 percent contained 
seven or more loans; and 23 percent had 10 or more loans. Other sources 
on vehicle title lending are more limited than for payday lending, but 
are generally consistent. For instance, the Tennessee Department of 
Financial Institutions publishes a biennial report on 30-day single-
payment vehicle title loans. The most recent report shows very similar 
results to those the Bureau found in its research, with 49 percent of 
borrowers taking out four or more loans in row, 35 percent taking out 
more than seven loans in a row, and 25 percent taking out more than 10 
loans in a row.\482\
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    \481\ See generally CFPB Single-Payment Vehicle Title Report.
    \482\ Tenn. Dep't of Fin. Insts., 2016 Report on the Title 
Pledge Industry, at (2016), at 8, http://www.tennessee.gov/assets/entities/tdfi/attachments/Title_Pledge_Report_2016_Final_Draft_Apr_6_2016.pdf.
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    In addition to direct measures of the length of loan sequences, 
there is ample indirect evidence from the cumulative number of loans 
that borrowers take out that borrowers are often getting stuck in a 
long-term debt cycle. The Bureau has measured total borrowing by payday 
borrowers in two ways. In one study, the Bureau took a snapshot of 
borrowers in lenders' portfolios at a point in time (measured as 
borrowing in a particular month) and tracked them for an additional 11 
months (for a total of 12 months) to assess overall loan use. This

[[Page 47927]]

study found that the median borrowing level was 10 loans over the 
course of a year, and more than half of the borrowers had loans 
outstanding for more than half of the year.\483\ In another study, the 
Bureau measured the total number of loans taken out by borrowers 
beginning new loan sequences. It found that these borrowers had lower 
total borrowing than borrowers who may have been mid-sequence at the 
beginning of the period, but the median number of loans for the new 
borrowers was six loans over a slightly shorter (11-month) time 
period.\484\ Research by others finds similar results, with average or 
median borrowing, using various data sources and various samples, of 
six to 13 loans per year.\485\
---------------------------------------------------------------------------

    \483\ CFPB Payday Loans and Deposit Advance Products White 
Paper, at 23.
    \484\ CFPB Data Point: Payday Lending, at 10-15.
    \485\ Paige Marta Skiba & Jeremy Tobacman, Payday Loans, 
Uncertainty, and Discounting: Explaining Patterns of Borrowing, 
Repayment, and Default, at 6 (Vanderbilt University Law School, Law 
and Economics Working Paper #08-33, 2008), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1319751&download=yes 
(finding an average of six loans per year for payday borrowers). A 
study of Oklahoma payday borrowing found an average of nine loans 
per year. Uriah King and Leslie Parrish, Payday Loans, Inc.: Short 
on Credit, Long on Debt, at 1 (2011), http://www.responsiblelending.org/payday-lending/research-analysis/payday-loan-inc.pdf. Another study cites a median of nine loans per year. 
See also Elliehausen, An Analysis of Consumers' Use of Payday Loans, 
at 43 (finding a median of 9-13 loans in the last year); Michael A. 
Stegman, Payday Lending, 21 J. of Econ. Perspectives 169, 176 
(2007), available at http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.21.1.169.
---------------------------------------------------------------------------

    Given differences in the regulatory context and the overall nature 
of the market, less information is available on online lending than 
storefront lending. Borrowers who take out payday loans online are 
likely to change lenders more frequently than storefront borrowers, 
which makes measuring the duration of loan sequences much more 
challenging. The limited information that is available suggests that 
online borrowers take out fewer loans than storefront borrowers, but 
that borrowing is highly likely to be under-counted. A report 
commissioned by an online lender trade association, using data from 
three online lenders making single-payment payday loans, reported an 
average loan length of 20 days and average days in debt per year of 73 
days.\486\ The report combines medians of each statistic across the 
three lenders, making interpretation difficult, but these findings 
suggest that borrowers take out three to four loans per year at these 
lenders.
---------------------------------------------------------------------------

    \486\ G. Michael Flores, The State of Online Short-term Lending, 
Statistical Analysis, Second Annual, at 5 (2015), http://onlinelendersalliance.org/wp-content/uploads/2015/07/2015-Bretton-Woods-Online-Lending-Study-FINAL.pdf (last visited May 18, 2016) 
(commissioned by the Online Lenders Alliance).
---------------------------------------------------------------------------

    Additional analysis is available based on the records of a 
specialty consumer reporting agency. These show similar loans per 
borrower, 2.9, but over a multi-year period.\487\ These loans, however, 
are not primarily single-payment payday loans. A small number are 
installment loans, while most are ``hybrid'' loans that typically have 
a duration of roughly four pay cycles. In addition, this statistic 
likely understates usage because online lenders may not report all of 
the loans they make, and some may only report the first loan they make 
to a borrower. Borrowers may also be more likely to change lenders 
online, and many lenders do not report to the specialty consumer 
reporting agency that provided the data for the analysis, so that when 
borrowers change lenders it may often be the case that their subsequent 
loans are not in the data analyzed.
---------------------------------------------------------------------------

    \487\ nonPrime 101, Report 7-A, ``How Persistent in the 
Borrower-Lender Relationship in Payday Lending?'', at Table 1 
(September 2015).
---------------------------------------------------------------------------

d. Consumer Expectations and Understanding of Loan Sequences
    Extended sequences of loans raise concerns about the market for 
short-term loans. This concern is exacerbated by the available 
empirical evidence regarding consumer understanding of such loans, 
which strongly indicates that borrowers who take out long sequences of 
payday loans and vehicle title loans do not anticipate those long 
sequences.
    Measuring consumers' expectations about reborrowing is inherently 
challenging. When answering survey questions about loan repayment, 
there is the risk that borrowers may conflate repaying an individual 
loan with completing an extended sequence of borrowing. Asking 
borrowers retrospective questions about their expectations at the time 
they started borrowing is likely to suffer from recall problems, as 
people have difficulty remembering what they expected at some time in 
the past. The recall problem is likely to be compounded by respondents 
tending to want to avoid saying that they made a mistake. Asking about 
expectations for future borrowing may also be imperfect, as some 
consumers may not be thinking explicitly about how many times they will 
roll a loan over when taking out their first loan. Asking the question 
may cause people to think about it more than they otherwise would have.
    Two studies have asked payday and vehicle title borrowers at the 
time they took out their loans about their expectations about 
reborrowing, either the behavior of the average borrower or their own 
borrowing, and compared their responses with actual repayment behavior 
of the overall borrower population. One 2009 survey of payday borrowers 
found that over 40 percent of borrowers thought that the average 
borrower would have a loan outstanding for only two weeks. Another 25 
percent responded with four weeks. Translating weeks into loans, the 
four-week response likely reflects borrowers who believe the average 
number of loans a borrower take out before repaying is one loan or two 
loans, depending on the mix of respondents paid bi-weekly or monthly. 
The report did not provide data on actual reborrowing, but based on 
analysis by the Bureau and others, this suggests that respondents were, 
on average, somewhat optimistic about reborrowing behavior.\488\ 
However, it is difficult to be certain that some survey respondents did 
not conflate the time loans are outstanding with the contract term of 
individual loans, because the researchers asked borrowers, ``What's 
your best guess of how long it takes the average person to pay back in 
full a $300 payday loan?'', which some borrowers may have interpreted 
to refer to the specific loan being taken out, and not subsequent 
rollovers. Borrowers' beliefs about their own reborrowing behavior 
could also vary from their beliefs about average borrowing behavior by 
others.
---------------------------------------------------------------------------

    \488\ Marianne Bertrand & Adair Morse, Information Disclosure, 
Cognitive Biases and Payday Borrowing and Payday Borrowing, 66 J. 
Fin. 1865, 1866 (2011), available at http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2011.01698.x/full. Based on the Bureau's 
analysis, approximately 50-55 percent of loan sequences, measured 
using a 14-day sequence definition, end after one or two loans, 
including sequences that end in default. See also CFPB Data Point: 
Payday Lending, at 11; CFPB Report on Supplemental Findings, at ch. 
5. Using a relatively short reborrowing period seems more likely to 
match how respondents interpret the survey question, but that is 
speculative. Translating loans to weeks is complicated by the fact 
that loan terms vary depending on borrowers' pay frequency; four 
weeks is two loans for a borrower paid bi-weekly, but only one loan 
for a borrower paid monthly.
---------------------------------------------------------------------------

    In a study of vehicle title borrowers, researchers surveyed 
borrowers about their expectations about how long it would take to 
repay the loan.\489\ The report did not have data on borrowing, but 
compared the responses with the distribution of repayment times 
reported by the Tennessee Department of Financial Institutions and 
found that

[[Page 47928]]

borrowers were slightly optimistic, on average, in their 
predictions.\490\
---------------------------------------------------------------------------

    \489\ Fritzdixon, et al., at 1029-1030.
    \490\ As noted above, the Bureau found that the re-borrowing 
patterns in data analyzed by the Bureau are very similar to those 
reported by the Tennessee Department of Financial Institutions.
---------------------------------------------------------------------------

    The two studies just described compared borrowers' predictions of 
average borrowing with overall average borrowing levels, which is only 
informative about how accurate borrowers' predictions are on average. A 
2014 study by Columbia University Professor Ronald Mann \491\ surveyed 
borrowers at the point at which they were borrowing about their 
expectations for repaying their loans and compared their responses with 
their subsequent actual borrowing behavior, using loan records to 
measure how accurate their predictions were. The results described in 
Mann's report, combined with subsequent analysis that Professor Mann 
shared with Bureau staff, show the following.\492\
---------------------------------------------------------------------------

    \491\ Ronald Mann, Assessing the Optimism of Payday Loan 
Borrowers, 21 Supreme Court Econ. Rev. 105 (2014).
    \492\ The Bureau notes that Professor Mann draws different 
interpretations from his analysis than does the Bureau in certain 
instances, as explained below, and industry stakeholders, including 
SERs, have cited Mann's study as support for their criticism of the 
Small Business Review Panel Outline. Much of this criticism is based 
on Professor Mann's finding that that ``about 60 percent of 
borrowers accurately predict how long it will take them finally to 
repay their payday loans.'' Id. at 105. The Bureau notes, however, 
that this was largely driven by the fact that many borrowers 
predicted that they would not remain in debt for longer than one or 
two loans, and in fact this was accurate for many borrowers.
---------------------------------------------------------------------------

    First, borrowers are very poor at predicting long sequences of 
loans. Fewer borrowers expected to experience long sequences of loans 
than actually did experience long sequences. Only 10 percent of 
borrowers expected to be in debt for more than 70 days (five two-week 
loans), and only five percent expected to be in debt for more than 110 
days (roughly eight two-week) loan, yet the actual numbers were 
substantially higher. Indeed, approximately 12 percent of borrowers 
remained in debt after 200 days (14 two-week loans).\493\ Borrowers who 
experienced long sequences of loans had not expected those long 
sequences when they made their initial borrowing decision; in fact they 
had not predicted that their sequences would be longer than borrowers 
overall. And while some borrowers did expect long sequences, those 
borrowers did not in fact actually have unusually long sequences; as 
Mann notes, ``it appears that those who predict long borrowing periods 
are those most likely to err substantially in their predictions.'' 
\494\
---------------------------------------------------------------------------

    \493\ Id. at 119; Email from Ronald Mann, Professor, Columbia 
Law School, to Jialan Wang & Jesse Leary, Bureau of Consumer Fin. 
Prot. (Sept. 24, 2013, 1:32 EDT).
    \494\ Mann, at 127.
---------------------------------------------------------------------------

    Second, Mann's analysis shows that many borrowers do not appear to 
learn from their past borrowing experience. Those who had borrowed the 
most in the past did not do a better job of predicting their future 
use; they were actually more likely to underestimate how long it would 
take them to repay fully. As Mann noted in his paper, ``heavy users of 
the product tend to be those that understand least what is likely to 
happen to them.'' \495\
---------------------------------------------------------------------------

    \495\ Id.
---------------------------------------------------------------------------

    Finally, Mann found that borrowers' predictions about the need to 
reborrow at least once versus not at all were optimistic, with 60 
percent of borrowers predicting they would not roll over or reborrow 
within one pay cycle and only 40 percent actually not doing so.
    A trade association commissioned two surveys which suggest that 
consumers are able to predict their borrowing patterns.\496\ These 
surveys, which were very similar to each other, were of storefront 
payday borrowers who had recently repaid a loan and had not taken 
another loan within a specified period of time, and were conducted in 
2013 and 2016. Of these borrowers, 94 to 96 percent reported that when 
they took out the loan they understood well or very well ``how long it 
would take to completely repay the loan'' and a similar percentage 
reported that they, in fact, were able to repay their loan in the 
amount of time they expected. These surveys suffers from the challenge 
of asking people to describe their expectations about borrowing at some 
time in the past, which may lead to recall problems, as described 
earlier. It is also unclear what the borrowers understood the phrase 
``completely repay'' to mean--whether they took it to mean the specific 
loan they had recently repaid or the original loan that ultimately led 
to the loan they repaid. For these reasons, the Bureau does not believe 
that these studies undermine the evidence above indicating that 
consumers are generally not able to predict accurately the number of 
times that they will need to reborrow, particularly with respect to 
long-term reborrowing.
---------------------------------------------------------------------------

    \496\ Tarrance Group, et al., Borrower and Voter Views of Payday 
Loans (2016), http://www.tarrance.com/docs/CFSA-BorrowerandVoterSurvey-AnalysisF03.03.16.pdf (last visited May 29, 
2016); Harris Interactive, Payday Loans and the Borrower Experience 
(2013), http://cfsaa.com/Portals/0/Harris_Interactive/CFSA_HarrisPoll_SurveyResults.pdf (last visted May 29, 2016). The 
trade association and SERs have cited this survey in support of 
their critiques of the Bureau's Small Business Review Panel Outline.
---------------------------------------------------------------------------

    There are several factors that may contribute to consumers' lack of 
understanding of the risk of reborrowing that will result from loans 
that prove unaffordable. As explained above in the section on lender 
practices, there is a mismatch between how these products are marketed 
and described by industry and how they operate in practice. Although 
lenders present the loans as a temporary bridge option, only a minority 
of payday loans are repaid without any reborrowing. These loans often 
produce lengthy cycles of rollovers or new loans taken out shortly 
after the prior loans are repaid. Not surprisingly, many borrowers are 
not able to tell when they take out the first loan how long their 
cycles will last and how much they will ultimately pay for the initial 
disbursement of cash. Even borrowers who believe they will be unable to 
repay the loan immediately--and therefore expect some amount of 
reborrowing--are generally unable to predict accurately how many times 
they will reborrow and at what cost. As noted above, this is especially 
true for borrowers who reborrow many times.
    Moreover, research suggests that financial distress could also be a 
factor in borrowers' decision making. As discussed above, payday and 
vehicle title loan borrowers are often in financial distress at the 
time they take out the loans. Their long-term financial condition is 
typically very poor. For example, as described above, studies find that 
both storefront and online payday borrowers have little to no savings 
and very low credit scores, which is a sign of overall poor financial 
condition. They may have credit cards but likely do not have unused 
credit, are often delinquent on one or more cards, and have often 
experienced multiple overdrafts and/or NSFs on their checking 
accounts.\497\ They typically have tried and failed to obtain other 
forms of credit before turning to a payday lender or they otherwise may 
perceive that such other options would not be available to them and 
that there is no time to comparison shop when facing an imminent 
liquidity crisis.
---------------------------------------------------------------------------

    \497\ See Bhutta, Skiba, & Tobacman, at 16; CFPB Online Payday 
Loan Payments, at 3-4; Brian Baugh, What Happens When Payday 
Borrowers Are Cut Off From Payday Lending? A Natural Experiment 
(Aug. 2015) (Ph.D. dissertation, Ohio State University), available 
at http://fisher.osu.edu/supplements/10/16174/Baugh.pdf; 
nonPrime101, Profiling Internet Small-Dollar Lending, at 7 (2014), 
https://www.nonprime101.com/wp-content/uploads/2013/10/Clarity-Services-Profiling-Internet-Small-Dollar-Lending.pdf.
---------------------------------------------------------------------------

    Research has shown that when people are under pressure they tend to 
focus on

[[Page 47929]]

the immediate problem they are confronting and discount other 
considerations, including the longer-term implications of their 
actions. Researchers sometimes refer to this phenomenon as 
``tunneling,'' evoking the tunnel-vision decision making people can 
engage in. Consumers experiencing a financial crisis deciding on 
whether to take out a loan are a prime example of this behavior.\498\ 
Even when consumers are not facing a crisis, research shows that they 
tend to underestimate their near-term expenditures,\499\ and, when 
estimating how much financial ``slack'' they will have in the future, 
discount even the expenditures they do expect to incur.\500\ Finally, 
regardless of their financial situation, research suggests consumers 
may generally have unrealistic expectations about their future 
earnings, their future expenses, and their ability to save money to 
repay future obligations. Research documents that consumers in many 
contexts demonstrate ``optimism bias'' about future events and their 
own future performance.\501\
---------------------------------------------------------------------------

    \498\ See generally Sendhil Mullainathan & Eldar Shafir, 
Scarcity: The New Science of Having Less and How It Defines Our 
Lives (2014).
    \499\ Johanna Peetz & Roger Buehler, When Distance Pays Off: The 
Role of Construal Level in Spending Predictions, 48 J. of 
Experimental Soc. Psychol. 395 (2012); Johanna Peetz & Roger 
Buehler, Is the A Budget Fallacy? The Role of Savings Goals in the 
Prediction of Personal Spending, 34 Personality and Social Psychol. 
Bull. 1579 (2009); Gulden Ulkuman, Manoj Thomas, & Vicki G. Morwitz, 
Will I Spend More in 12 Months or a Year? The Effects of Ease of 
Estimation and Confidence on Budget Estimates, 35 J. of Consumer 
Research 245, 249 (2008).
    \500\ Jonathan Z. Berman, Expense Neglect in Forecasting 
Personal Finances, at 5 (2014) (forthcoming publication in J. 
Marketing Research), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2542805.
    \501\ The original work in the area of optimistic predictions 
about the future is in the area of predicting how long it will to 
complete certain tasks in the future. See, e.g., Daniel Kahneman & 
Amos Tversky, Intuitive Prediction: Biases and Corrective 
Procedures, 12 TIMS Studies in Mgmt. Science 313 (1979); Roger 
Buehler, Dale Griffin, & Michael Ross, Exploring the ``Planning 
Fallacy'': Why People Underestimate their Task Completion Times, 67 
J. Personality & Soc. Psychol. 366 (1994); Roger Buehler, Dale 
Griffin, & Michael Ross, Inside the Planning Fallacy: The Causes and 
Consequences of Optimistic Time Prediction, in Heuristics and 
Biases: The Psychology of Intuitive Judgment, at 250-70 (Thomas 
Gilovich, Dale Griffin, & Daniel Kahneman eds., 2002).
---------------------------------------------------------------------------

    Each of these behavioral biases, which are exacerbated when facing 
a financial crisis, contribute to consumers who are considering taking 
out a payday loan or single-payment vehicle title loan failing to 
assess accurately the likely duration of indebtedness, and, 
consequently, the total costs they will pay as a result of taking out 
the loan. Tunneling may cause consumers not to focus sufficiently on 
the future implications of taking out a loan. To the extent that 
consumers do comprehend what will happen when the loan comes due, 
underestimation of future expenditures and optimism bias will cause 
them to misunderstand the likelihood of repeated reborrowing due to 
their belief that they are more likely to be able to repay the loan 
without defaulting or reborrowing than they actually are. And consumers 
who recognize at origination that they will have difficulty paying back 
the loan and that they may need to roll the loan over or reborrow may 
still underestimate the likelihood that they will wind up rolling over 
or reborrowing multiple times and the high cost of doing so.
    Regardless of the underlying explanation, the empirical evidence 
indicates that borrowers do not expect to be in very long sequences and 
are overly optimistic about the likelihood that they will avoid rolling 
over or reborrowing their loans at all.
e. Delinquency and Default
    In addition to the harm caused by unanticipated loan sequences, the 
Bureau is concerned that many borrowers suffer other harms from 
unaffordable loans in the form of the costs that come from being 
delinquent or defaulting on the loans. Many borrowers, when faced with 
unaffordable payments, will be late in making loan payments, and may 
ultimately cease making payments altogether and default on their 
loans.\502\ They may take out multiple loans before defaulting--69 
percent of payday loan sequences that end in default are multi-loan 
sequences in which the borrower has rolled over or reborrowed at least 
once before defaulting--either because they are simply delaying the 
inevitable or because their financial situation deteriorates over time 
to the point where they become delinquent and eventually default rather 
than continuing to pay additional reborrowing fees.
---------------------------------------------------------------------------

    \502\ This discussion uses the term ``default'' to refer to 
borrowers who do not repay their loans. Precise definitions will 
vary across analyses, depending on specific circumstances and data 
availability.
---------------------------------------------------------------------------

    While the Bureau is not aware of any data directly measuring the 
number of late payments across the industry, studies of what happens 
when payments are so late that the lenders deposit the consumers' 
original post-dated checks suggest that late payment rates are 
relatively high. For example, one study of payday borrowers in Texas 
found that in 10 percent of all loans, the post-dated checks were 
deposited and bounced.\503\ Looking at the borrower level, the study 
found that half of all borrowers had a check deposited and bounce over 
the course of the year following their first payday loan.\504\ An 
analysis of data collected in North Dakota showed a lower, but still 
high, rate of lenders depositing checks that subsequently bounced or 
attempting to collect loan payment via an ACH payment request that 
failed. It showed that 39 percent of new borrowers experienced a failed 
loan payment of this type in the year following their first payday 
loans, and 46 percent did so in the first two years following their 
first payday loan.\505\ In a public filing, one large storefront payday 
lender reported a lower rate, 6.5 percent, of depositing checks, of 
which nearly two-thirds were returned for insufficient funds.\506\ In 
Bureau analysis of ACH payments initiated by online payday and payday 
installment lenders, 50 percent of online borrowers had at least one 
overdraft or non-sufficient funds transaction in connection with their 
loans over an 18 month period. These borrowers' depository accounts 
incurred an average total of $185 in fees.\507\
---------------------------------------------------------------------------

    \503\ Skiba & Tobacman, at 6. The study did not separately 
report the percentage of loans on which the checks that were 
deposited were paid.
    \504\ These results are limited to borrowers paid on a bi-weekly 
schedule.
    \505\ Susanna Montezemolo & Sarah Wolff, Payday Mayday: Visible 
and Invisible Payday Defaults, at 4 (2015), available at http://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/finalpaydaymayday_defaults.pdf.
    \506\ ``For the years ended December 31, 2011 and 2010, we 
deposited customer checks or presented an Automated Clearing House 
(``ACH'') authorization for approximately 6.7 percent and 6.5 
percent, respectively, of all the customer checks and ACHs we 
received and we were unable to collect approximately 63 percent and 
64 percent, respectively, of these deposited customer checks or 
presented ACHs.'' Advance America 2011 10-K. Borrower-level rates of 
deposited checks were not reported.
    \507\ CFPB Online Payday Loan Payments, at 10-11.
---------------------------------------------------------------------------

    Bounced checks and failed ACH payments can be quite costly for 
borrowers. The median bank NSF fee is $34,\508\ which is equivalent to 
the cost of a rollover on a $300 storefront loan. If the lender makes 
repeated attempts to collect using these methods, this leads to 
repeated fees. The Bureau's research indicates that when one attempt 
fails, online payday lenders make a second attempt to collect 75 
percent of the time but are unsuccessful in 70 percent of

[[Page 47930]]

those cases. The failure rate increases with each subsequent 
attempt.\509\
---------------------------------------------------------------------------

    \508\ Bureau of Consumer Fin. Prot., CFPB Study of Overdraft 
Programs, at 52 (2013), http://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf
    \509\ CFPB Online Payday Loan Payments, at 3; see generally 
Market Concerns--Payments.
---------------------------------------------------------------------------

    In addition to incurring NSF fees from a bank, in many cases when a 
check bounces the consumer can be charged a returned check fee by the 
lender; late fees are restricted in some but not all States.\510\
---------------------------------------------------------------------------

    \510\ Most States limit returned item fees on payday loans to a 
single fee of $15-$40; $25 is the most common returned-item fee 
limit. Most States do not permit lenders to charge a late fee on a 
payday loan, although Delaware permits a late fee of five percent 
and several States' laws are silent on the question of late fees.
---------------------------------------------------------------------------

    Default can also be quite costly for borrowers. These costs vary 
with the type of loan and the channel through which the borrower took 
out the loan. As noted, default may come after a lender has made 
repeated attempts to collect from the borrower's deposit account, such 
that a borrower may ultimately find it necessary to close the account, 
or the borrower's bank or credit union may close the account if the 
balance is driven negative and the borrower is unable for an extended 
period of time to return the balance to positive. And borrowers of 
vehicle title loans stand to suffer the greatest harm from default, as 
it may lead to the repossession of their vehicle. In addition to the 
direct costs of the loss of an asset, this can seriously disrupt 
people's lives and put at risk their ability to remain employed.
    Default rates on individual payday loans appear at first glance to 
be fairly low. This figure is three percent in the data the Bureau has 
analyzed.\511\ But because so many borrowers respond to the 
unaffordability of these loans by reborrowing in sequences of loans 
rather than by defaulting immediately, a more meaningful measure of 
default is the share of loan sequences that end in default. The 
Bureau's data show that, using a 30-day sequence definition, 20 percent 
of loan sequences end in default. A recent report based on a multi-
lender dataset showed similar results, with a 3 percent loan-level 
default rate and a 16 percent sequence-level default rate.\512\
---------------------------------------------------------------------------

    \511\ Default here is defined as a loan not being repaid as of 
the end of the period covered by the data or 30 days after the 
maturity date of the loan, whichever was later. The default rate was 
slightly higher, [four percent], for new loans that are not part of 
an existing loan sequence, which could reflect an intention by some 
borrowers to take out a loan and not repay, or the mechanical fact 
that borrowers with a high probability of defaulting for some other 
reason are less likely to have a long sequence of loans.
    \512\ nonprime101, Measure of Reduced Form Relationship between 
the Payment-Income Ratio and the Default Probability, at 6 (2015), 
https://www.nonprime101.com/wp-content/uploads/2015/02/Clarity-Services-Measure-of-Reduced-Form-Relationship-Final-21715rev.pdf. 
This analysis defines sequences based on the pay frequency of the 
borrower, so some loans that would be considered part of the same 
sequence using a 30-day definition are not considered part of the 
same sequence in this analysis.
---------------------------------------------------------------------------

    Other researchers have found similarly high levels of default at 
the borrower level. One study of Texas borrowers found that 4.7 percent 
of loans were charged off, while 30 percent of borrowers had a loan 
charged off in their first year of borrowing.\513\
---------------------------------------------------------------------------

    \513\ Skiba & Tobacman, at Table 2. Again, these results are 
limited to borrowers paid bi-weekly.
---------------------------------------------------------------------------

    Default rates on single-payment vehicle title loans are higher than 
those on storefront payday loans. In the data analyzed by the Bureau, 
the default rate on all vehicle title loans is 6 percent, and the 
sequence-level default rate is 33 percent.\514\ The Bureau's research 
suggests that title lenders repossess a vehicle slightly more than half 
the time when a borrower defaults on a loan. In the data the Bureau has 
analyzed, three percent of all single-payment vehicle title loans lead 
to repossession, which represents approximately 50 percent of loans on 
which the borrower defaulted. At the sequence level, 20 percent of 
sequences end with repossession. In other words, one in five borrowers 
is unable to escape debt without losing their car.
---------------------------------------------------------------------------

    \514\ CFPB Single-Payment Vehicle Title Lending, at 23.
---------------------------------------------------------------------------

    Borrowers of all types of covered loans are also likely to be 
subject to collection efforts. The Bureau observed in its consumer 
complaint data that from November 2013 through December 2015 
approximately 24,000 debt collection complaints had payday loan as the 
underlying debt. More than 10 percent of the complaints the Bureau has 
received about debt collection stem from payday loans.\515\ These 
collections efforts can include harmful and harassing conduct such as 
repeated phone calls from collectors to the borrower's home or place of 
work, as well as in-person visits to consumers' homes and worksites. 
Some of this conduct, depending on facts and circumstances, may be 
illegal. Aggressive calling to the borrower's workplace can put at risk 
the borrower's employment and jeopardize future earnings. Many of these 
practices can cause psychological distress and anxiety in borrowers who 
are already under financial pressure. In addition, the Bureau's 
enforcement and supervisory examination processes have uncovered 
evidence of numerous illegal collection practices by payday lenders. 
These include: Illegal third-party calls; false threats to add new 
fees; false threats of legal action or referral to a non-existent in-
house ``collections department''; and deceptive messages regarding non-
existent ``special promotions'' to induce borrowers to return 
calls.\516\
---------------------------------------------------------------------------

    \515\ Bureau of Consumer Fin. Prot., Monthly Complaint Report, 
at 12 (March 2016), http://files.consumerfinance.gov/f/201603_cfpb_monthly-complaint-report-vol-9.pdf.
    \516\ See Bureau of Consumer Fin. Prot., Supervisory Highlight, 
at 17-19 (Spring 2014), http://files.consumerfinance.gov/f/201405_cfpb_supervisory-highlights-spring-2014.pdf.
---------------------------------------------------------------------------

    Even if a vehicle title borrower does not have her vehicle 
repossessed, the threat of repossession in itself may cause harm to 
borrowers. It may cause them to forgo other essential expenditures in 
order to make the payment and avoid repossession.\517\ And there may be 
psychological harm in addition to the stress associated with the 
possible loss of a vehicle. Lenders recognize that consumers often have 
a ``pride of ownership'' in their vehicle and, as discussed above in 
part II, one or more lenders exceed their maximum loan amount 
guidelines and consider the vehicle's sentimental or use value to the 
consumer when assessing the amount of funds they will lend.
---------------------------------------------------------------------------

    \517\ As the D.C. Circuit observed of consumers loans secured by 
interests in household goods, ``[c]onsumers threatened with the loss 
of their most basic possessions become desperate and peculiarly 
vulnerable to any suggested `ways out.' As a result, `creditors are 
in a prime position to urge debtors to take steps which may worsen 
their financial circumstances.' The consumer may default on other 
debts or agree to enter refinancing agreements which may reduce or 
defer monthly payments on a short-term basis but at the cost of 
increasing the consumer's total long-term debt obligation.'' AFSA, 
767 F.2d at 974 (internal citation omitted).
---------------------------------------------------------------------------

    The potential impacts of the loss of a vehicle depend on the 
transportation needs of the borrower's household and the available 
transportation alternatives. According to two surveys of vehicle title 
loan borrowers, 15 percent of all borrowers report that they would have 
no way to get to work or school if they lost their vehicle to 
repossession.\518\ More than one-third (35 percent) of borrowers pledge 
the title to the only working vehicle in the household (Pew 2015). Even 
those with a second vehicle or the ability to get rides from friends or 
take public transportation would presumably experience significant 
inconvenience or even hardship from the loss of a vehicle.
---------------------------------------------------------------------------

    \518\ Fritzdixon, et al., at 1029-1030; Pew Charitable Trusts, 
Auto Title Loans: Market Practices and Borrowers' Experiences, at 14 
(2015), http://www.pewtrusts.org/~/media/assets/2015/03/
autotitleloansreport.pdf.
---------------------------------------------------------------------------

    The Bureau analyzed online payday and payday installments lenders' 
attempts to withdraw payments from borrowers' deposit accounts, and 
found that six percent of payment attempts

[[Page 47931]]

that were not preceded by a failed payment attempt themselves 
fail.\519\ An additional six percent succeed despite a lack of 
sufficient available funds in the borrower's account because the 
borrower's depository institution makes the payment as an overdraft, in 
which case the borrower was also likely charged a similar fee. Default 
rates are more difficult to determine, but 36 percent of checking 
accounts with failed online loan payments are subsequently closed. This 
provides a rough measure of default on these loans, but more 
importantly demonstrates the harm borrowers suffer in the process of 
defaulting on these loans.
---------------------------------------------------------------------------

    \519\ The bank's analysis includes both online and storefront 
lenders. Storefront lenders normally collect payment in cash and 
only deposit checks or submit ACH requests for payment when a 
borrower has failed to pay in person. These check presentments and 
ACH payment requests, where the borrower has already failed to make 
the agreed-upon payment, have a higher rate of insufficient funds.
---------------------------------------------------------------------------

    The risk that they will default and the costs associated with 
default are likely to be under-appreciated by borrowers when obtaining 
a payday or vehicle title loan. Consumers are unlikely, when deciding 
whether to take out a loan, to be thinking about what will happen if 
they were to default or what it will take to avoid default. They may be 
overly focused on their immediate needs relative to the longer-term 
picture. The lender's marketing materials may have succeeded in 
convincing the consumer of the value of a loan to bridge until their 
next paycheck. Some of the remedies a lender might take, such as 
repeatedly attempting to collect from a borrower's checking account or 
using remotely created checks, may be unfamiliar to borrowers. 
Realizing that this is even a possibility would depend on the borrower 
investigating what would happen in the case of an event they do not 
expect to occur, such as a default.
f. Collateral Harms From Making Unaffordable Payments
    In addition to the harms associated with delinquency and default, 
borrowers who take out these loans may experience other financial 
hardships as a result of making payments on unaffordable loans. These 
may arise if the borrower feels compelled to prioritize payment on the 
loan and does not wish to reborrow. This course may result in 
defaulting on other obligations or forgoing basic living expenses. If a 
lender has taken a security interest in the borrower's vehicle, for 
example, the borrower is likely to feel compelled to prioritize 
payments on the title loan over other bills or crucial expenditures 
because of the leverage that the threat of repossession gives to the 
lender.
    The repayment mechanisms for other short-term loans can also cause 
borrowers to lose control over their own finances. If a lender has the 
ability to withdraw payment directly from a borrower's checking 
account, especially when the lender is able to time the withdrawal to 
align with the borrower's payday or the day the borrower receives 
periodic income, the borrower may lose control over the order in which 
payments are made and may be unable to choose to make essential 
expenditures before repaying the loan.
    The Bureau is not able to directly observe the harms borrowers 
suffer from making unaffordable payments. The rates of reborrowing and 
default on these loans indicate that many borrowers do struggle to 
repay these loans, and it is therefore reasonable to infer that many 
borrowers are suffering harms from making unaffordable payments 
particularly where a leveraged payment mechanism and vehicle security 
strongly incentivize consumers to prioritize short-term loans over 
other expenses.
g. Harms Remain Under Existing Regulatory Approaches
    Based on Bureau analysis and outreach, the harms the Bureau 
perceives from payday loans, single-payment vehicle title loans, and 
other short-term loans persist in these markets despite existing 
regulatory frameworks. In particular, the Bureau believes that existing 
regulatory frameworks in those States that have authorized payday and/
or vehicle title lending have still left many consumers vulnerable to 
the specific harms discussed above relating to reborrowing, default, 
and collateral harms from making unaffordable payments.
    Several different factors have complicated State efforts to 
effectively apply their regulatory frameworks to payday loans and other 
short-term loans. For example, lenders may adjust their product 
offerings or their licensing status to avoid State law restrictions, 
such as by shifting from payday loans to vehicle title or installment 
loans or open-end credit or by obtaining licenses under State mortgage 
lending laws.\520\ States also have faced challenges in applying their 
laws to certain online lenders, including lenders claiming tribal 
affiliation or offshore lenders.\521\
---------------------------------------------------------------------------

    \520\ As discussed in part II, payday lenders in Ohio began 
making loans under the State's Mortgage Loan Act and Credit Service 
Organization Act following the 2008 adoption of the Short-Term 
Lender Act, which limited interest and fees to 28 percent APR among 
other requirements, and a public referendum the same year voting 
down the reinstatement of the State's Check-Cashing Lender Law, 
under which payday lenders had been making loans at higher rates.
    \521\ For example, a number of States have taken action against 
Western Sky Financial, a South Dakota-based online lender based on 
an Indian reservation and owned by a tribal member, online loan 
servicer CashCall, Inc., and related entities for evading State 
payday lending laws. A recent report summarizes these legal actions 
and advisory notices. See Diane Standaert & Brandon Coleman, Ending 
the Cycle of Evasion: Effective State and Federal Payday Lending 
Enforcement (2015), http://www.responsiblelending.org/payday-lending/research-analysis/crl_payday_enforcement_brief_nov2015.pdf.
---------------------------------------------------------------------------

    As discussed above in part II, States have adopted a variety of 
different approaches for regulating payday loans and other short-term 
loans. For example, fourteen States and the District of Columbia have 
interest rate caps or other restrictions that, in effect, prohibit 
payday lending. Although consumers in these States may still be exposed 
to potential harms from short-term lending, such as online loans made 
by lenders that claim immunity from these State laws or from loans 
obtained in neighboring States, these provisions provide strong 
protections for consumers by substantially reducing their exposure to 
the harms from payday loans.
    The 36 States that permit payday loans in some form have taken a 
variety of different approaches to regulating such loans. Some States 
have restrictions on rollovers or other reborrowing. Among other 
things, these restrictions may include caps on the total number of 
permissible loans in a given period, or cooling-off periods between 
loans. Some States prohibit a lender from making a payday loan to a 
borrower who already has an outstanding payday loan. Some States have 
adopted provisions with minimum income requirements. For example, some 
States provide that a payday loan cannot exceed a percentage (most 
commonly 25 percent) of a consumer's gross monthly income. Some State 
payday or vehicle title lending statutes require that the lender 
consider a consumer's ability to repay the loan, though none of them 
specify what steps lenders must take to determine whether the consumer 
has the ability to repay a loan. Some States require that consumers 
have the opportunity to repay a short-term loan through an extended 
payment plan over the course of a longer period of time. Additionally, 
some jurisdictions require lenders to provide specific disclosures to 
alert borrowers of potential risks.
    While these provisions may have been designed to target some of the 
same or

[[Page 47932]]

similar potential harms identified above, these provisions do not 
appear to have had a significant impact on reducing reborrowing and 
other harms that confront consumers of short-term loans. In particular, 
as discussed above, the Bureau's primary concern for payday loans and 
other short-term loans is that many consumers end up reborrowing over 
and over again, turning what was ostensibly a short-term loan into a 
long-term cycle of debt. The Bureau's analysis of borrowing patterns in 
different States that permit payday loans indicates that most States 
have very similar rates of reborrowing, with about 80 percent of loans 
followed by another loan within 30 days, regardless of the restrictions 
that are in place.\522\ In particular, laws that prevent direct 
rollovers of loans, as well as laws that impose short cooling-off 
periods between loans, such as Florida's prohibition on same-day 
reborrowing, have very little impact on reborrowing rates measured over 
periods longer than one day. The 30-day reborrowing rate in all States 
that prohibit rollovers is 80 percent, and in Florida the rate is 89 
percent. Several States, however, do stand out as having substantially 
lower reborrowing rates than other States. These include Washington, 
which limits borrowers to no more than eight loans in a rolling 12-
month period and has a 30-day reborrowing rate of 63 percent, and 
Virginia, which imposes a minimum loan length of two pay periods and 
imposes a 45-day cooling off period once a borrower has had [five] 
loans in a rolling six-month period, and has a 30-day reborrowing rate 
of 61 percent.
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    \522\ CFPB Report on Supplemental Findings, at ch. 4.
---------------------------------------------------------------------------

    Likewise, the Bureau believes that disclosures are insufficient to 
adequately reduce the harm that consumers suffer when lenders do not 
determine consumers' ability to repay, for two primary reasons.\523\ 
First, disclosures do not address the underlying incentives in this 
market for lenders to encourage borrowers to reborrow and take out long 
sequences of loans. As discussed above, the prevailing business model 
in the short-term loan market involves lenders deriving a very high 
percentage of their revenues from long loan sequences. While enhanced 
disclosures would provide additional information to consumers, the 
Bureau believes that the loans would remain unaffordable for most 
consumers, lenders would have no greater incentive to underwrite more 
rigorously, and lenders would remain dependent on long-term loan 
sequences for revenues.
---------------------------------------------------------------------------

    \523\ See also section-by-section analysis of proposed Sec.  
1041.7.
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    Second, empirical evidence suggests that disclosures have only 
modest impacts on consumer borrowing patterns for short-term loans 
generally and negligible impacts on whether consumers reborrow. 
Evidence from a field trial of several disclosures designed 
specifically to warn of the risks of reborrowing and the costs of 
reborrowing showed that these disclosures had a marginal effect on the 
total volume of payday borrowing.\524\ Analysis by the Bureau of 
similar disclosures implemented by the State of Texas showed a 
reduction in loan volume of 13 percent after the disclosure requirement 
went into effect, relative to the loan volume changes for the study 
period in comparison States.\525\ The Bureau believes these findings 
confirm the limited magnitude of the impacts from the field trial. In 
addition, analysis by the Bureau of the impacts of the disclosures in 
Texas shows that the probability of reborrowing on a payday loan 
declined by only approximately 2 percent once the disclosure was put in 
place. Together, these findings indicate that high levels of 
reborrowing and long sequences of payday loans remain a significant 
source of consumer harm even after a disclosure regime is put into 
place. Further, as discussed above in Market Concerns--Short-Term 
Loans, the Bureau has observed that consumers have a very high 
probability of winding up in a very long sequence once they have taken 
out only a few loans in a row.\526\ The contrast of the very high 
likelihood that a consumer will wind up in a long-term debt cycle after 
taking out only a few loans with the near negligible impact of a 
disclosure on consumer reborrowing patterns provides further evidence 
of the insufficiency of disclosures to address what the Bureau believes 
are the core harms to consumers in this credit market.
---------------------------------------------------------------------------

    \524\ Marianne Bertrand & Adair Morse, Information Disclosure, 
Cognitive Biases and Payday Borrowing and Payday Borrowing, 66 J. 
Fin. 1865 (2011), available at http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2011.01698.x/full.
    \525\ See CFPB Report on Supplemental Findings, at 73.
    \526\ As discussed above in this Market Concerns--Short-Term 
Loans, a borrower who takes out a fourth loan in a sequence has a 66 
percent likelihood of taking out at least three more loans, for a 
total sequence length of seven loans, and a 57 percent likelihood of 
taking out at least six more loans, for a total sequence length of 
10 loans.
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    During the SBREFA process, many of the SERs urged the Bureau to 
reconsider the proposals under consideration and defer to existing 
regulation of these credit markets by the States or to model Federal 
regulation on the laws or regulations of certain States. In the Small 
Business Review Panel Report, the Panel recommended that the Bureau 
continue to consider whether regulations in place at the State level 
are sufficient to address concerns about unaffordable loan payments and 
that the Bureau consider whether existing State laws and regulations 
could provide a model for elements of the Federal regulation. The 
Bureau has examined State laws closely in connection with preparing the 
proposed rule, as discussed in part II. Moreover, based on the Bureau's 
data analysis as noted above, the regulatory frameworks in most States 
do not appear to have had a significant impact on reducing reborrowing 
and other harms that confront consumers of short-term loans. For these 
and the other reasons discussed in Market Concerns--Short-Term Loans, 
the Bureau believes that Federal intervention in these markets is 
warranted at this time.
Section 1041.4 Identification of Abusive and Unfair Practice--Short-
Term Loans
    In most consumer lending markets, it is standard practice for 
lenders to assess whether a consumer has the ability to repay a loan 
before making the loan. In certain markets, Federal law requires 
this.\527\ The Bureau has not determined whether, as a general rule, it 
is an unfair or abusive practice for any lender to make a loan without 
making such a determination. Nor is the Bureau proposing to resolve 
that question in this rulemaking. Rather, the focus of Subpart B of 
this proposed rule is on a specific set of loans which the Bureau has 
carefully studied, as discussed in more detail in part II and Market 
Concerns--Short-Term Loans. Based on the evidence described in part II 
and Market Concerns--Short-Term Loans, and pursuant to its authority 
under section 1031(b) of the Dodd-Frank Act,

[[Page 47933]]

the Bureau is proposing in Sec.  1041.4 to identify it as both an 
abusive and an unfair act or practice for a lender to make a covered 
short-term loan without reasonably determining that the consumer has 
the ability to repay the loan. ``Ability to repay'' in this context 
means that the consumer has the ability to repay the loan without 
reborrowing and while meeting the consumer's major financial 
obligations and basic living expenses. The Bureau's preliminary 
findings with regard to abusiveness and unfairness are discussed 
separately below. The Bureau is making these preliminary findings based 
on the specific evidence cited below in the section-by-section analysis 
of proposed Sec.  1041.4, as well as the evidence discussed in part II 
and Market Concerns--Short-Term Loans.
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    \527\ See, e.g., Dodd-Frank Act section 1411, codified at 15 
U.S.C. 1639c(a)(1); CARD Act, 15 U.S.C. 1665e; HPML Rule, 73 FR 
44522, at 44543 (July 30, 2008). In addition, the OCC has issued 
numerous guidance documents about the potential for legal liability 
and reputational risk connected with lending that does not take 
account of borrowers' ability to repay. See OCC Advisory Letter 
2003-3, Avoiding Predatory and Abusive Lending Practices in Brokered 
and Purchased Loans (Feb. 21, 2003), available at http://www.occ.gov/static/news-issuances/memos-advisory-letters/2003/advisory-letter-2003-3.pdf; FDIC, Guidance on Supervisory Concerns 
and Expectations Regarding Deposit Advance Products, 78 FR 70552 
(Nov. 26, 2013); OCC, Guidance on Supervisory Concerns and 
Expectations Regarding Deposit Advance Products, 78 FR 70624 (Nov. 
26, 2013).
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Abusiveness
    Under Sec.  1031(d)(2)(A) and (B) of the Dodd-Frank Act, the Bureau 
may find an act or practice to be abusive in connection with a consumer 
financial product or service if the act or practice takes unreasonable 
advantage of (A) a lack of understanding on the part of the consumer of 
the material risks, costs, or conditions of the product or service or 
of (B) the inability of the consumer to protect the interests of the 
consumer in selecting or using a consumer financial product or service. 
It appears to the Bureau that consumers generally do not understand the 
material risks and costs of taking out a payday, vehicle title, or 
other short-term loan, and further lack the ability to protect their 
interests in selecting or using such loans. It also appears to the 
Bureau that lenders take unreasonable advantage of these consumer 
vulnerabilities by making loans of this type without reasonably 
determining that the consumer has the ability to repay the loan.
Consumers Lack an Understanding of Material Risks and Costs
    As discussed in Market Concerns--Short-Term Loans, short-term 
payday and vehicle title loans can and frequently do lead to a number 
of negative consequences for consumers, which range from extensive 
reborrowing to defaulting to being unable to pay other obligations or 
basic living expenses as a result of making an unaffordable payment. 
All of these--including the direct costs that may be payable to lenders 
and the collateral consequences that may flow from the loans--are risks 
or costs of these loans, as the Bureau understands and reasonably 
interprets that phrase.
    The Bureau recognizes that consumers who take out a payday, vehicle 
title, or other short-term loan understand that they are incurring a 
debt which must be repaid within a prescribed period of time and that 
if they are unable to do so, they will either have to make other 
arrangements or suffer adverse consequences. The Bureau does not 
believe, however, that such a generalized understanding suffices to 
establish that consumers understand the material costs and risks of 
these products. Rather, the Bureau believes that it is reasonable to 
interpret ``understanding'' in this context to mean more than a mere 
awareness that it is within the realm of possibility that a particular 
negative consequence may follow or cost may be incurred as a result of 
using the product. For example, consumers may not understand that a 
risk is very likely to materialize or that--though relatively rare--the 
impact of a particular risk would be severe.
    As discussed above in Market Concerns--Short-Term Loans, the single 
largest risk to a consumer of taking out a payday, vehicle title, or 
similar short-term loan is that the initial loan will lead to an 
extended cycle of indebtedness. This occurs in large part because the 
structure of the loan usually requires the consumer to make a lump-sum 
payment within a short period of time, typically two weeks, or a month, 
which would absorb such a large share of the consumer's disposable 
income as to leave the consumer unable to pay the consumer's major 
financial obligations and basic living expenses. Additionally, in 
States where it is permitted, lenders often offer borrowers the 
enticing, but ultimately costly, alternative of paying a smaller fee 
(such as 15 percent of the principal) and rolling over the loan or 
making back-to-back repayment and reborrowing transactions rather than 
repaying the loan in full--and many borrowers choose this option. 
Alternatively, borrowers may repay the loan in full when due but find 
it necessary to take out another loan a short time later because the 
large amount of cash needed to repay the first loan relative to their 
income leaves them without sufficient funds to meet their other 
obligations and expenses. This cycle of indebtedness affects a large 
segment of borrowers: As described in Market Concerns--Short-Term 
Loans, 50 percent of storefront payday loan sequences contain at least 
four loans. One-third contain seven loans or more, by which point 
consumers will have paid charges equal to 100 percent of the amount 
borrowed and still owe the full amount of the principal. Almost one-
quarter of loan sequences contain at least 10 loans in a row. And 
looking just at loans made to borrowers who are paid weekly, biweekly, 
or semi-monthly, 21 percent of loans are in sequences consisting of at 
least 20 loans. For loans made to borrowers who are paid monthly, 46 
percent of loans are in sequences consisting of at least 10 loans.
    The evidence summarized in Market Concerns--Short-Term Loans also 
shows that consumers who take out these loans typically appear not to 
understand when they first take out a loan how long they are likely to 
remain in debt and how costly that will be for them. Payday borrowers 
tend to overestimate their likelihood of repaying without reborrowing 
and underestimate the likelihood that they will end up in an extended 
loan sequence. For example, one study found that while 60 percent of 
borrowers predict they would not roll over or reborrow their payday 
loan, only 40 percent actually did not roll over or reborrow. The same 
study found that consumers who end up reborrowing numerous times--i.e., 
the consumers who suffer the most harm--are particularly bad at 
predicting the number of times they will need to reborrow. Thus, many 
consumers who expected to be in debt only a short amount of time can 
find themselves in a months-long cycle of indebtedness, paying hundreds 
of dollars in fees above what they expected while struggling to repay 
the original loan amount.
    The Bureau has observed similar outcomes for borrowers of single-
payment vehicle title loans. For example, 83 percent of vehicle title 
loans being reborrowed on the same day that a previous loan was due, 
and 85 percent of vehicle title loans are reborrowed within 30 days of 
a previous vehicle title loan. Fifty-six percent of vehicle title loan 
sequences consist of more than three loans, 36 percent consist of at 
least seven loans, and almost one quarter--23 percent--consist of more 
than 10 loans. While there is no comparable research on the 
expectations of vehicle title borrowers, the Bureau believes that the 
research in the payday context can be extrapolated to these other 
products given the significant similarities in the product structures, 
the characteristics of the borrowers, and the outcomes borrowers 
experience, as detailed in part II and Market Concerns--Short-Term 
Loans.
    Consumers are also exposed to other material risks and costs in 
connection with covered short-term loans. As discussed in more detail 
in Market Concerns--Short-Term Loans, the unaffordability of the 
payments for

[[Page 47934]]

many consumers creates a substantial risk of default. Indeed, 20 
percent of payday loan sequences and 33 percent of title loan sequences 
end in default. And 69 percent of payday loan defaults occur in loan 
sequences in which the consumer reborrows at least once. For a payday 
borrower, the cost of default generally includes the cost of at least 
one, and often multiple, NSF fees assessed by the borrower's bank when 
the lender attempts to cash the borrower's postdated check or debit the 
consumer's account via ACH transfer and the attempt fails. NSFs are 
associated with a high rate of bank account closures. Defaults also 
often expose consumers to aggressive debt collection activities by the 
lender or a third-party debt collector. The consequences of default can 
be even more dire for a vehicle title borrower, including the loss of 
the consumer's vehicle--which is the result in 20 percent of single-
payment vehicle title loan sequences.
    The Bureau does not believe that many consumers who take out 
payday, vehicle title, or other short-term loans understand the 
magnitude of these additional risks--for example, that they have at 
least a one in five (or for auto title borrowers a one in three) chance 
of defaulting. Nor are payday borrowers likely to factor into their 
decision on whether to take out the loan the many collateral 
consequences of default, including expensive bank fees, aggressive 
collections, or the costs of having to get to work or otherwise from 
place to place if their vehicle is repossessed.
    As discussed in Market Concerns--Short-Term Loans, several factors 
can impede consumers' understanding of the material risks and costs of 
payday, vehicle title, and other short-term loans. To begin with, there 
is a mismatch between how these loans are structured and how they 
operate in practice. Although the loans are presented as standalone 
short-term products, only a minority of payday loans are repaid without 
any reborrowing. These loans often instead produce lengthy cycles of 
rollovers or new loans taken out shortly after the prior loans are 
repaid. Empirical evidence shows that consumers are not able to 
accurately predict how many times they will reborrow, and thus are not 
able to tell when they take out the first loan how long their cycles 
will last and how much they will ultimately pay for the initial 
disbursement of loan proceeds. Even consumers who believe they will be 
unable to repay the loan immediately and therefore expect some amount 
of reborrowing are generally unable to predict accurately how many 
times they will reborrow and at what cost. This is especially true for 
consumers who reborrow many times.
    In addition, consumers in extreme financial distress tend to focus 
on their immediate liquidity needs rather than potential future costs 
in a way that makes them particularly susceptible to lender marketing, 
and payday and vehicle title lenders often emphasize the speed with 
which the lender will provide funds to the consumer.\528\ In fact, 
numerous lenders select company names that emphasize rapid loan 
funding. But there is a substantial disparity between how these loans 
are marketed by lenders and how they are actually experienced by many 
consumers. While covered short-term loans are marketed as short-
duration loans intended for short-term or emergency use only,\529\ a 
substantial percentage of consumers do not repay the loan quickly and 
thus either default, or, in a majority of the cases, reborrow--often 
many times. Moreover, consumers who take out covered short-term loans 
may be overly optimistic about their future cash flow. Such incorrect 
expectations may lead consumers to misunderstand whether they will have 
the ability to repay the loan, or to expect that they will be able to 
repay it after reborrowing only a few times. These consumers may find 
themselves caught in a cycle of reborrowing that is both very costly 
and very difficult to escape.
---------------------------------------------------------------------------

    \528\ In fact, during the SBREFA process for this rulemaking, 
numerous SERs commented that the Bureau's contemplated proposal 
would slow the loan origination process and thus negatively impact 
their business model.
    \529\ For example, as noted in Market Concerns--Short-Term 
Loans, the Web site for a national trade association representing 
storefront payday lenders analogizes a payday loan to a ``cost-
efficient `financial taxi' to get from one payday to another when a 
consumer is faced with a small, short-term cash need.''
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Consumer Inability to Protect Interests
    Under section 1031(d)(2)(B) of the Dodd-Frank Act, an act or 
practice is abusive if it takes unreasonable advantage of the inability 
of the consumer to protect the interests of the consumer in selecting 
or using a consumer financial product or service. Consumers who lack an 
understanding of the material risks and costs of a consumer financial 
product or service often will also lack the ability to protect their 
interests in selecting or using that consumer financial product or 
service. For instance, as discussed above, the Bureau believes that 
consumers are unlikely to be able to protect their interests in 
selecting or using payday, vehicle title, and other short-term loans 
because they do not understand the material risks and costs associated 
with these products.
    But it is reasonable to also conclude from the structure of section 
1031(d), which separately declares it abusive to take unreasonable 
advantage of consumer lack of understanding or of consumers' inability 
to protect their interests in using or selecting a product or service 
that, in some circumstances, consumers may understand the risks and 
costs of a product, but nonetheless be unable to protect their 
interests in selecting or using the product. The Bureau believes that 
consumers who take out an initial payday loan, vehicle title loan, or 
other short-term loan may be unable to protect their interests in 
selecting or using such loans, given their immediate need for credit 
and their inability in the moment to search out or develop alternatives 
that would either enable them to avoid the need to borrow or to borrow 
on terms that are within their ability to repay.
    As discussed in Market Concerns--Short-Term Loans, consumers who 
take out payday or short-term vehicle title loans typically have 
exhausted other sources of credit such as their credit card(s). In the 
months leading up to their liquidity shortfall, they typically have 
tried and failed to obtain other forms of credit. Their need is 
immediate. Moreover, consumers facing an immediate liquidity shortfall 
may believe that a short-term loan is their only choice; one study 
found that 37 percent of borrowers say they have been in such a 
difficult financial situation that they would take a payday loan on any 
terms offered.\530\ They may not have the time or other resources to 
seek out, develop, or take advantage of alternatives. These factors may 
place consumers in such a vulnerable position when seeking out and 
taking these loans that they are potentially unable to protect their 
interests.
---------------------------------------------------------------------------

    \530\ Pew Charitable Trusts, How Borrowers Choose and Repay 
Payday Loans, at 20 (2013), http://www.pewtrusts.org/~/media/assets/
2013/02/20/pew_choosing_borrowing_payday_feb2013-(1).pdf.
---------------------------------------------------------------------------

    The Bureau also believes that once consumers have commenced a loan 
sequence they may be unable to protect their interests in the selection 
or use of subsequent loans. After the initial loan in a sequence has 
been consummated, the consumer is legally obligated to repay the debt. 
Consumers who do not have the ability to repay that initial loan are 
faced with making a choice among three bad options: They can either 
default on the loan, skip or delay payments on major financial 
obligations or living expenses in order to repay the

[[Page 47935]]

loan, or, as is most often the case, take out another loan and soon 
face the same predicament again. At that point, at least some consumers 
may gain a fuller awareness of the risks and costs of this type of 
loan,\531\ but by then it may be too late for the consumer to be able 
to protect her interests. Each of these choices results in increased 
costs to consumers--often very high and unexpected costs--which harm 
consumers' interests. An unaffordable first loan can thus ensnare 
consumers in a cycle of debt from which consumers have no reasonable 
means to extricate themselves, rendering them unable to protect their 
interests in selecting or using covered short-term loans.
---------------------------------------------------------------------------

    \531\ However, the Mann study discussed in more detail in Market 
Concerns--Short-Term Loans suggests that consumers do not, in fact, 
gain a fuller awareness of the risks and costs of this type of loan 
the more they use the product. Mann, at 127.
---------------------------------------------------------------------------

Practice Takes Unreasonable Advantage of Consumer Vulnerabilities
    Under section 1031(d)(2) of the Dodd-Frank Act, a practice is 
abusive if it takes unreasonable advantage of consumers' lack of 
understanding or inability to protect their interests. The Bureau 
believes that the lender practice of making covered short-term loans 
without determining that the consumer has the ability to repay may take 
unreasonable advantage both of consumers' lack of understanding of the 
material risks, costs, and conditions of such loans, and consumers' 
inability to protect their interests in selecting or using the loans.
    The Bureau recognizes that in any transaction involving a consumer 
financial product or service there is likely to be some information 
asymmetry between the consumer and the financial institution. Often, 
the financial institution will have superior bargaining power as well. 
Section 1031(d) of the Dodd-Frank Act does not prohibit financial 
institutions from taking advantage of their superior knowledge or 
bargaining power to maximize their profit. Indeed, in a market economy, 
market participants with such advantages generally pursue their self-
interests. However, section 1031 of the Dodd-Frank Act makes plain that 
there comes a point at which a financial institution's conduct in 
leveraging its superior information or bargaining power becomes 
unreasonable advantage-taking and thus is abusive.\532\
---------------------------------------------------------------------------

    \532\ A covered person taking unreasonable advantage of one or 
more of the three consumer vulnerabilities identified in section 
1031(d) of the Dodd-Frank Act in circumstances in which the covered 
person lacks such superior knowledge or bargaining power may still 
be an abusive act or practice.
---------------------------------------------------------------------------

    The Dodd-Frank Act delegates to the Bureau the responsibility for 
determining when that line has been crossed. The Bureau believes that 
such determinations are best made with respect to any particular act or 
practice by taking into account all of the facts and circumstances that 
are relevant to assessing whether such an act or practice takes 
unreasonable advantage of consumers' lack of understanding or of 
consumers' inability to protect their interests. Several interrelated 
considerations lead the Bureau to believe that the practice of making 
payday, vehicle title, and other short-term loans without regard to the 
consumer's ability to repay may cross the line and take unreasonable 
advantage of consumers' lack of understanding and inability to protect 
their interests.
    The Bureau first notes that the practice of making loans without 
regard to the consumer's ability to repay stands in stark contrast to 
the practice of lenders in virtually every other credit market, and 
upends traditional notions of responsible lending enshrined in safety-
and-soundness principles as well as in a number of other laws.\533\ The 
general presupposition of credit markets is that the interests of 
lenders and borrowers are closely aligned: lenders succeed (i.e., 
profit) only when consumers succeed (i.e., repay their loan according 
to its terms). For example, lenders in other markets, including other 
subprime lenders, typically do not make loans without first making an 
assessment that consumers have the capacity to repay the loan according 
to the loan terms. Indeed, ``capacity'' is one of the traditional three 
``Cs'' of lending and is often embodied in tests that look at debt as a 
proportion of the consumer's income or at the consumer's residual 
income after repaying the debt.
---------------------------------------------------------------------------

    \533\ Dodd-Frank Act section 1411, codified at 15 U.S.C. 
1639c(a)(1); CARD Act, 15 U.S.C. 1665e; HPML Rule, 73 FR 44522, 
44543 (July 30, 2008); OCC Advisory Letter 2003-3, Avoiding 
Predatory and Abusive Lending Practices in Brokered and Purchased 
Loans (Feb. 21, 2003), available at http://www.occ.gov/static/news-issuances/memos-advisory-letters/2003/advisory-letter-2003-3.pdf; 
OCC, Guidance on Supervisory Concerns and Expectations Regarding 
Deposit Advance Products, 78 FR 70624 (Nov. 26, 2013); FDIC Guidance 
on Supervisory Concerns and Expectations Regarding Deposit Advance 
Products, 78 FR 70552 (Nov. 26, 2013).
---------------------------------------------------------------------------

    In the markets for payday, vehicle title, and similar short-term 
loans, however, lenders have built a business model that--unbeknownst 
to borrowers--depends upon the consumer's lack of capacity to repay 
such loans without needing to reborrow. As explained above, the costs 
of maintaining business operations (which include customer acquisition 
costs and overhead expenses) often exceed the revenue that could be 
generated from making individual short-term loans that are repaid 
without reborrowing. Thus, lenders' business model depends upon a 
substantial percentage of consumers not being able to repay their loans 
when due and, instead, taking out multiple additional loans in quick 
succession. Indeed, upwards of half of all payday and single-payment 
vehicle title loans are made to--and an even higher percentage of 
revenue is derived from--borrowers in a sequence of ten loans or more. 
This dependency on revenue from long-term debt cycles has been 
acknowledged by industry stakeholders. For example, as noted in Market 
Concerns--Short-Term Loans, an attorney for a national trade 
association representing storefront payday lenders asserted in a letter 
to the Bureau that, ``[i]n any large, mature payday loan portfolio, 
loans to repeat borrowers generally constitute between 70 and 90 
percent of the portfolio, and for some lenders, even more.''
    Also relevant in assessing whether the practice at issue here 
involves unreasonable advantage-taking is the vulnerability of the 
consumers seeking these types of loans. As discussed in Market 
Concerns--Short-Term Loans, payday and vehicle title borrowers--and by 
extension borrowers of similar short-term loans--generally have modest 
incomes, little or no savings, and have tried and failed to obtain 
other forms of credit. They generally turn to these products in times 
of need as a ``last resort,'' and when the loan comes due and threatens 
to take a large portion of their income, their situation becomes, if 
anything, even more desperate.
    In addition, the evidence described in Market Concerns--Short-Term 
Loans suggests that lenders engage in practices that further exacerbate 
the risks and costs to the interests of consumers. Lenders market these 
loans as being for use ``until next payday'' or to ``tide over'' 
consumers until they receive income, thus encouraging overly optimistic 
thinking about how the consumer is likely to use the product. Lender 
advertising also focuses on immediacy and speed, which may increase 
consumers' existing sense of urgency. Lenders make an initial short-
term loan and then roll over or make new loans to consumers in close 
proximity to the prior loan, compounding the consumer's initial 
inability to repay. Lenders make this reborrowing option easy and 
salient to consumers in comparison to repayment

[[Page 47936]]

of the full loan principal. Moreover, lenders do not appear to 
encourage borrowers to reduce the outstanding principal over the course 
of a loan sequence, which would help consumers extricate themselves 
from the cycle of indebtedness more quickly and reduce their costs from 
reborrowing. Storefront lenders in particular encourage loan sequences 
because they encourage or require consumers to repay in person in an 
effort to frame the consumer's experience in a way to encourage 
reborrowing. Lenders often give financial incentives to employees to 
reward maximizing loan volume.
    By not determining that consumers have the ability to repay their 
loans, lenders potentially take unreasonable advantage of a lack of 
understanding on the part of the consumer of the material risks of 
those loans and of the inability of the consumer to protect the 
interests of the consumer in selecting or using those loans.
Unfairness
    Under section 1031(c)(1) of the Dodd-Frank Act, an act or practice 
is unfair if it causes or is likely to cause substantial injury to 
consumers which is not reasonably avoidably by consumers and such 
injury is not outweighed by countervailing benefits to consumers or to 
competition. Under section 1031(c)(2), the Bureau may consider 
established public policies as evidence in making this determination. 
The Bureau believes that it may be an unfair act or practice for a 
lender to make a covered short-term loan without reasonably determining 
that the consumer has the ability to repay the loan.
Practice Causes or Is Likely To Cause Substantial Injury
    As noted in part IV, the Bureau's interpretation of the various 
prongs of the unfairness test is informed by the FTC Act, the FTC 
Policy Statement on Unfairness, and FTC and other Federal agency 
rulemakings and related case law.\534\ Under these authorities, as 
discussed in part IV, substantial injury may consist of a small amount 
of harm to a large number of individuals or a larger amount of harm to 
a smaller number of individuals. In this case, the practice at issue 
causes or is likely to cause both--a substantial number of consumers 
suffer a high degree of harm, and a large number of consumers suffer a 
lower but still meaningful degree of harm.
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    \534\ Over the past several decades, the FTC and Federal banking 
regulators have promulgated a number of rules addressing acts or 
practices involving financial products or services that the agencies 
found to be unfair under the FTC Act (the 1994 amendments to which 
codified the FTC Policy Statement on Unfairness). For example, in 
the Credit Practices Rule, the FTC determined that certain features 
of consumer-credit transactions were unfair, including most wage 
assignments and security interests in household goods, pyramiding of 
late charges, and cosigner liability. 49 FR 7740 (Mar. 1, 1984) 
(codified at 16 CFR 444). The D.C. Circuit upheld the rule as a 
permissible exercise of unfairness authority. AFSA, 767 F.2d at 957. 
The Federal Reserve Board adopted a parallel rule applicable to 
banks in 1985. (The Federal Reserve Board's parallel rule was 
codified in Regulation AA, 12 CFR part 227, subpart B. Regulation AA 
has been repealed as of March 21, 2016, following the Dodd-Frank 
Act's elimination of the Federal Reserve Board's rule writing 
authority under the FTC Act. See 81 FR 8133 (Feb. 18, 2016). In 
2009, in the HPML Rule, the Federal Reserve Board found that 
disregarding a consumer's repayment ability when extending a higher-
priced mortgage loan or HOEPA loan, or failing to verify the 
consumer's income, assets, and obligations used to determine 
repayment ability, is an unfair practice. See 73 FR 44522 (July 30, 
2008). The Federal Reserve Board relied on rulemaking authority 
pursuant to TILA section 129(l)(2), 15 U.S.C. 1639(l)(2), which 
incorporated the provisions of the Home Ownership and Equity 
Protection Act (HOEPA). The Federal Reserve Board interpreted the 
HOEPA unfairness standard to be informed by the FTC Act unfairness 
standard. See 73 FR 44522, 44529 (July 30, 2008). That same year, 
the Federal Reserve Board, the OTS, and the NCUA issued the 
interagency Subprime Credit Card Practices Rule, in which the 
agencies concluded that creditors were engaging in certain unfair 
practices in connection with consumer credit card accounts. See 74 
FR 5498 (Jan. 29, 2009).
---------------------------------------------------------------------------

    The Bureau believes that the practice of making a covered short-
term loan without assessing the consumer's ability to repay may cause 
or be likely to cause substantial injury. When a loan is structured to 
require repayment within a short period of time, the payments may 
outstrip the consumer's ability to repay since the type of consumers 
who turn to these products cannot absorb large loan payments on top of 
their major financial obligations and basic living expenses. If a 
lender nonetheless makes such loans without determining that the loan 
payments are within the consumer's ability to repay, then it appears 
the lender's conduct causes or is likely to cause the injuries 
described below.
    In the aggregate, the consumers who suffer the greatest injury are 
those consumers who have exceedingly long loan sequences. As discussed 
above in Market Concerns--Short-Term Loans, consumers who become 
trapped in long loan sequences pay substantial fees for reborrowing, 
and they usually do not reduce the principal amount owed when they 
reborrow. For example, roughly half of payday loan sequences consist of 
at least three rollovers, at which point, in a typical two-week loan, a 
storefront payday borrower will have paid over a period of eight weeks 
charges equal to 60 percent or more of the loan amount--and will still 
owe the full amount borrowed. Roughly one-third of consumers roll over 
or renew their loan at least six times, which means that, after three 
and a half months with a typical two-week loan, the consumer will have 
paid to the lender a sum equal to 100 percent of the loan amount and 
made no progress in repaying the principal. Almost one-quarter of loan 
sequences consist of at least 10 loans in a row, and 50 percent of all 
loans are in sequences of 10 loans or more. And looking just at loans 
made to borrowers who are paid weekly, biweekly, or semi-monthly, 
approximately 21 percent of loans are in sequences consisting of at 
least 20 loans. For loans made to borrowers who are paid monthly, 42 
percent of loans are in sequences consisting of at least 10 loans. In 
many instances, such consumers also incur bank penalty fees (such as 
NSF fees) and lender penalty fees (such as late fees and/or returned 
check fees) before rolling over a loan. Similarly, for vehicle title 
loans, the Bureau found that more than half, 56 percent, of single-
payment vehicle title sequences consist of at least four loans in a 
row; over a third, 36 percent, consist of seven or more loans in a row; 
and 23 percent had 10 or more loans.
    Moreover, consumers whose loan sequences are shorter may still 
suffer meaningful injury from reborrowing beyond expected levels, 
albeit to a lesser degree than those in longer sequences. Even a 
consumer who reborrows only once or twice--and, as described in Market 
Concerns--Short-Term Loans, 22 percent of payday and 23 percent of 
vehicle title loan sequences show this pattern--will still incur 
substantial costs related to reborrowing or rolling over the loans.
    The injuries resulting from default on these loans also appear to 
be significant in magnitude. As described in section Market Concerns--
Short-Term Loans, 20 percent of payday loan sequences end in default, 
while 33 percent of vehicle title sequences end in default. Because 
short-term loans (other than vehicle title loans) are usually 
accompanied by some means of payment collection--typically a postdated 
check for storefront payday loans and an authorization to submit 
electronic debits to the consumer's account for online payday loans--a 
default means that the lender was unable to secure payment despite 
using those tools. That means that a default is preceded by failed 
payment withdrawal attempts which generate bank fees (such as NSF 
fees), that can put the consumer's account at risk and lender fees 
(such as late fees or returned check fees) which add to the consumer's

[[Page 47937]]

indebtedness. Additionally, as discussed in Market Concerns--Short-Term 
Loans, where lenders' attempts to extract money directly from the 
consumer's account fails, the lender often will resort to other 
collection techniques, some of which--such as repeated phone calls, in-
person visits to homes and worksites, and lawsuits leading to wage 
garnishments--can inflict significant financial and psychological 
damage on consumers.\535\
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    \535\ As noted in part IV (Legal Authority), the D.C. Circuit 
held that psychological harm can form part of the substantial injury 
along with financial harm. See AFSA, 767 F.2d at 973-74, n.20.
---------------------------------------------------------------------------

    For consumers with a short-term vehicle title loan, the injury from 
default can be even greater. In such cases lenders do not have access 
to the consumers' bank account but instead have the ability to 
repossess the consumer's vehicle. As discussed above, almost one in 
five vehicle title loan sequences end with the consumer's vehicle being 
repossessed. Consumers whose vehicles are repossessed may end up either 
wholly dependent upon public transportation, or family, or friends to 
get to work, to shop, or to attend to personal needs, or in many areas 
of the country without any effective means of transportation at all.
    Moreover, the Bureau believes that many consumers, regardless of 
whether they ultimately manage to pay off the loan, suffer collateral 
consequences as they struggle to make payments that are beyond their 
ability to repay. For instance, they may be unable to meet their other 
major financial obligations or be forced to forgo basic living expenses 
as a result of prioritizing a loan payment and other loan charges--or 
having it prioritized for them by the lender's exercise of its 
leveraged payment mechanism.
Injury Not Reasonably Avoidable
    As previously noted in part IV, under the FTC Act unfairness 
standard, the FTC Policy Statement on Unfairness, FTC and other Federal 
agency rulemakings, and related case law, which inform the Bureau's 
interpretation and application of the unfairness test, an injury is not 
reasonably avoidable where ``some form of seller behavior . . . 
unreasonably creates or takes advantage of an obstacle to the free 
exercise of consumer decision-making,'' \536\ or, put another way, 
unless consumers have reason to anticipate the injury and the means to 
avoid it. It appears that, in a significant proportion of cases, 
consumers are unable to reasonably avoid the substantial injuries 
caused or likely to be caused by the identified practice. Prior to 
entering into a payday, vehicle title, or other short-term loan, 
consumers are unable to reasonably anticipate the likelihood and 
severity of injuries that frequently results from such loans, and after 
entering into the loan, consumers do not have the means to avoid the 
injuries that may result should the loan prove unaffordable.
---------------------------------------------------------------------------

    \536\ FTC Policy Statement on Unfairness, 104 FTC at 1074.
---------------------------------------------------------------------------

    As discussed above in Market Concerns--Short-Term Loans, a 
confluence of factors creates obstacles to the free exercise of 
consumers' decision-making, preventing them from reasonably avoiding 
injury caused by unaffordable short-term loans. Such loans involve a 
basic mismatch between how they appear to function as short term credit 
and how they are actually designed to function in long sequences of 
reborrowing. Lenders present short-term loans as short-term, liquidity-
enhancing products that consumers can use to bridge an income shortfall 
until their next paycheck. But in practice, these loans often do not 
operate that way. The disparity between how these loans appear to 
function and how they actually function creates difficulties for 
consumers in estimating with any accuracy how long they will remain in 
debt and how much they will ultimately pay for the initial extension of 
credit. Consumer predictions are often overly optimistic, and consumers 
who experience long sequences of loans often do not expect those long 
sequences when they make their initial borrowing decision. As detailed 
in Market Concerns--Short-Term Loans, empirical evidence demonstrates 
that consumer predictions of how long the loan sequence will last tend 
to be inaccurate, with many consumers underestimating the length of 
their loan sequence. Consumers are particularly poor at predicting long 
sequences of loans, and many do not appear to improve the accuracy of 
their predictions as a result of past borrowing experience.\537\
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    \537\ As noted in Market Concerns--Short-Term Loans, it appears 
that some consumers are able to accurately predict that they will 
need to reborrow one or two times, but decide to take the loan out 
regardless of the additional cost of one or two additional loans. 
Accordingly, such costs do not count as substantial injury that is 
not reasonably avoidable.
---------------------------------------------------------------------------

    Likewise, consumers are unable to reasonably anticipate the 
likelihood and severity of the consequences of being unable to repay 
the loan. The consequences include, for example, the risk of 
accumulating numerous penalty fees on their bank account and on their 
loan, and the risk that their vehicle will be repossessed, leading to 
numerous direct and indirect costs. The typical consumer does not have 
the information to understand the frequency with which these adverse 
consequences do occur or the likelihood of such consequences befalling 
a typical consumer of such a loan.
    In analyzing reasonable avoidability under the FTC Act unfairness 
standard, the Bureau notes that the FTC and other agencies have at 
times focused on factors such as the vulnerability of affected 
consumers,\538\ as well as those consumers' perception of the 
availability of alternative products.\539\ Likewise, the Bureau 
believes that the substantial injury from short-term loans may not be 
reasonably avoidable in part because of the consumers' precarious 
financial situation at the time they borrow and their reasonable belief 
that searching for alternatives will be fruitless and costly. As 
discussed in part Market Concerns--Short-Term Loans, consumers who take 
out payday or short-term vehicle title loans typically have tried and 
failed to obtain other forms of credit before turning to these

[[Page 47938]]

loans as a ``last resort.'' Thus, based on their prior negative 
experience with attempting to obtain credit, they may reasonably 
perceive that alternative options would not be available. Consumers 
facing an imminent liquidity crisis may also reasonably believe that 
their situation is so dire that they do not have time to shop for 
alternatives and that doing so could prove costly.
---------------------------------------------------------------------------

    \538\ See, e.g., FTC Policy Statement on Unfairness, 104 FTC at 
1074 (noting that the FTC may consider the ``exercise [of] undue 
influence over highly susceptible classes of purchasers''); Mortgage 
Assistance Relief Services Rule, 75 FR 75092, 75117 (Dec. 1, 2010) 
(emphasizing the ``financially distressed'' condition of consumers 
``who often are desperate for any solution to their mortgage 
problems and thus are vulnerable to providers' purported 
solutions''); Telemarketing Sales Rule, 75 FR 48458, 48487 (Aug. 10, 
2010) (concluding that injury from debt relief programs was not 
reasonably avoidable in part because ``purchasers of debt relief 
services typically are in serious financial straits and thus are 
particularly vulnerable'' to the ``glowing claims'' of service 
providers); Funeral Industry Practices Rule, 47 FR 42260, 42262 
(Sept. 24, 1982) (citing characteristics which place the consumer in 
a disadvantaged bargaining position relative to the funeral 
director, leaving the consumer vulnerable to unfair and deceptive 
practices, and causing consumers to have little knowledge of legal 
requirements and available alternatives). The Funeral Industry 
Practices Rule and amendments were upheld in the Fourth and Third 
Circuits. See Harry and Bryant Co. v. FTC, 726 F.2d 993 (4th Cir. 
1984); Pennsylvania Funeral Directors Ass'n, Inc. v. FTC, 41 F.3d 81 
(3d Cir. 1994). In the Subprime Credit Card Practices Rule--in which 
three Federal banking regulators identified as unfair certain 
practices being routinely followed by credit card issuers--the 
Federal Reserve Board, OTS, and NCUA noted their concern that 
subprime credit cards ``are typically marketed to vulnerable 
consumers whose credit histories or other characteristics prevent 
them from obtaining less expensive credit products.'' 74 FR 5498, 
5539 (Jan. 29, 2009).
    \539\ In the HPML Rule, the Federal Reserve Board discussed how 
subprime consumers ``accept loans knowing they may have difficulty 
affording the payments because they reasonably believe a more 
affordable loan will not be available to them,'' how ``taking more 
time to shop can be costly, especially for the borrower in a 
financial pinch,'' and how because of these factors ``borrowers 
often make a reasoned decision to accept unfavorable terms.'' 73 FR 
44522, 44542 (July 30, 2008).
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    Not only are consumers unable to reasonably anticipate potential 
harms before entering into a payday, vehicle title, or other short-term 
loan, once they have entered into a loan, they do not have the means to 
avoid the injuries should the loan prove unaffordable. Consumers who 
obtain a covered short-term loan beyond their ability to repay face 
three options: Either reborrow, default, or repay the loan but defer or 
skip payments on their major financial obligations and for basic living 
expenses. In other words, for a consumer facing an unaffordable 
payment, some form of substantial injury is almost inevitable 
regardless of what actions are taken by the consumer. And as discussed 
above, lenders engage in a variety of practices that further increase 
the degree of harm, for instance by encouraging additional reborrowing 
even among consumers who are already experiencing substantial 
difficulties and engaging in payment collection practices that are 
likely to cause consumers to incur substantial additional fees beyond 
what they already owe.
Injury Not Outweighed by Countervailing Benefits to Consumers or to 
Competition
    As noted in part IV, the Bureau's interpretation of the various 
prongs of the unfairness test is informed by the FTC Act, the FTC 
Policy Statement on Unfairness, and FTC and other Federal agency 
rulemakings and related case law. Under those authorities, it generally 
is appropriate for purposes of the countervailing benefits prong of the 
unfairness standard to consider both the costs of imposing a remedy and 
any benefits that consumers enjoy as a result of the practice, but the 
determination does not require a precise quantitative analysis of 
benefits and costs.
    It appears to the Bureau that the current practice of making 
payday, vehicle title, and other short-term loans without determining 
that the consumer has the ability to repay does not result in benefits 
to consumers or competition that outweigh the substantial injury that 
consumers cannot reasonably avoid. As discussed above, the amount of 
injury that is caused by the unfair practice, in the aggregate, appears 
to be extremely high. Although some individual consumers may be able to 
avoid the injury, as noted above, a significant number of consumers who 
end up in very long loan sequences can incur extremely severe financial 
injuries that were not reasonably avoidable. Moreover, some consumers 
whose short-term loans become short- to medium-length loan sequences 
incur various degrees of injury ranging from modest to severe depending 
on the particular consumer's circumstances (such as the specific loan 
terms, whether and how much the consumer expected to reborrow, and the 
extent to which the consumer incurred collateral harms from making 
unaffordable payments). In addition, many borrowers also experience 
substantial injury that is not reasonably avoidable as a result of 
defaulting on a loan or repaying a loan but not being able to meet 
other obligations and expenses.
    Against this very significant amount of harm, the Bureau must weigh 
several potential countervailing benefits to consumers or competition 
of the practice in assessing whether it is unfair. The Bureau believes 
it is helpful to divide consumers into several groups of different 
borrowing experiences when analyzing whether the practice of extending 
covered short-term loans without determining that the consumer has the 
ability to repay yields countervailing benefits to consumers.
    The first group consists of borrowers who repay their loan without 
reborrowing. The Bureau refers to these borrowers as ``repayers'' for 
purposes of this countervailing benefits analysis. As discussed in 
Market Concerns--Short-Term Loans, 22 percent of payday loan sequences 
and 12 percent of vehicle title loan sequences end with the consumer 
repaying the initial loan in a sequence without reborrowing. Many of 
these consumers may reasonably be determined, before getting a loan, to 
have the ability to repay their loan, such that the ability-to-repay 
requirement in proposed Sec.  1041.5 would not have a significant 
impact on their eligibility for this type of credit. At most, it would 
reduce somewhat the speed and convenience of applying for a loan under 
the current practice. Under the status quo, the median borrower lives 
five miles from the nearest payday store. Consumers generally can 
obtain payday loans simply by traveling to the store and showing a 
paystub and evidence of a checking account; online payday lenders may 
require even less. For vehicle title loans, all that is generally 
required is that the consumer owns their vehicle outright without any 
encumbrance.
    As discussed in more detail in part VI, there could be a 
significant contraction in the number of payday stores if lenders were 
required to assess consumers' ability to pay in the manner required by 
the proposal, but the Bureau projects that 93 to 95 percent of 
borrowers would not have to travel more than five additional miles. 
Lenders likely would require more information and documentation from 
the consumer. Indeed, under the proposed rule consumers may be required 
in certain circumstances to provide documentation of their income for a 
longer period of time than their last paystub and may be required to 
document their rental expenses. Consumers would also be required to 
complete a written statement with respect to their expected future 
income and major financial obligations.
    Additionally, when a lender makes a loan without determining a 
consumer's ability to repay, the lender can make the loan 
instantaneously upon obtaining a consumer's paystub or vehicle title. 
In contrast, if lenders assessed consumers' ability to repay, they 
might secure extrinsic data, such as a consumer report from a national 
consumer reporting agency, which could slow the process down. Indeed, 
under the proposed rule lenders would be required to review the 
consumer's borrowing history using the lender's own records and a 
report from a registered information system, and lenders would also be 
required to review a credit report from a national credit reporting 
agency. Using this information, along with verified income, lenders 
would have to project the consumer's residual income.
    As discussed below in the section-by-section analysis of proposed 
Sec.  1041.5, the proposed rule has been designed to enable lenders to 
obtain electronic income verification, to use a model to estimate 
rental expenses, and to automate the process of securing additional 
information and assessing the consumer's ability to repay. If the 
proposed ability-to-repay requirements are finalized, the Bureau 
anticipates that consumers who are able to demonstrate the ability to 
repay under proposed Sec.  1041.5 would be able to obtain credit to a 
similar extent as they do in the current market. While the speed and 
convenience fostered by the current practice may be reduced for these 
consumers under the proposed rule's requirements, the Bureau does not 
believe that the proposed requirements will be overly burdensome in 
this respect. As described in part VI, the Bureau estimates that the 
required ability-to-repay determination would

[[Page 47939]]

take essentially no time for a fully automated electronic system and 
between 15 and 20 minutes for a fully manual system.
    While the Bureau believes that most repayers would be able to 
demonstrate the ability to repay under proposed Sec.  1041.5, the 
Bureau recognizes that there is a sub-segment of repayers who could not 
demonstrate their ability to repay if required to do so by a lender. 
For them, the current lender practice of making loans without 
determining their ability to repay enables these consumers to obtain 
credit that, by hypothesis, may actually be within their ability to 
repay. The Bureau acknowledges that for this group of ``false 
negatives'' there may be significant benefits of being able to obtain 
covered loans without having to demonstrate their ability to repay in 
the way prescribed by proposed Sec.  1041.5.
    However, the Bureau believes that under the proposed rule lenders 
will generally be able to identify consumers who are able to repay and 
that the size of any residual ``false negative'' population will be 
small. This is especially true to the extent that this class of 
consumers is disproportionately drawn from the ranks of those whose 
need to borrow is driven by a temporary mismatch in the timing between 
their income and expenses rather than those who have experienced an 
income or expense shock or those with a chronic cash shortfall. It is 
very much in the interest of these borrowers to attempt to demonstrate 
their ability to repay in order to receive the loan and for the same 
reason lenders will have every incentive to err on the side of finding 
such an ability. Moreover, even if these consumers could not qualify 
for the loan they would have obtained absent an ability-to-pay 
requirement, they may still be able to get different credit within 
their demonstrable ability to repay, such as a smaller loan or a loan 
with a longer term.\540\ For these reasons, the Bureau does not believe 
that there would be a large false negative population if lenders made 
loans only to those with the ability to repay.
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    \540\ Moreover, consumers who cannot or do not want to attempt 
to demonstrate and ability to repay may be able to take out a loan 
under proposed Sec.  1041.7. For the purpose of this countervailing 
benefits analysis, however, the Bureau is not relying on the fact 
that consumers who cannot demonstrate an ability to repay may be 
able to take out a loan under proposed Sec.  1041.7.
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    Finally, some of the repayers may not actually be able to afford 
the loan, but choose to repay it nonetheless, rather than reborrow or 
default--which may result in their incurring costs in connection with 
another obligation, such as a late fee on a utility bill. Such repayers 
would not be able to obtain under proposed Sec.  1041.5 the same loan 
that they would have obtained absent an ability-to-repay requirement, 
but any benefit they receive under the current practice would appear to 
be small, at most.
    The second group consists of borrowers who eventually default on 
their loan, either on the first loan or later in a loan sequence after 
having reborrowed. The Bureau refers to these borrowers as 
``defaulters'' for purposes of this countervailing benefits analysis. 
As discussed in Market Concerns--Short-Term Loans, borrowers of 20 
percent of payday and 33 percent of vehicle title loan sequences fall 
within this group. For these consumers, the current lender practice of 
making loans without regard to their ability to repay may enable them 
to obtain what amounts to a temporary ``reprieve'' from their current 
situation. They can obtain some cash which may enable them to pay a 
current bill or current expense. However, for many consumers, the 
reprieve can be exceedingly short-lived: 31 percent of payday loan 
sequences that default are single loan sequences, and an additional 27 
percent of loan sequences that default are two or three loans long 
(meaning that 58 percent of defaults occur in loan sequences that are 
one, two, or three loans long). Twenty-nine percent of single-payment 
vehicle title loan sequences that default are single loan sequences, 
and an additional 26 percent of loan sequences that default are two or 
three loans long.
    These consumers thus are merely substituting a payday lender or 
vehicle title lender for a preexisting creditor, and in doing so, end 
up in a deeper hole by accruing finance charges, late fees, or other 
charges at a high rate. Vehicle title loans can have an even more dire 
consequence for defaulters: 20 percent have their vehicle repossessed. 
The Bureau thus does not believe that defaulters obtain benefits from 
the current lender practice of not determining ability to repay.\541\
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    \541\ The Bureau recognizes that defaulters may not default 
because they lack the ability to repay, but the Bureau believes that 
the percentage of consumers who default despite having the ability 
to repay the loan is small. Moreover, any benefit such borrowers 
derive from the loan would not be diminished by proposed Sec.  
1041.5 precisely because they have the ability to repay the loans.
---------------------------------------------------------------------------

    The final and largest group of consumers consists of those who 
neither default nor repay their loans without reborrowing but who, 
instead, reborrow before eventually repaying. The Bureau refers to 
consumers with such loan sequences as ``reborrowers'' for purposes of 
this countervailing benefits discussion. These consumers represent 58 
percent of payday loan sequences and 56 percent of auto title loan 
sequences. For these consumers, as for the defaulters, the practice of 
making loans without regard to their ability to repay enables them to 
obtain a temporary reprieve from their current situation. But for this 
group, that reprieve can come at a greater cost than initially 
expected, sometimes substantially greater.
    Some reborrowers are able to end their borrowing after a relatively 
small number of additional loans; for example, approximately 22 percent 
of payday loan sequences and 23 percent of vehicle title loan sequences 
are repaid after the initial loan is reborrowed once or twice. But even 
among this group, many consumers do not anticipate before taking out a 
loan that they will need to reborrow. These consumers cannot reasonably 
avoid their injuries, and while their injuries may be somewhat less 
severe than the injuries suffered by consumers with extremely long loan 
sequences, their injuries can nonetheless be substantial, particularly 
in light of their already precarious finances. Conversely, some of 
these consumers may expect to reborrow and may accurately predict how 
many times they will have to reborrow. For consumers who accurately 
predict their reborrowing, the Bureau is not counting their reborrowing 
costs as substantial injury that should be placed on the ``injury'' 
side of the countervailing benefits scale.
    While some reborrowers end their borrowing after a relatively small 
number of additional loans, a large percentage of reborrowers end up in 
significantly longer loan sequences. Of storefront payday loan 
sequences, for instance, one-third percent contain seven or more loans, 
meaning that consumers pay finance charges equal to or greater than 100 
percent of the amount borrowed. About a quarter percent of loan 
sequences contain 10 or more loans in succession. For vehicle title 
borrowers, the picture is similarly dramatic: Only 23 percent of loan 
sequences taken out by vehicle title reborrowers are repaid after two 
or three successive loans whereas 23 percent of sequences are for 10 or 
more loans in succession. The Bureau does not believe any significant 
number of consumers anticipate such lengthy sequences.
    Thus, the Bureau believes that the substantial injury suffered by 
the defaulters and reborrowers--the categories that represent the vast 
majority of overall short-term payday and vehicle title borrowers--
dwarfs any benefits these groups of borrowers may

[[Page 47940]]

receive in terms of a temporary reprieve and also dwarfs the speed and 
convenience benefits that the repayers may experience. The Bureau 
acknowledges that any benefits derived by the aforementioned ``false 
negatives'' may be reduced under the proposed rule, but the Bureau 
believes that the benefits this relatively small group receives is 
outweighed by the substantial injuries to the defaulters and 
reborrowers as discussed above. Further, the Bureau believes that under 
the proposed intervention, many of these borrowers may find more 
sustainable options, such as underwritten credit on terms that are 
tailored to their budget and more affordable.
    Turning to benefits of the practice for competition, the Bureau 
acknowledges, as discussed further in part II, that the current 
practice of lending without regard to consumers' ability to repay has 
enabled the payday industry to build a business model in which 50 
percent or more of the revenue comes from consumers who borrow 10 or 
more times in succession. This, in turn, has enabled a substantial 
number of firms to extend such loans from a substantial number of 
storefront locations. As discussed in part II, the Bureau estimates 
that the top ten storefront payday lenders control only about half of 
the market, and that there are 3,300 storefront payday lenders that are 
small entities as defined by the SBA. The Bureau also acknowledges 
that, as discussed above and further in part VI, the anticipated effect 
of limiting lenders to loans that consumers can afford to repay will be 
to substantially shrink the number of loans per consumer which may, in 
turn, result in a more highly concentrated markets in some geographic 
areas. Moreover, the current practice enables to lenders to avoid the 
procedural costs that the proposed rule would impose.
    However, the Bureau does not believe the proposed rule will reduce 
the competitiveness of the payday or vehicle title markets. As 
discussed in part II, most States in which such lending takes place 
have established a maximum price for these loans. Although in any given 
State there are a large number of lenders making these loans, typically 
in close proximity to one another, research has shown that there is 
generally no meaningful price competition among these firms. Rather, in 
general, the firms currently charge the maximum price allowed in any 
given State. Lenders who operate in multiple States generally vary 
their prices from State to State to take advantage of whatever local 
law allows. Thus, for example, lenders operating in Florida are 
permitted to charge $10 per $100 loaned,\542\ and those same lenders, 
when lending in South Carolina, charge $15 per $100.\543\
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    \542\ Fla. Stat. Ann. Sec.  560.404(6).
    \543\ S.C. Code Sec.  34-39-180(E).
---------------------------------------------------------------------------

    In sum, it appears that the benefits of the identified unfair 
practice for consumers and competition do not outweigh the substantial, 
not reasonably avoidable injury caused or likely to be cause by the 
practice. On the contrary, it appears that the very significant injury 
caused by the practice outweighs the relatively modest benefits of the 
practice to consumers.
Consideration of Public Policy
    Section 1031(c)(2) of the Dodd-Frank Act allows the Bureau to 
``consider established public policies as evidence to be considered 
with all other evidence'' in determining whether a practice is unfair 
as long as the public policy considerations are not the primary basis 
of the determination. In addition to the evidence described above and 
in Market Concerns--Short-Term Loans, established public policy 
supports the proposed finding that it is an unfair act or practice for 
lenders to make covered short-term loans without determining that the 
consumer has the ability to repay.
    Specifically, as noted above, several consumer financial statutes, 
regulations, and guidance documents require or recommend that covered 
lenders assess their customers' ability to repay before extending 
credit. These include the Dodd-Frank Act with regard to closed-end 
mortgage loans,\544\ the CARD Act with regard to credit cards,\545\ 
guidance from the OCC on abusive lending practices,\546\ guidance from 
the FDIC on small dollar lending,\547\ and guidance from the OCC \548\ 
and FDIC \549\ on deposit advance products. In addition, the Federal 
Reserve Board promulgated a rule requiring an ability-to-repay 
determination regarding higher priced mortgages, although that rule has 
since been superseded by the Dodd-Frank Act's ability-to-repay 
requirement and its implementation regulations which apply generally to 
mortgages regardless of price.\550\ In short, Congress, State 
legislatures,\551\ and other agencies have found consumer harm to 
result from lenders failing to determine that consumer have the ability 
to repay credit. These established policies support a finding that it 
is unfair for a lender to make covered short-term loans without 
determining that the consumer has the ability to repay, and evince 
public policy that supports the Bureau's proposed imposition of the 
consumer protections in proposed part 1041. The Bureau gives weight to 
this policy and bases its proposed finding that the identified practice 
is unfair, in part, on this significant body of public policy.
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    \544\ Dodd-Frank Act section 1411, codified at 15 U.S.C. 
1639c(a)(1) (``no creditor may make a residential mortgage loan 
unless the creditor makes a reasonable and good faith determination 
based on verified and documented information that, at the time the 
loan is consummated, the consumer has a reasonable ability to repay 
the loan, according to its terms, and all applicable taxes, 
insurance (including mortgage guarantee insurance), and 
assessments.'').
    \545\ 15 U.S.C. 1665e (credit card issuer must ``consider[ ] the 
ability of the consumer to make the required payments'').
    \546\ OCC Advisory Letter 2003-3, Avoiding Predatory and Abusive 
Lending Practices in Brokered and Purchased Loans (Feb. 21, 2003), 
available at http://www.occ.gov/static/news-issuances/memos-advisory-letters/2003/advisory-letter-2003-3.pdf (cautioning banks 
not to extend credit without first determining that the consumer has 
the ability to repay the loan).
    \547\ FDIC Financial Institution Letter FIL-50-2007, Affordable 
Small-Dollar Loan Guidelines (June 19, 2007).
    \548\ OCC, Guidance on Supervisory Concerns and Expectations 
Regarding Deposit Advance Products, 78 FR 70624, 70629 (Nov. 26, 
2013) (``Deposit advance loans often have weaknesses that may 
jeopardize the liquidation of the debt. Customers often have limited 
repayment capacity. A bank should adequately review repayment 
capacity to assess whether a customer will be able to repay the loan 
without needing to incur further deposit advance borrowing.'').
    \549\ FDIC, Guidance on Supervisory Concerns and Expectations 
Regarding Deposit Advance Products, 78 FR 70552 (Nov. 26, 2013) 
(same as OCC guidance).
    \550\ Higher-Priced Mortgage Loan Rule, 73 FR 44522, 44543 (July 
30, 2008) (``the Board finds extending higher-priced mortgage loans 
or HOEPA loans based on the collateral without regard to the 
consumer's repayment ability to be an unfair practice. The final 
rule prohibits this practice.'').
    \551\ See, e.g., 815 Ill. Comp. Stat. Ann. 137/20 (lender must 
assess ATR in making ``high risk home loan''); Nev. Rev. Stat. Ann. 
Sec.  598D.100 (it is unfair practice to make home loan without 
determining ATR); Tex. Educ. Code Ann. Sec.  52.321 (state board 
will set standards for student-loan applicants based in part on 
ATR).
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    The Bureau seeks comment on the evidence and proposed findings and 
conclusions in proposed Sec.  1041.4 and Market Concerns--Short-Term 
Loans above. As discussed further below in connection with proposed 
Sec.  1041.7, the Bureau also seeks comment on whether making loans 
with the types of consumer protections contained in proposed Sec.  
1041.7(b) through (e) should not be included in the practice identified 
in proposed Sec.  1041.4.
Section 1041.5 Ability-To-Repay Determination Required
    As discussed in the section-by-section analysis of Sec.  1041.4 
above, the Bureau has tentatively concluded that it is an unfair and 
abusive act or practice to

[[Page 47941]]

make a covered short-term loan without reasonably determining that the 
consumer will have the ability to repay the loan. Section 1031(b) of 
the Dodd-Frank Act provides that the Bureau's rules may include 
requirements for the purpose of preventing unfair or abusive acts or 
practices. The Bureau is proposing to prevent the abusive and unfair 
practice by including in proposed Sec. Sec.  1041.5 and 1041.6 minimum 
requirements for how a lender may reasonably determine that a consumer 
has the ability to repay a covered short-term loan.
    Proposed Sec.  1041.5 sets forth the prohibition against making a 
covered short-term loan (other than a loan that satisfies the 
protective conditions in proposed Sec.  1041.7) without first making a 
reasonable determination that the consumer will have the ability to 
repay the covered short term loan according to its terms. It also, in 
combination with proposed Sec.  1041.6, specifies minimum elements of a 
baseline methodology that would be required for determining a 
consumer's ability to repay, using a residual income analysis and an 
assessment of the consumer's prior borrowing history. In crafting the 
baseline ability-to-repay methodology established in proposed 
Sec. Sec.  1041.5 and 1041.6, the Bureau is attempting to balance 
carefully several considerations, including the need for consumer 
protection, industry interests in regulatory certainty and manageable 
compliance burden, and preservation of access to credit.
    Proposed Sec.  1041.5 would generally require the lender to make a 
reasonable determination that a consumer will have sufficient income, 
after meeting major financial obligations, to make payments under a 
prospective covered short-term loan and to continue meeting basic 
living expenses. However, based on feedback from a wide range of 
stakeholders and its own internal analysis, as well as the Bureau's 
belief that consumer harm has resulted despite more general standards 
in State law, the Bureau believes that merely establishing such a 
general requirement would provide insufficient protection for consumers 
and insufficient certainty for lenders.
    Many lenders have informed the Bureau that they conduct some type 
of underwriting on covered short-term loans and assert that it should 
be sufficient to meet the Bureau's standards. However, as discussed 
above, such underwriting often is designed to screen primarily for 
fraud and to assess whether the lender will be able to extract payments 
from the consumer. It typically makes no attempt to assess whether the 
consumer might be forced to forgo basic necessities or to default on 
other obligations in order to repay the covered loan. Moreover, such 
underwriting essentially treats reborrowing as a neutral or positive 
outcome, rather than as a sign of the consumer's distress, because 
reborrowing does not present a risk of loss or decreased profitability 
to the lender. On the contrary, new fees from each reborrowing 
contribute to the lender's profitability. In the Bureau's experience, 
industry underwriting typically goes no further than to predict the 
consumer's propensity to repay rather than the consumer's financial 
capacity (i.e., ability) to repay consistent with the consumer's other 
obligations and need to cover basic living expenses. Such underwriting 
ignores the fact that repayment may force the consumer to miss other 
obligations or to be unable to cover basic living expenses.
    The Bureau believes that to prevent the abusive and unfair 
practices that appear to be occurring in the market, it would be 
appropriate not only to require lenders to make a reasonable 
determination of a consumer's ability to repay before making a covered 
short term loan but also to specify minimum elements of a baseline 
methodology for evaluating consumers' individual financial situations, 
including their borrowing history. The baseline methodology is not 
intended to be a substitute for lender screening and underwriting 
methods, such as those designed to screen out fraud or predict and 
avoid other types of lender losses. Accordingly, lenders would be 
permitted to supplement the baseline methodology with other 
underwriting and screening methods.
    The baseline methodology in proposed Sec.  1041.5 rests on a 
residual income analysis--that is, an analysis of whether, given the 
consumer's projected income and major obligations, the consumer will 
have sufficient remaining (i.e., residual) income to cover the payments 
on the proposed loan and still meet basic living expenses. The Bureau 
recognizes that in other markets and under other regulatory regimes 
financial capacity is more typically measured by establishing a maximum 
debt-to-income (DTI) ratio.\552\ DTI tests generally rest on the 
assumption that so long as a consumer's debt burden does not exceed a 
certain threshold percentage of the consumer's income, the remaining 
share of income will be sufficient for a consumer to be able meet non-
debt obligations and other expenses. However, for low- and moderate-
income consumers, the Bureau believes that assumption is less likely to 
be true: A DTI ratio that might seem quite reasonable for the 
``average'' consumer can be quite unmanageable for a consumer at the 
lower end of the income spectrum and the higher end of the debt burden 
range.\553\ Ultimately, whether a particular loan is affordable will 
depend upon how much money the consumer will have left after paying 
existing obligations and whether that amount is sufficient to cover the 
proposed new obligation while still meeting basic living expenses.
---------------------------------------------------------------------------

    \552\ For example, DTI is an important component of the Bureau's 
ability to repay regulation for mortgages in 12 CFR 1026.43. It is a 
factor that a creditor must consider in determining a consumer's 
ability to repay and also a component of the standards that a 
residential mortgage loan must meet to be a qualified mortgage under 
that regulation.
    \553\ For example, under the Bureau's ability-to-repay 
requirements for residential mortgage loans, a qualified mortgage 
results in a DTI ratio of 43 percent or less. But for a consumer 
with a DTI ratio of 43 percent and low income, the 57 percent of 
income not consumed by payments under debt obligations is unlikely 
to indicate the same capacity to handle a new loan payment of a 
given dollar amount, compared to consumers with the same DTI and 
higher income. That is especially true if the low income consumer 
also faces significant non-debt expenses, such as high rent 
payments, that consume significant portions of the remaining 57 
percent of her income.
---------------------------------------------------------------------------

    In addition, in contrast with other markets in which there are 
long-established norms for DTI levels that are consistent with 
sustainable indebtedness, the Bureau does not believe that there exist 
analogous norms for sustainable DTI levels for consumers taking covered 
short-term loans. Thus, the Bureau believes that residual income is a 
more direct test of ability to repay than DTI and a more appropriate 
test with respect to the types of products covered in this rulemaking 
and the types of consumers to whom these loans are made.
    The Bureau has designed the residual income methodology 
requirements specified in proposed Sec. Sec.  1041.5 and 1041.6 in an 
effort to ensure that ability-to-repay determinations can be made 
through scalable underwriting models. The Bureau is proposing that the 
most critical inputs into the determination rest on documentation but 
the Bureau's proposed methodology would allow for various means of 
documenting major financial obligations and also establishes 
alternatives to documentation where appropriate. It recognizes that 
rent, in particular, often cannot be readily documented and therefore 
would allow for estimation of rental expense. See the section-by-
section analysis of Sec.  1041.5(c)(3)(ii)(D), below. The Bureau's 
proposed

[[Page 47942]]

methodology also would not mandate verification or detailed analysis of 
every individual consumer expenditure. The Bureau believes that such 
detailed analysis may not be the only method to prevent unaffordable 
loans and is concerned that it would substantially increase costs to 
lenders and borrowers. See the discussion of basic living expenses, 
below.
    Finally, the Bureau's proposed methodology would not dictate a 
formulaic answer to whether, in a particular case, a consumer's 
residual income is sufficient to make a particular loan affordable. 
Instead, the proposed methodology would allow lenders to exercise 
discretion in arriving at a reasonable determination with respect to 
that question. Because this type of underwriting is so different from 
what many lenders currently engage in, the Bureau is particularly 
conscious of the need to leave room for lenders to innovate and refine 
their methods over time, including by building automated systems to 
assess a consumer's ability to repay so long as the basic elements are 
taken into account.
    Proposed Sec.  1041.5 outlines the methodology for assessing the 
consumer's residual income as part of the assessment of ability to 
repay. Proposed Sec.  1041.5(a) would set forth definitions used 
throughout proposed Sec. Sec.  1041.5 and 1041.6. Proposed Sec.  
1041.5(b) would establish the requirement for a lender to determine 
that a consumer will have the ability to repay a covered short-term 
loan and would set forth minimum standards for a reasonable 
determination that a consumer will have the ability to repay such a 
covered loan. The standards in proposed Sec.  1041.5(b) would generally 
require a lender to determine that the consumer's income will be 
sufficient for the consumer to make payments under a covered short-term 
loan while accounting for the consumer's payments for major financial 
obligations and the consumer's basic living expenses. Proposed Sec.  
1041.5(c) would establish standards for verification and projections of 
a consumer's income and major financial obligations on which the lender 
would be required to base its determination under proposed Sec.  
1041.5. Proposed Sec.  1041.6 would impose certain additional 
presumptions, prohibitions, and requirements where the consumer's 
reborrowing during the term of the loan or shortly after having a prior 
loan outstanding suggests that the prior loan was not affordable for 
the consumer, so that the consumer may have particular difficulty in 
repaying a new covered short-term loan with similar repayment terms.
    In explaining the requirements of the various provisions of 
proposed Sec.  1041.5, the Bureau is mindful that substantially all of 
the loans being made today which would fall within the definition of 
covered short-term loans are single-payment loans, either payday loans 
or single-payment vehicle title loans. The Bureau recognizes, however, 
that the definition of covered short-term loan could encompass loans 
with multiple payments and a term of 45 days or less, for example, a 
30-day loan payable in two installments. Accordingly, in the discussion 
that follows, the Bureau generally refers to payments in the plural and 
uses phrases such as the ``highest payment due.'' For most covered 
short-term loans the highest payment would be the only payment and the 
determinations required by proposed Sec.  1041.5 would be made only for 
a single payment and the 30 days following such payment.
    As an alternative to the proposed ability-to-repay requirement, the 
Bureau considered whether lenders should be required to provide 
disclosures to borrowers warning them of the costs and risks of 
reborrowing, default, and collateral harms from unaffordable payments 
associated with taking out covered short-term loans. However, the 
Bureau believes that such a disclosure remedy would be significantly 
less effective in preventing the consumer harms described above, for 
three reasons.
    First, disclosures do not address the underlying incentives in this 
market for lenders to encourage borrowers to reborrow and take out long 
sequences of loans. As discussed in Market Concerns--Short-Term Loans, 
the prevailing business model involves lenders deriving a very high 
percentage of their revenues from long loan sequences. While enhanced 
disclosures would provide additional information to consumers, the 
loans would remain unaffordable for consumers, lenders would have no 
greater incentive to underwrite more rigorously, and lenders would 
remain dependent on long-term loan sequences for revenues.
    Second, empirical evidence suggests that disclosures have only 
modest impacts on consumer borrowing patterns for short-term loans 
generally and negligible impacts on whether consumers reborrow. 
Evidence from a field trial of several disclosures designed 
specifically to warn of the risks of reborrowing and the costs of 
reborrowing showed that these disclosures had a marginal effect on the 
total volume of payday borrowing.\554\ Further, the Bureau has analyzed 
the impacts of the change in law in Texas (effective January 1, 2012) 
requiring payday lenders and short-term vehicle title lenders to 
provide a new disclosure to prospective borrowers before each payday 
loan transaction.\555\ The Bureau observed that with respect to payday 
loan transactions, using the Bureau's supervisory data, there was an 
overall 13 percent decline in loan volume in Texas after the disclosure 
requirement went into effect, relative to the loan volume changes for 
the study period in comparison States.\556\ The Bureau's analysis of 
the impacts of the Texas disclosures also shows that the probability of 
reborrowing on a payday loan declined by approximately 2 percent once 
the disclosure was put in place.\557\ This finding indicates that high 
levels of reborrowing and long sequences of payday loans remain a 
significant source of consumer harm even with a disclosure regime in 
place.\558\ Further, as discussed in Market Concerns--Short-Term Loans, 
the Bureau has observed that borrowers have a very high probability of 
winding up in a very long sequence once they have taken out only a few 
loans in a row. The contrast of the extremely high likelihood that a 
consumer will wind up in a long-term debt cycle after taking out only a 
few loans with the near negligible impact of a disclosure on consumer 
reborrowing patterns provides further evidence of the insufficiency of 
disclosures to address what the Bureau believes are the core harms to 
consumers in this credit market.
---------------------------------------------------------------------------

    \554\ Marianne Bertrand & Adair Morse, Information Disclosure, 
Cognitive Biases and Payday Borrowing and Payday Borrowing, 66 J. 
Fin. 1865, 1866 (2011), available at http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2011.01698.x/full.
    \555\ See chapter 3 of the CFPB Report on Supplemental Findings.
    \556\ See CFPB Report on Supplemental Findings, at 73.
    \557\ See CFPB Report on Supplemental Findings, at 78-79.
    \558\ The empirical data suggests that the modest loan volume 
reductions are primarily attributable to reductions in originations; 
once a borrower has taken out the initial loan, the disclosure has 
very little impact.
---------------------------------------------------------------------------

    Third, as discussed in part VI, the Bureau believes that behavioral 
factors make it likely that disclosures to consumers taking out covered 
short-term loans would be ineffective in warning consumers of the risks 
and preventing the harms that the Bureau seeks to address with the 
proposal. Due to the potential for tunneling in their decision-making 
and general optimism bias, as discussed in more detail in Market 
Concerns--Short-Term Loans,

[[Page 47943]]

consumers are likely to dismiss warnings of possible negative outcomes 
as not applying to them, and to not focus on disclosures of the 
possible harms associated with outcomes--reborrowing and default--that 
they do not anticipate experiencing themselves. To the extent the 
borrowers have thought about the likelihood that they themselves will 
reborrow or default (or both) on a loan, a general warning about how 
often people reborrow or default (or both) is unlikely to cause them to 
revise their own expectations about the chances they themselves will 
reborrow or default (or both).
    The Bureau requests comment on the appropriateness of all aspects 
of the proposed approach. For example, the Bureau requests comment on 
whether a simple prohibition on making covered short-term loans without 
determining ability to repay, without specifying the elements of a 
minimum baseline methodology, would provide adequate protection to 
consumers and clarity to industry about what would constitute 
compliance. Similarly, the Bureau requests comment on the adequacy of a 
less prescriptive requirement for lenders to ``consider'' specified 
factors, such as payment amount under a covered short-term loan, 
income, debt service payments, and borrowing history, rather than a 
requirement to determine that residual income is sufficient. (Such an 
approach could be similar to that of the Bureau's ability-to-repay 
requirements for residential mortgage loans.) Specifically, the Bureau 
requests comment on whether there currently exist sufficient norms 
around the levels of such factors that are and are not consistent with 
a consumer's ability to repay, such that a requirement for a lender to 
``consider'' such factors would provide adequate consumer protection, 
as well as adequate certainty for lenders regarding what determinations 
of ability to repay would and would not reflect sufficient 
consideration of those factors.
    Also during outreach, some stakeholders suggested that the Bureau 
should adopt underwriting rules of thumb--for example, a maximum 
payment-to-income (PTI) ratio--to either presumptively or conclusively 
demonstrate compliance with the rule. The Bureau solicits comment on 
whether the Bureau should define such rules of thumb and, if so, what 
metrics should be included in a final rule and what significance should 
be given to such metrics.
5(a) Definitions
    Proposed Sec.  1041.5(a) would provide definitions of several terms 
used in proposed Sec.  1041.5 in assessing the consumer's financial 
situation and proposed Sec.  1041.6 in assessing consumers' borrowing 
history before determining whether a consumer has the ability to repay 
a new covered short-term loan. In particular, proposed Sec.  1041.5(a) 
includes definitions for various categories of income and expenses that 
are used in proposed Sec.  1041.5(b), which would establish the 
methodology that would generally be required for assessing consumers' 
ability to repay covered short-term loans. The substantive requirements 
for making the calculations for each category of income and expenses, 
as well as the overall determination of a consumer's ability to repay, 
are provided in proposed Sec.  1041.5(b) and (c), and in their 
respective commentary. These proposed definitions are discussed in 
detail below.
5(a)(1) Basic Living Expenses
    Proposed Sec.  1041.5(a)(1) would define the basic living expenses 
component of the ability-to-repay determination that would be required 
in proposed Sec.  1041.5(b). It would define basic living expenses as 
expenditures, other than payments for major financial obligations, that 
a consumer makes for goods and services necessary to maintain the 
consumer's health, welfare, and ability to produce income, and the 
health and welfare of members of the consumer's household who are 
financially dependent on the consumer. Proposed Sec.  1041.5(b) would 
require the lender to reasonably determine a dollar amount that is 
sufficiently large so that the consumer would likely be able to make 
the loan payments and meet basic living expenses without having to 
default on major financial obligations or having to rely on new 
consumer credit during the applicable period.
    Accordingly, the proposed definition of basic living expenses is a 
principle-based definition and does not provide a comprehensive list of 
the expenses for which a lender must account. Proposed comment 5(a)(1)-
1 provides illustrative examples of expenses that would be covered by 
the definition. It provides that food and utilities are examples of 
goods and services that are necessary for maintaining health and 
welfare, and that transportation to and from a place of employment and 
daycare for dependent children, if applicable, are examples of goods 
and services that are necessary for maintaining the ability to produce 
income.
    The Bureau recognizes that provision of a principle-based 
definition leaves some ambiguity about, for example, what types and 
amounts of goods and services are ``necessary'' for the stated 
purposes. Lenders would have flexibility in how they determine dollar 
amounts that meet the proposed definition, provided that they do not 
rely on amounts that are so low that they are not reasonable for 
consumers to pay for the types and level of expenses in the definition.
    The Bureau's proposed methodology also would not mandate 
verification or detailed analysis of every individual consumer 
expenditure. In contrast to major financial obligations (see below), a 
consumer's recent expenditures may not necessarily reflect the amounts 
a consumer needs for basic living expenses during the term of a 
prospective loan, and the Bureau is concerned that such a requirement 
could substantially increase costs for lenders and consumers while 
adding little protection for consumers.
    The Bureau solicits comment on its principle-based approach to 
defining basic living expenses, including whether limitation of the 
definition to ``necessary'' expenses is appropriate, and whether an 
alternative, more prescriptive approach would be preferable. For 
example, the Bureau solicits comment on whether the definition should 
include, rather than expenses of the types and in amounts that are 
``necessary'' for the purposes specified in the proposed definition, 
expenses of the types that are likely to recur through the term of the 
loan and in amounts below which a consumer cannot realistically reduce 
them. The Bureau also solicits comment on whether there are standards 
used in other contexts that could be relied upon by the Bureau. For 
example, the Bureau is aware that the Internal Revenue Service and 
bankruptcy courts have their own respective standards for calculating 
amounts an individual needs for expenses while making payments toward a 
delinquent tax liability or under a bankruptcy-related repayment plan.
5(a)(2) Major Financial Obligations
    Proposed Sec.  1041.5(a)(2) would define the major financial 
obligations component of the ability-to-repay determination specified 
in proposed Sec.  1041.5(b). Proposed Sec.  1041.5(b) would generally 
require a lender to determine that a consumer will have sufficient 
residual income, which is net income after subtracting amounts already 
committed for making payments for major financial obligations, to make 
payments under a prospective covered short term loan and to meet basic 
living expenses. Payments for major financial obligations would be 
subject to the consumer statement and verification

[[Page 47944]]

evidence provisions under proposed Sec.  1041.5(c)(3).
    Specifically, proposed Sec.  1041.5(a)(2) would define the term to 
mean a consumer's housing expense, minimum payments and any delinquent 
amounts due under debt obligations (including outstanding covered 
loans), and court- or government agency-ordered child support 
obligations. Comment 5(a)(2)-1 would further clarify that housing 
expense includes the total periodic amount that the consumer applying 
for the loan is responsible for paying, such as the amount the consumer 
owes to a landlord for rent or to a creditor for a mortgage. It would 
provide that minimum payments under debt obligations include periodic 
payments for automobile loan payments, student loan payments, other 
covered loan payments, and minimum required credit card payments.
    Expenses that the Bureau has included in the proposed definition 
are expenses that are typically recurring, that can be significant in 
the amount of a consumer's income that they consume, and that a 
consumer has little or no ability to change, reduce or eliminate in the 
short run, relative to their levels up until application for a covered 
short-term loan. The Bureau believes that the extent to which a 
particular consumer's net income is already committed to making such 
payments is highly relevant to determining whether that consumer has 
the ability to make payments under a prospective covered short-term 
loan. As a result, the Bureau believes that a lender should be required 
to inquire about such payments, that they should be subject to 
verification for accuracy and completeness to the extent feasible, and 
that a lender should not be permitted to rely on consumer income 
already committed to such payments in determining a consumer's ability 
to repay. Expenses included in the proposed definition are roughly 
analogous to those included in total monthly debt obligations for 
calculating monthly debt-to-income ratio and monthly residual income 
under the Bureau's ability-to-repay requirements for certain 
residential mortgage loans. (See 12 CFR 1026.43(c)(7)(i)(A).)
    The Bureau has adjusted its approach to major financial obligations 
based on feedback from SERs and other industry stakeholders on the 
Small Business Review Panel Outline. In the SBREFA process, the Bureau 
stated that it was considering including within the category of major 
financial obligations ``other legally required payments,'' such as 
alimony, and that the Bureau had considered an alternative approach 
that would have included utility payments and regular medical expenses. 
However, the Bureau now believes that it would be unduly burdensome to 
require lenders to make individualized projections of a consumer's 
utility or medical expenses. With respect to alimony, the Bureau 
believes that relatively few consumers seeking covered loans have 
readily verifiable alimony obligations and that, accordingly, inquiring 
about alimony obligations would impose unnecessary burden. The Bureau 
also is not including a category of ``other legally required payments'' 
because the Bureau believes that category, which was included in the 
Small Business Review Panel Outline, would leave too much ambiguity 
about what other payments are covered. For further discussion of burden 
on small businesses associated with verification requirements, see the 
section-by-section analysis of proposed Sec.  1041.5(c)(3), below.
    The Bureau invites comment on whether the items included in the 
proposed definition of major financial obligations are appropriate, 
whether other items should be included and, if so, whether and how the 
items should be subject to verification. For example, the Bureau 
invites comment on whether there are other obligations that are 
typically recurring, significant, and not changeable by the consumer, 
such as, for example, alimony, daycare commitments, health insurance 
premiums (other than premiums deducted from a consumer's paycheck, 
which are already excluded from the proposed definition of net income), 
or unavoidable medical expenses. The Bureau likewise invites comment on 
whether there are types of payments to which a consumer may be 
contractually obligated, such as payments or portions of payments under 
contracts for telecommunication services, that a consumer is unable to 
reduce from their amounts as of consummation, such that the payments 
should be included in the definition of major financial obligations. 
The Bureau also invites comment on the inclusion in the proposed 
definition of delinquent amounts due, such as on the practicality of 
asking consumers about delinquent amounts due on major financial 
obligations, of comparing stated amounts to any delinquent amounts that 
may be included in verification evidence (e.g., in a national consumer 
report), and of accounting for such amounts in projecting a consumer's 
residual income during the term of the prospective loan. The Bureau 
also invites comment on whether the Bureau should specify additional 
rules for addressing major financial obligations that are joint 
obligations of a consumer applying for a covered short-term loan (and 
of a consumer who is not applying for the loan), or whether the 
provision in proposed Sec.  1041.5(c)(1) allowing lenders to consider 
consumer explanations and other evidence is sufficient.
5(a)(3) National Consumer Report
    Proposed Sec.  1041.5(a)(3) would define national consumer report 
to mean a consumer report, as defined in section 603(d) of the Fair 
Credit Reporting Act (FCRA), 15 U.S.C. 1681a(d), obtained from a 
consumer reporting agency that compiles and maintains files on 
consumers on a nationwide basis, as defined in section 603(p) of the 
Fair Credit Reporting Act, 15 U.S.C. 1681a(p). Proposed Sec.  
1041.5(c)(3)(ii) would require a lender to obtain a national consumer 
report as verification evidence for a consumer's required payments 
under debt obligations and required payments under court- or government 
agency-ordered child support obligations. Reports that meet the 
proposed definition are often referred to informally as a credit report 
or credit history from one of the three major credit reporting agencies 
or bureaus. A national consumer report may be furnished to a lender 
from a consumer reporting agency that is not a nationwide consumer 
reporting agency, such as a consumer reporting agency that is a 
reseller.
5(a)(4) Net Income
    Proposed Sec.  1041.5(a)(4) would define the net income component 
of the ability-to-repay determination calculation specified in proposed 
Sec.  1041.5(b). Specifically, it would define the term as the total 
amount that a consumer receives after the payer deducts amounts for 
taxes, other obligations, and voluntary contributions that the consumer 
has directed the payer to deduct, but before deductions of any amounts 
for payments under a prospective covered short term loan or for any 
major financial obligation. Proposed Sec.  1041.5(b) would generally 
require a lender to determine that a consumer will have sufficient 
residual income to make payments under a prospective covered short-term 
loan and to meet basic living expenses. Proposed Sec.  1041.5(a)(6), 
discussed below, would define residual income as the sum of net income 
that the lender projects the consumer will receive during a period, 
minus the sum of amounts that the lender projects will be payable by 
the consumer for major financial obligations during the period. Net 
income would be

[[Page 47945]]

subject to the consumer statement and verification evidence provisions 
under proposed Sec.  1041.5(c)(3).
    The proposed definition is similar to what is commonly referred to 
as ``take-home pay'' but is phrased broadly to apply to income received 
from employment, government benefits, or other sources. It would 
exclude virtually all amounts deducted by the payer of the income, 
whether deductions are required or voluntary, such as voluntary 
insurance premiums or union dues. The Bureau believes that the total 
dollar amount that a consumer actually receives after all such 
deductions is the amount that is most instructive in determining a 
consumer's ability to repay. Certain deductions (e.g., taxes) are 
beyond the consumer's control. Other deductions may not be revocable, 
at least for a significant period of time, as a result of contractual 
obligations to which the consumer has entered. Even with respect to 
purely voluntary deductions, most consumers are unlikely to be able to 
reduce or eliminate such deductions, between consummation of a loan and 
the time when payments under the loan would fall due. The Bureau also 
believes that the net amount a consumer actually receives after all 
such deductions is likely to be the amount most readily known to 
consumers applying for a covered short-term loan (rather than, for 
example, periodic gross income) and is also the amount that is most 
readily verifiable by lenders through a variety of methods. The 
proposed definition would clarify, however, that net income is 
calculated before deductions of any amounts for payments under a 
prospective covered short-term loan or for any major financial 
obligation. The Bureau proposes the clarification to prevent double 
counting any such amounts when making the ability-to-repay 
determination.
    The Bureau invites comment on the proposed definition of net income 
and whether further guidance would be helpful.
5(a)(5) Payment Under the Covered Short-Term Loan
    Proposed Sec.  1041.5(a)(5) would define payment under the covered 
short-term loan, which is a component of the ability-to-repay 
determination calculation specified in proposed Sec.  1041.5(b). 
Proposed Sec.  1041.5(b) would generally require a lender to determine 
that a consumer will have sufficient residual income to make payments 
under a covered short-term loan and to meet basic living expenses. 
Specifically, the definition of payment under the covered short-term 
loan in proposed Sec.  1041.5(a)(5)(i) and (ii) would include all costs 
payable by the consumer at a particular time after consummation, 
regardless of how the costs are described in an agreement or whether 
they are payable to the lender or a third party. Proposed Sec.  
1041.5(a)(5)(iii) provides special rules for projecting payments under 
the covered short-term loan on lines of credit for purposes of the 
ability to repay test, since actual payments for lines of credit may 
vary depending on usage.
    Proposed Sec.  1041.5(a)(5)(i) would apply to all covered short-
term loans. It would define payment under the covered short-term loan 
broadly to mean the combined dollar amount payable by the consumer in 
connection with the covered short-term loan at a particular time 
following consummation. Under proposed Sec.  1041.5(b), the lender 
would be required to reasonably determine the payment amount under this 
proposed definition as of the time of consummation. The proposed 
definition would further provide that, for short-term loans with 
multiple payments, in calculating each payment under the covered loan, 
the lender must assume that the consumer has made preceding required 
payments and that the consumer has not taken any affirmative act to 
extend or restructure the repayment schedule or to suspend, cancel, or 
delay payment for any product, service, or membership provided in 
connection with the covered loan. Proposed Sec.  1041.5(a)(5)(ii) would 
similarly apply to all covered short-term loans and would clarify that 
payment under the covered loan includes all principal, interest, 
charges, and fees.
    The Bureau believes that a broad definition, such as the one 
proposed, is necessary to capture the full dollar amount payable by the 
consumer in connection with the covered short-term loan, including 
amounts for voluntary insurance or memberships and regardless of 
whether amounts are due to the lender or another person. It is the 
total dollar amount due at each particular time that is relevant to 
determining whether or not a consumer has the ability to repay the loan 
based on the consumer's projected net income and payments for major 
financial obligations. The amount of the payment is what is important, 
not whether the components of the payment include principal, interest, 
fees, insurance premiums, or other charges. The Bureau recognizes, 
however, that under the terms of some covered short-term loans, a 
consumer may have options regarding how much the consumer must pay at 
any given time and that the consumer may in some cases be able to 
select a different payment option. The proposed definition would 
include any amount payable by a consumer in the absence of any 
affirmative act by the consumer to extend or restructure the repayment 
schedule, or to suspend, cancel, or delay payment for any product, 
service, or membership provided in connection with the covered short-
term loan. Proposed comment 5(a)(5)(i) and 5(a)(5)(ii)-1 includes three 
examples applying the proposed definition to scenarios in which the 
payment under the covered short-term loan includes several components, 
including voluntary fees owed to a person other than the lender, as 
well as scenarios in which the consumer has the option of making 
different payment amounts.
    Proposed Sec.  1041.5(a)(5)(iii) would include additional 
provisions for calculating the projected payment amount under a covered 
line of credit for purposes of assessing a consumer's ability to repay 
the loan. As explained in proposed comment 5(a)(5)(iii)-1, such rules 
are necessary because the amount and timing of the consumer's actual 
payments on a line of credit after consummation may depend on the 
consumer's utilization of the credit (i.e., the amount the consumer has 
drawn down) or on amounts that the consumer has repaid prior to the 
payments in question. As a result, if the definition of payment under 
the covered short-term loan did not specify assumptions about consumer 
utilization and repayment under a line of credit, there would be 
uncertainty as to the amounts and timing of payments to which the 
ability-to-repay requirement applies. Proposed Sec.  1041.5(a)(5)(iii) 
therefore would prescribe assumptions that a lender must make in 
calculating the payment under the covered short-term loan. It would 
require the lender to assume that the consumer will utilize the full 
amount of credit under the covered loan as soon as the credit is 
available to the consumer and that the consumer will make only minimum 
required payments under the covered loan. The lender would then apply 
the ability-to-repay determination to that assumed repayment schedule.
    The Bureau believes these assumptions about a consumer's 
utilization and repayment are important to ensure that the lender makes 
its ability-to-repay determination based on the most challenging loan 
payment that a consumer may face under the covered loan. They also 
reflect what the Bureau believes to be the likely borrowing and 
repayment behavior of many consumers who obtain covered loans with a 
line of credit. Such consumers are typically

[[Page 47946]]

facing an immediate liquidity need and, in light of the relatively high 
cost of credit, would normally seek a line of credit approximating the 
amount of the need. Assuming the lender does not provide a line of 
credit well in excess of the consumer's need, the consumer is then 
likely to draw down the full amount of the line of credit shortly after 
consummation. Liquidity-constrained consumers may make only minimum 
required payments under a line of credit and, if the terms of the 
covered loan provide for an end date, may then face having to repay the 
outstanding balance in one payment at a time specified under the terms 
of the covered short-term loan. It is such a payment that is likely to 
be the highest payment possible under the terms of the covered short-
term loan and therefore the payment for which a consumer is least 
likely to have the ability to repay.
    The Bureau invites comment on the proposed definition of payment 
under the covered short-term loan. Specifically, the Bureau invites 
comment on whether the provisions of proposed Sec.  1041.5(a)(5) are 
sufficiently comprehensive and clear to allow for determination of 
payment amounts under covered short-term loans, especially for lines of 
credit.
5(a)(6) Residual Income
    Proposed Sec.  1041.5(a)(6) would define the residual income 
component of the ability-to-repay determination calculation specified 
in proposed Sec.  1041.5(b). Specifically, it would define the term as 
the sum of net income that the lender projects the consumer obligated 
under the loan will receive during a period, minus the sum of amounts 
that the lender projects will be payable by the consumer for major 
financial obligations during the period, all of which projected amounts 
must be based on verification evidence, as provided under proposed 
Sec.  1041.5(c). Proposed Sec.  1041.5(b) would generally require a 
lender to determine that a consumer will have sufficient residual 
income to make payments under a covered short-term loan and to meet 
basic living expenses.
    The proposed definition would ensure that a lender's ability-to-
repay determination cannot rely on the amount of a consumer's net 
income that, as of the time a prospective loan would be consummated, is 
already committed to pay for major financial obligations during the 
applicable period. For example, a consumer's net income may be greater 
than the amount of a loan payment, so that the lender successfully 
obtains the loan payment from a consumer's deposit account once the 
consumer's income is deposited into the account. But if the consumer is 
then left with insufficient funds to make payments for major financial 
obligations, such as a rent payment, then the consumer may be forced to 
choose between failing to pay rent when due, forgoing basic needs, or 
reborrowing.
5(b) Reasonable Determination Required
    Proposed Sec.  1041.5(b) would prohibit lenders from making covered 
short-term loans without first making a reasonable determination that 
the consumer will have the ability to repay the loan according to its 
terms, unless the loans are made in accordance with proposed Sec.  
1041.7. Specifically, proposed Sec.  1041.5(b)(1) would require lenders 
to make a reasonable determination of ability to repay before making a 
new covered short-term loan, increasing the credit available under an 
existing loan, or before advancing additional credit under a covered 
line of credit if more than 180 days have expired since the last such 
determination. Proposed Sec.  1041.5(b)(2) specifies minimum elements 
of a baseline methodology that would be required for determining a 
consumer's ability to repay, using a residual income analysis and an 
assessment of the consumer's prior borrowing history. It would require 
the assessment to be based on projections of the consumer's net income, 
major financial obligations, and basic living expenses that are made in 
accordance with proposed Sec.  1041.5(c). It would require that, using 
such projections, the lender must reasonably conclude that the 
consumer's residual income will be sufficient for the consumer to make 
all payments under the loan and still meet basic living expenses during 
the term of the loan. It would further require that a lender must 
conclude that the consumer, after making the highest payment under the 
loan (typically, the last payment), will continue to be able to meet 
major financial obligations as they fall due and meet basic living 
expenses for a period of 30 additional days. Finally, proposed Sec.  
1041.5(b)(2) would require that, in situations in which the consumer's 
recent borrowing history suggests that she may have difficulty repaying 
a new loan as specified in proposed Sec.  1041.6, a lender must satisfy 
the requirements in proposed Sec.  1041.6 before extending credit.
5(b)(1)
    Proposed Sec.  1041.5(b)(1) would provide generally that, except as 
provided in Sec.  1041.7, a lender must not make a covered short-term 
loan or increase the credit available under a covered short-term loan 
unless the lender first makes a reasonable determination of ability to 
repay for the covered short-term loan. The provision would also impose 
a requirement to determine a consumer's ability to repay before 
advancing additional funds under a covered short-term loan that is a 
line of credit if such advance would occur more than 180 days after the 
date of a previous required determination.
    Proposed Sec.  1041.5(b)(1)(i) would provide that a lender is not 
required to make the determination when it makes a covered short-term 
loan under the conditions set forth in Sec.  1041.7. The conditions 
that apply under Sec.  1041.7 provide alternative protections from the 
harms caused by covered short-term loan payments that exceed a 
consumer's ability to repay, such that the Bureau is proposing to allow 
lenders to make such loans in accordance with the regulation without 
engaging in an ability-to-repay determination under Sec. Sec.  1041.5 
and 1041.6. (See the discussions of Sec.  1041.7, below.)
    The Bureau notes that proposed Sec.  1041.5(b)(1) would require the 
ability-to-repay determination before a lender actually takes one of 
the triggering actions. The Bureau recognizes that lenders decline 
covered loan applications for a variety of reasons, including to 
prevent fraud, avoid possible losses, and to comply with State law or 
other regulatory requirements. Accordingly, the requirements of Sec.  
1041.5(b)(1) would not require a lender to make the ability-to-repay 
determination for every covered short-term loan application it 
receives, but rather only before taking one of the enumerated actions 
with respect to a covered short-term loan. Similarly, nothing in 
proposed Sec.  1041.5(b)(1) would prohibit a lender from applying 
screening or underwriting approaches in addition to those required 
under proposed Sec.  1041.5(b) prior to making a covered short-term 
loan.
    Proposed Sec.  1041.5(b)(1)(ii) would provide that, for a covered 
short-term loan that is a line of credit, a lender must not permit a 
consumer to obtain an advance under the line of credit more than 180 
days after the date of a prior required determination, unless the 
lender first makes a new reasonable determination that the consumer 
will have the ability to repay the covered short-term loan. Under a 
line of credit, a consumer typically can obtain advances up to the 
maximum available credit at the consumer's discretion, often long after 
the covered loan was

[[Page 47947]]

consummated. Each time the consumer obtains an advance under a line of 
credit, the consumer becomes obligated to make a new payment or series 
of payments based on the terms of the covered loan. But when 
significant time has elapsed since the date of a lender's prior 
required determination, the facts on which the lender relied in 
determining the consumer's ability to repay may have changed 
significantly. During the Bureau's outreach to industry, the Small 
Dollar Roundtable urged the Bureau to require a lender to periodically 
make a new reasonable determination of ability to repay in connection 
with a covered loan that is a line of credit. The Bureau believes that 
the proposed requirement to make a new determination of ability to 
repay for a line of credit 180 days following a prior required 
determination appropriately balances the burden on lenders and the 
protective benefit for consumers.
Reasonable Determination
    Proposed Sec.  1041.5(b) would require a lender to make a 
reasonable determination that a consumer will be able to repay a 
covered short-term loan according to its terms. As discussed above and 
as reflected in the provisions of proposed Sec.  1041.5(b), a consumer 
has the ability to repay a covered short-term loan according to its 
terms only if the consumer is able to make all payments under the 
covered loan as they fall due while also making payments under the 
consumer's major financial obligations as they fall due and continuing 
to meet basic living expenses without, as a result of making payments 
under the covered loan, having to reborrow.
    Proposed comment 5(b)-1 provides an overview of the baseline 
methodology that would be required as part of a reasonable 
determination of a consumer's ability to repay in proposed Sec. Sec.  
1041.5(b)(2) and (c) and 1041.6.
    Proposed comment 5(b)-2 would identify standards for evaluating 
whether a lender's ability-to-repay determinations under proposed Sec.  
1041.5 are reasonable. It would clarify minimum requirements of a 
reasonable ability-to-repay determination; identify assumptions that, 
if relied upon by the lender, render a determination not reasonable; 
and establish that the overall performance of a lender's covered short-
term loans is evidence of whether the lender's determinations for those 
covered loans are reasonable.
    The proposed standards would not impose bright line rules 
prohibiting covered short-term loans based on fixed mathematical ratios 
or similar distinctions. Moreover, the Bureau does not anticipate that 
a lender would need to perform a manual analysis of each prospective 
loan to determine whether it meets all of the proposed standards. 
Instead, each lender would be required under proposed Sec.  1041.18 to 
develop and implement policies and procedures for approving and making 
covered loans in compliance with the proposed standards and based on 
the types of covered loans that the lender makes. A lender would then 
apply its own policies and procedures to its underwriting decisions, 
which the Bureau anticipates could be largely automated for the 
majority of consumers and covered loans.
    Minimum requirements. Proposed comment 5(b)-2.i would describe some 
of the specific respects in which a lender's determination must be 
reasonable. For example, it would note that the determination must 
include the applicable determinations provided in proposed Sec.  
1041.5(b)(2), be based on reasonable projections of a consumer's net 
income and major financial obligations in accordance with proposed 
Sec.  1041.5(c), be based on reasonable estimates of a consumer's basic 
living expenses under proposed Sec.  1041.5(b), and appropriately 
account for the possibility of volatility in a consumer's income and 
basic living expenses during the term of the loan under proposed Sec.  
1041.5(b)(2)(i). It would also have to be consistent with the lender's 
written policies and procedures required under proposed Sec.  
1041.18(b).
    Proposed comment 5(b)-2.i would also provide that to be reasonable, 
a lender's ability-to-repay determination must be grounded in 
reasonable inferences and conclusions in light of information the 
lender is required to obtain or consider. As discussed above, each 
lender would be required under proposed Sec.  1041.18 to develop 
policies and procedures for approving and making covered loans in 
compliance with the proposal. The policies and procedures would specify 
the conclusions that the lender makes based on information it obtains, 
and lenders would then be able to largely automate application of those 
policies and procedures for most consumers. For example, proposed Sec.  
1041.5(c) would require a lender to obtain verification evidence for a 
consumer's net income and payments for major financial obligations, but 
it would provide for lender discretion in resolving any ambiguities in 
the verification evidence to project what the consumer's net income and 
payments for major financial obligations will be following consummation 
of the covered short-term loan.
    Finally, proposed comment 5(b)-2.i would provide that for a 
lender's ability-to-repay determination to be reasonable, the lender 
must appropriately account for information known by the lender, whether 
or not the lender is required to obtain the information under proposed 
Sec.  1041.5, that indicates that the consumer may not have the ability 
to repay a covered short-term loan according to its terms. The 
provision would not require a lender to obtain information other than 
information specified in proposed Sec.  1041.5. However, a lender might 
become aware of information that casts doubt on whether a particular 
consumer would have the ability to repay a particular prospective 
covered short-term loan. For example, proposed Sec.  1041.5 would not 
require a lender to inquire about a consumer's individual 
transportation or medical expenses, and the lender's ability-to-repay 
method might comply with the proposed requirement to estimate 
consumers' basic living expenses by factoring into the estimate of 
basic living expenses a normal allowance for expenses of this type. But 
if the lender learned that a particular consumer had a transportation 
or recurring medical expense dramatically in excess of an amount the 
lender used in estimating basic living expenses for consumers 
generally, proposed comment 5(b)-2.i would clarify that the lender 
could not simply ignore that fact. Instead, it would have to consider 
the transportation or medical expense and then reach a reasonable 
determination that the expense does not negate the lender's otherwise 
reasonable ability-to-repay determination.
    Similarly, in reviewing borrowing history records a lender might 
learn that the consumer completed a three-loan sequence of covered 
short-term loans made either under proposed Sec. Sec.  1041.5 and 
1041.6 or under proposed Sec.  1041.7, waited for 30 days before 
seeking to reborrow as required by proposed Sec.  1041.6 or proposed 
Sec.  1041.7 and then sought to borrow on the first permissible day 
under those sections, and that this has been a recurring pattern for 
the consumer in the past. While the fact that the consumer on more than 
one occasion has sought a loan on the first possible day that the 
consumer is free to do so may be attributable to new needs that arose 
following the conclusion of each prior sequence, an alternative--and 
perhaps more likely explanation--is that the consumer's consistent need 
to borrow as soon as possible is attributable to spillover effects from 
having repaid the last loan sequence. In these circumstances, a 
lender's decision

[[Page 47948]]

that the consumer has the ability to repay a new loan of the same 
amount and on the same terms as the prior loans might not be reasonable 
if the lender did not take into account these circumstances.
    The Bureau invites comments on the minimum requirements for making 
a reasonable determination of ability to repay, including whether 
additional specificity should be provided in the regulation text or in 
the commentary with respect to circumstances in which a lender is 
required to take into account information known by the lender.
    Determinations that are not reasonable. Proposed comment 5(b)-2.ii 
would provide an example of an ability-to-repay determination that is 
not reasonable. The example is a determination that relies on an 
assumption that the consumer will obtain additional consumer credit to 
be able to make payments under the covered short-term loan, to make 
payments under major financial obligations, or to meet basic living 
expenses. The Bureau believes that a consumer whose net income would be 
sufficient to make payments under a prospective covered short-term 
loan, to make payments under major financial obligations, and to meet 
basic living expenses during the applicable period only if the consumer 
supplements that net income by borrowing additional consumer credit is 
a consumer who, by definition, lacks the ability to repay the 
prospective covered short-term loan. Although the Bureau believes this 
reasoning is clear, it is proposing the commentary example because some 
lenders have argued that the mere fact that a lender successfully 
secures repayment of the full amount due from a consumer's deposit 
account shows that the consumer had the ability to repay the loan, even 
if the consumer then immediately has to reborrow to meet the consumer's 
other obligations and expenses. Inclusion of the example in commentary 
would confirm that an ability-to-repay determination is not reasonable 
if it relies on an implicit assumption that a consumer will have the 
ability to repay a covered short-term loan for the reason that the 
consumer will obtain further consumer credit to make payments under 
major financial obligations or to meet basic living expenses.
    The Bureau invites comment on whether it would be useful to 
articulate additional specific examples of ability-to-repay 
determinations that are not reasonable, and if so which specific 
examples should be listed. In this regard, the Bureau has considered 
whether there are any circumstances under which basing an ability-to-
repay determination for a covered short-term loan on assumed future 
borrowing or assumed future accumulation of savings would be 
reasonable, particularly in light of the nature of consumer 
circumstances when they take out such loans. The Bureau seeks comment 
on this question.
    Performance of a lender's short-term covered loans as evidence. In 
determining whether a lender has complied with the requirements of 
proposed Sec.  1041.5, there is a threshold question of whether the 
lender has carried out the required procedural steps, for example by 
obtaining consumer statements and verification evidence, projecting net 
income and payments under major financial obligations, and making 
determinations about the sufficiency of a consumer's residual income. 
In some cases, a lender might have carried out these steps but still 
have violated Sec.  1041.5 by making determinations that are facially 
unreasonable, such as if a lender's determinations assume that a 
consumer needs amounts to meet basic living expenses that are clearly 
insufficient for that purpose.
    In other cases the reasonableness or unreasonableness of a lender's 
determinations might be less clear. Accordingly, proposed comment 5(b)-
2.iii would provide that evidence of whether a lender's determinations 
of ability to repay are reasonable may include the extent to which the 
lender's determinations subject to proposed Sec.  1041.5 result in 
rates of delinquency, default, and reborrowing for covered short-term 
loans that are low, equal to, or high, including in comparison to the 
rates of other lenders making similar covered loans to similarly 
situated consumers.
    As discussed above, the Bureau recognizes that the affordability of 
loan payments is not the only factor that affects whether a consumer 
repays a covered loan according to its terms without reborrowing. A 
particular consumer may obtain a covered loan with payments that are 
within the consumer's ability to repay at the time of consummation, but 
factors such as the consumer's continual opportunity to work, 
willingness to repay, and financial management may affect the 
performance of that consumer's loan. Similarly, a particular consumer 
may obtain a covered loan with payments that exceed the consumer's 
ability to repay at the time of consummation, but factors such as a 
lender's use of a leveraged payment mechanism, taking of vehicle 
security, and collection tactics, as well as the consumer's ability to 
access informal credit from friends or relatives, might result in 
repayment of the loan without indicia of harm that are visible through 
observations of loan performance and reborrowing. However, if a 
lender's determinations subject to proposed Sec.  1041.5 regularly 
result in rates of delinquency, default, or reborrowing that are 
significantly higher than those of other lenders making similar short-
term covered loans to similarly situated consumers, that fact is 
evidence that the lender may be systematically underestimating amounts 
that consumers generally need for basic living expenses, or is in some 
other way overestimating consumers' ability to repay.
    Proposed comment 5(b)-2.iii would not mean that a lender's 
compliance with the requirements of proposed Sec.  1041.5 for a 
particular loan could be determined based on the performance of that 
loan. Nor would proposed comment 5(b)-2.iii mean that comparison of the 
performance of a lender's covered short-term loans with the performance 
of covered short-term loans of other lenders could be the sole basis 
for determining whether that lender's determinations of ability to 
repay comply or do not comply with the requirements of proposed Sec.  
1041.5. For example, one lender may have default rates that are much 
lower than the default rates of other lenders because it uses 
aggressive collection tactics, not because its determinations of 
ability to repay are reasonable. Similarly, the fact that one lender's 
default rates are similar to the default rates of other lenders does 
not necessarily indicate that the lenders' determinations of ability to 
repay are reasonable; the similar rates could also result from the fact 
that the lenders' respective determinations of ability to repay are 
similarly unreasonable. The Bureau believes, however, that such 
comparisons will provide important evidence that, considered along with 
other evidence, would facilitate evaluation of whether a lender's 
ability-to-repay determinations are reasonable.
    For example, a lender may use estimates for a consumer's basic 
living expenses that initially appear unrealistically low, but if the 
lender's determinations otherwise comply with the requirements of 
proposed Sec.  1041.5 and otherwise result in covered short-term loan 
performance that is materially better than that of peer lenders, the 
covered short-term loan performance may help show that the lender's 
determinations are reasonable. Similarly, an online lender might 
experience default rates significantly in excess of those of peer 
lenders, but other

[[Page 47949]]

evidence may show that the lender followed policies and procedures 
similar to those used by other lenders and that the high default rate 
resulted from a high number of fraudulent applications. On the other 
hand, if consumers experience systematically worse rates of 
delinquency, default, and reborrowing on covered short-term loans made 
by lender A, compared to the rates of other lenders making similar 
loans, that fact may be important evidence of whether that lender's 
estimates of basic living expenses are, in fact, unrealistically low 
and therefore whether the lender's ability-to-repay determinations are 
reasonable.
    The Bureau invites comment on whether and, if so, how the 
performance of a lender's portfolio of covered short-term loans should 
be factored in to an assessment of whether the lender has complied with 
its obligations under the rule, including whether the Bureau should 
specify thresholds which presumptively or conclusively establish 
compliance or non-compliance and, if so, how such thresholds should be 
determined.
Payments Under the Covered Short-Term Loan
    Proposed comment 5(b)-3 notes that a lender is responsible for 
calculating the timing and amount of all payments under the covered 
short-term loan. The timing and amount of all loan payments under the 
covered short-term loan are an essential component of the required 
reasonable determination of a consumer's ability to repay under 
proposed Sec.  1041.5(b)(2)(i), (ii), and (iii). Calculation of the 
timing and amount of all payments under a covered loan is also 
necessary to determine which component determinations under proposed 
Sec.  1041.5(b)(2)(i), (ii), and (iii) apply to a particular 
prospective covered loan. Proposed comment 5(b)-3 cross references the 
definition of payment under a covered short-term loan in proposed Sec.  
1041.5(a)(5), which includes requirements and assumptions that apply to 
a lender's calculation of the amount and timing of all payments under a 
covered short-term loan.
Basic Living Expenses
    A lender's ability-to-repay determination under proposed Sec.  
1041.5(b) would be required to account for a consumer's need to meet 
basic living expenses during the applicable period while also making 
payments for major financial obligations and payments under a covered 
short-term loan. As discussed above, proposed Sec.  1041.5(a)(1) would 
define basic living expenses as expenditures, other than payments for 
major financial obligations, that the consumer must make for goods and 
services that are necessary to maintain the consumer's health, welfare, 
and ability to produce income, and the health and welfare of members of 
the consumer's household who are financially dependent on the consumer. 
If a lender's ability-to-repay determination did not account for a 
consumer's need to meet basic living expenses, and instead merely 
determined that a consumer's net income is sufficient to make payments 
for major financial obligations and for the covered short-term loan, 
the determination would greatly overestimate a consumer's ability to 
repay a covered short-term loan and would be unreasonable. Doing so 
would be the equivalent of determining, under the Bureau's ability-to-
repay rule for residential mortgage loans, that a consumer has the 
ability to repay a mortgage from income even if that mortgage would 
result in a debt-to-income ratio of 100 percent. The Bureau believes 
there would be nearly universal consensus that such a determination 
would be unreasonable.
    However, the Bureau recognizes that in contrast with payments under 
most major financial obligations, which the Bureau believes a lender 
can usually ascertain and verify for each consumer without unreasonable 
burden, it would be extremely challenging to determine a complete and 
accurate itemization of each consumer's basic living expenses. 
Moreover, a consumer may have somewhat greater ability to reduce in the 
short-run some expenditures that do not meet the Bureau's proposed 
definition of major financial obligations. For example, a consumer may 
be able for a period of time to reduce commuting expenses by ride 
sharing.
    Accordingly, the Bureau is not proposing to prescribe a particular 
method that a lender would be required to use for estimating an amount 
of funds that a consumer requires to meet basic living expenses for an 
applicable period. Instead, proposed comment 5(b)-4 would provide the 
principle that whether a lender's method complies with the proposed 
Sec.  1041.5 requirement for a lender to make a reasonable ability-to-
repay determination depends on whether it is reasonably designed to 
determine whether a consumer would likely be able to make the loan 
payments and meet basic living expenses without defaulting on major 
financial obligations or having to rely on new consumer credit during 
the applicable period.
    Proposed comment 5(b)-4 would provide a non-exhaustive list of 
methods that may be reasonable ways to estimate basic living expenses. 
The first method is to set minimum percentages of income or dollar 
amounts based on a statistically valid survey of expenses of similarly 
situated consumers, taking into consideration the consumer's income, 
location, and household size. This example is based on a method that 
several lenders have told the Bureau they currently use in determining 
whether a consumer will have the ability to repay a loan and is 
consistent with the recommendations of the Small Dollar Roundtable. The 
Bureau notes that the Bureau of Labor Statistics conducts a periodic 
survey of consumer expenditures which may be useful for this purpose. 
The Bureau invites comment on whether the example should identify 
consideration of a consumer's income, location, and household size as 
an important aspect of the method.
    The second method is to obtain additional reliable information 
about a consumer's expenses other than the information required to be 
obtained under proposed Sec.  1041.5(c), to develop a reasonably 
accurate estimate of a consumer's basic living expenses. The example 
would not mean that a lender is required to obtain this information but 
would clarify that doing so may be one effective method of estimating a 
consumer's basic living expenses. The method described in the second 
example may be more convenient for smaller lenders or lenders with no 
experience working with statistically valid surveys of consumer 
expenses, as described in the first example.
    The third example is any method that reliably predicts basic living 
expenses. The Bureau is proposing to include this broadly phrased 
example to clarify that lenders may use innovative and data-driven 
methods that reliably estimate consumers' basic living expenses, even 
if the methods are not as intuitive as the methods in the first two 
examples. The Bureau would expect to evaluate the reliability of such 
methods by taking into account the performance of the lender's covered 
short-term loans in absolute terms and relative to other lenders, as 
discussed in proposed comment 5(b)-3.iii.
    Proposed comment 5(b)-4 would provide a non-exhaustive list of 
unreasonable methods of determining basic living expenses. The first 
example is a method that assumes that a consumer needs no or 
implausibly low amounts of funds to meet basic living expenses during 
the applicable period and that, accordingly, substantially all of a 
consumer's net income that is not required for payments for major

[[Page 47950]]

financial obligations is available for loan payments. The second 
example is a method of setting minimum percentages of income or dollar 
amounts that, when used in ability-to-repay determinations for covered 
short-term loans, have yielded high rates of default and reborrowing, 
in absolute terms or relative to rates of default and reborrowing of 
other lenders making covered short-term loans to similarly situated 
consumers.
    The Bureau solicits comment on all aspects of the proposed 
requirements for estimating basic living expenses, including the 
methods identified as reasonable or unreasonable, whether additional 
methods should be specified, or whether the Bureau should provide 
either a more prescriptive method for estimating basic living expenses 
or a safe harbor methodology (and, if so, what that methodology should 
be). The Bureau also solicits comment on whether lenders should be 
required to ask consumers to identify, on a written questionnaire that 
lists common types of basic living expenses, how much they typically 
spend on each type of expense. The Bureau further solicits comment on 
whether and how lenders should be required to verify the completeness 
and correctness of the amounts the consumer lists and how a lender 
should be required to determine how much of the identified or verified 
expenditures is necessary or, under the alternative approach to 
defining basic living expenses discussed above, is recurring and not 
realistically reducible during the term of the prospective loan.
5(b)(2)
    Proposed Sec.  1041.5(b)(2) would set forth the Bureau's specific 
proposed methodology for making a reasonable determination of a 
consumer's ability to pay a covered short-term loan. Specifically, it 
would provide that a lender's determination of a consumer's ability to 
repay is reasonable only if, based on projections in accordance with 
proposed Sec.  1041.5(c), the lender reasonably makes the applicable 
determinations provided in proposed Sec. Sec.  1041.5(b)(2)(i), (ii), 
and (iii). Proposed Sec.  1041.5(b)(2)(i) would require an assessment 
of the sufficiency of the consumer's residual income during the term of 
the loan, and proposed Sec.  1041.5(b)(2)(ii) would require assessment 
of an additional period in light of the special harms associated with 
loans with short-term structures. Proposed Sec.  1041.5(b)(2)(iii) 
would require compliance with additional requirements in proposed Sec.  
1041.6 in situations in which the consumer's borrowing history suggests 
that he or she may have difficulty repaying additional credit.
5(b)(2)(i)
    Proposed Sec.  1041.5(b)(2)(i) would provide that for any covered 
short-term loan subject to the ability-to-repay requirement of proposed 
Sec.  1041.5, a lender must reasonably conclude that the consumer's 
residual income will be sufficient for the consumer to make all 
payments under the covered short-term loan and to meet basic living 
expenses during the term of covered short-term loan. As defined in 
proposed Sec.  1041.5(a)(6), residual income is the amount of a 
consumer's net income during a period that is not already committed to 
payments under major financial obligations during the period. If the 
payments for a covered short-term loan would consume so much of a 
consumer's residual income that the consumer would be unable to meet 
basic living expenses, then the consumer would likely suffer injury 
from default or reborrowing, or suffer collateral harms from 
unaffordable payments.
    In proposing Sec.  1041.5(b)(2)(i) the Bureau recognizes that, even 
when lenders determine at the time of consummation that consumers will 
have the ability to repay a covered short-term loan, some consumers may 
still face difficulty making payments under covered short-term loans 
because of changes that occur after consummation. For example, some 
consumers would experience unforeseen decreases in income or increases 
in expenses that would leave them unable to repay their loans. Thus, 
the fact that a consumer ended up in default is not, in and of itself, 
evidence that the lender failed to make a reasonable assessment of the 
consumer's ability to repay ex ante. Rather, proposed Sec.  
1041.5(b)(2)(i) looks to the facts as reasonably knowable prior to 
consummation and would mean that a lender is prohibited from making a 
covered short-term loan subject to proposed Sec.  1041.5 if there is 
not a reasonable basis at consummation for concluding that the consumer 
will be able to make payments under the covered loan while also meeting 
the consumer's major financial obligations and meeting basic living 
expenses.
    While some consumers may have so little (or no) residual income as 
to be unable to afford any loan, for other consumers the ability to 
repay will depend on the amount and timing of the required repayments. 
Thus, even if a lender concludes that there is not a reasonable basis 
for believing that a consumer can pay a particular prospective loan, 
proposed Sec.  1041.5(b)(2)(i) would not prevent a lender from making a 
different covered loan with more affordable payments to such a 
consumer, provided that the more affordable payments would not consume 
so much of a consumer's residual income that the consumer would be 
unable to meet basic living expenses and provided further that the 
alternative loan is consistent with applicable State law.
Applicable Period for Residual Income
    As discussed above, under proposed Sec.  1041.5(b)(2)(i) a lender 
must reasonably conclude that the consumer's residual income will be 
sufficient for the consumer to make all payments under the covered 
short-term loan and to meet basic living expenses during the term of 
the covered short-term loan. To provide greater certainty, facilitate 
compliance, and reduce burden, the Bureau is proposing a comment to 
explain how lenders could comply with proposed Sec.  1041.5(b)(2)(i).
    Proposed comment 5(b)(2)(i)-1 would provide that a lender complies 
with the requirement in Sec.  1041.5(b)(2)(i) if it reasonably 
determines that the consumer's projected residual income during the 
shorter of the term of the loan or the period ending 45 days after 
consummation of the loan will be greater than the sum of all payments 
under the covered short-term loan plus an amount the lender reasonably 
estimates will be needed for basic living expenses during the term of 
the covered short-term loan. The method of compliance would allow the 
lender to make one determination based on the sum of all payments that 
would be due during the term of the covered short-term loan, rather 
than having to make a separate determination for each respective 
payment and payment period in isolation, in cases where the short-term 
loan provide for multiple payments. However, the lender would have to 
make the determination for the actual term of the loan, accounting for 
residual income (i.e., net income minus payments for major financial 
obligations) that would actually accrue during the shorter of the term 
of the loan or the period ending 45 days after consummation of the 
loan.
    The Bureau believes that for a covered loan with short duration, a 
lender should make the determination based on net income the consumer 
will actually receive during the term of the loan and payments for 
major financial obligations that will actually be payable during the 
term of the covered short-term loan, rather than, for example, based on 
a monthly period that may or may not coincide with the loan term.

[[Page 47951]]

When a covered loan period is under 45 days, determining whether the 
consumer's residual income will be sufficient to make all payments and 
meet basic living expenses depends a great deal on, for example, how 
many paychecks the consumer will actually receive during the term of 
the loan and whether the consumer will also have to make no rent 
payment, one rent payment, or two rent payments during the term of the 
loan.
    The Bureau is proposing to clarify that the determination must be 
based on residual income ``during the shorter of the term of the loan 
or the period ending 45 days after consummation of the loan'' because 
the definition of a covered short-term loan includes a loan under which 
the consumer is required to repay ``substantially'' the entire amount 
of the loan within 45 days of consummation. The clarification would 
ensure that, if an unsubstantial amount were due after 45 days 
following consummation, the lender could not rely on residual income 
projected to accrue after the forty-fifth day to determine that the 
consumer would have sufficient residual income as required under 
proposed Sec.  1041.5(b)(2)(i). Proposed comment 5(b)(2)(i)-1.i 
includes an example applying the method of compliance to a covered 
short-term loan payable in one payment 16 days after the lender makes 
the covered short-term loan.
    The Bureau invites comment on its proposed applicable time period 
for assessing residual income.
Sufficiency of Residual Income
    As discussed above, under proposed Sec.  1041.5(b)(2)(i) a lender 
must reasonably conclude that the consumer's residual income will be 
sufficient for the consumer to make all payments under the covered 
short-term loan and to meet basic living expenses during the shorter of 
the term of the loan or the period ending 45 days after consummation of 
the loan. Proposed comment 5(b)(2)(i)-2 would clarify what constitutes 
``sufficient'' residual income for a covered short-term loan. For a 
covered short-term loans, comment 5(b)(2)(i)-2.i would provide that 
residual income is sufficient so long as it is greater than the sum of 
payments that would be due under the covered loan plus an amount the 
lender reasonably estimates will be needed for basic living expenses.
5(b)(2)(ii)
    Proposed Sec.  1041.5(b)(2)(ii) would provide that for a covered 
short-term loan subject to the ability-to-repay requirement of proposed 
Sec.  1041.5, a lender must reasonably conclude that the consumer will 
be able to make payments required for major financial obligations as 
they fall due, to make any remaining payments under the covered short-
term loan, and to meet basic living expenses for 30 days after having 
made the highest payment under the covered short-term loan on its due 
date. Proposed comment 5(b)(2)(ii)-1 notes that a lender must include 
in its determination under proposed Sec.  1041.5(b)(2)(ii) the amount 
and timing of net income that it projects the consumer will receive 
during the 30-day period following the highest payment, in accordance 
with proposed Sec.  1041.5(c). Proposed comment 5(b)(2)(ii)-1 also 
includes an example of a covered short-term loan for which a lender 
could not make a reasonable determination that the consumer will have 
the ability to repay under proposed Sec.  1041.5(b)(2)(ii).
    The Bureau proposes to include the requirement in Sec.  
1041.5(b)(2)(ii) for covered short-term loans because the Bureau's 
research has found that these loan structures are particularly likely 
to result in reborrowing shortly after the consumer repays an earlier 
loan. As discussed above in Market Concerns--Short-Term Loans, when a 
covered loan's terms provide for it to be substantially repaid within 
45 days following consummation the fact that the consumer must repay so 
much within such a short period of time makes it especially likely that 
the consumer will be left with insufficient funds to make subsequent 
payments under major financial obligations and to meet basic living 
expenses. The consumer may then end up falling behind on payments under 
major financial obligations, being unable to meet basic living 
expenses, or borrowing additional consumer credit. Such consumers may 
be particularly likely to borrow new consumer credit in the form of a 
new covered loan.
    This shortfall in a consumer's funds is most likely to occur 
following the highest payment under the covered short-term loan (which 
is typically but not necessarily the final payment) and before the 
consumer's subsequent receipt of significant income. However, depending 
on regularity of a consumer's income payments and payment amounts, the 
point within a consumer's monthly expense cycle when the problematic 
covered short-term loan payment falls due, and the distribution of a 
consumer's expenses through the month, the resulting shortfall may not 
manifest until a consumer has attempted to meet all expenses in the 
consumer's monthly expense cycle, or even longer. Indeed, many payday 
loan borrowers who repay a first loan and do not reborrow during the 
ensuing pay cycle (i.e., within 14 days) nonetheless do find it 
necessary to reborrow before the end of the expense cycle (i.e., within 
30 days).
    In the Small Business Review Panel Outline, the Bureau described a 
proposal to require lenders to determine that a consumer will have the 
ability to repay a covered short-term loan without needing to reborrow 
for 60 days, consistent with the proposal in the same document to treat 
a loan taken within 60 days of having a prior covered short-term loan 
outstanding as part of the same sequence. Several consumer advocates 
have argued that consumers may be able to juggle expenses and financial 
obligations for a time, so that an unaffordable loan may not result in 
reborrowing until after a 30-day period. For the reasons discussed 
further below in the section-by-section analyses of Sec.  1041.6, the 
Bureau is now proposing a 30-day period for both purposes.
    The Bureau believes that the incidence of reborrowing caused by 
such loan structures would be somewhat ameliorated simply by 
determining that a consumer will have residual income during the term 
of the loan that exceeds the sum of covered loan payments plus an 
amount necessary to meet basic living expenses during that period. But 
if the loan payments consume all of a consumer's residual income during 
the period beyond the amount needed to meet basic living expenses 
during the period, then the consumer will be left with insufficient 
funds to make payments under major financial obligations and meet basic 
living expenses after the end of that period, unless the consumer 
receives sufficient net income shortly after the end of that period and 
before the next set of expenses fall due. Often, though, the opposite 
is true: A lender schedules the due dates of loan payments under 
covered short-term loans so that the loan payment due date coincides 
with dates of the consumer's receipts of income. This practice 
maximizes the probability that the lender will timely receive the 
payment under the covered short-term loan, but it also means the term 
of the loan (as well as the relevant period for the lender's 
determination that the consumer's residual income will be sufficient 
under proposed Sec.  1041.5(b)(2)(i)) ends on the date of the 
consumer's receipt of income, with the result that the time between the 
end of the loan term and the consumer's subsequent receipt of income is 
maximized.

[[Page 47952]]

    Thus, even if a lender made a reasonable determination under 
proposed Sec.  1041.5(b)(2)(i) that the consumer would have sufficient 
residual income during the loan term to make loan payments under the 
covered short-term loan and meet basic living expenses during the 
period, there would remain a significant risk that, as a result of an 
unaffordable highest payment (which may be the only payment, or the 
last of equal payments), the consumer would be forced to reborrow or 
suffer collateral harms from unaffordable payments. The example 
included in proposed comment 5(b)(2)(ii)-1 illustrates just such a 
result.
    The Bureau invites comment on the necessity of the requirement in 
proposed Sec.  1041.5(b)(2)(ii) to prevent consumer harms and on any 
alternatives that would adequately prevent consumer harm while reducing 
burden for lenders. The Bureau also invites comment on whether the 30-
day period in proposed Sec.  1041.5(b)(2)(ii) is the appropriate period 
of time to use or whether a shorter or longer period of time, such as 
the 60-day period described in the Small Business Review Panel Outline, 
would be appropriate. The Bureau also invites comment on whether the 
time period chosen should run from the date of the final payment, 
rather than the highest payment, in cases where the highest payment is 
other than the final payment.
5(b)(2)(iii)
    Proposed Sec.  1041.5(b)(2)(iii) would provide that for a covered 
short-term loan for which a presumption of unaffordability applies 
under proposed Sec.  1041.6, the lender determine that the requirements 
of proposed Sec.  1041.6 are satisfied. As discussed below, proposed 
Sec.  1041.6 would apply certain presumptions, requirements, and 
prohibitions when the consumer's borrowing history indicates that he or 
she may have particular difficulty in repaying a new covered loan with 
certain payment amounts or structures.
5(c) Projecting Consumer Net Income and Payments for Major Financial 
Obligations
    Proposed Sec.  1041.5(c) provides requirements that would apply to 
a lender's projections of net income and major financial obligations, 
which in turn serve as the basis for the lender's reasonable 
determination of ability to repay. Specifically, it would establish 
requirements for obtaining information directly from a consumer as well 
as specified types of verification evidence. It would also provide 
requirements for reconciling ambiguities and inconsistencies in the 
information and verification evidence.
5(c)(1) General
    As discussed above, proposed Sec.  1041.5(b)(2) would provide that 
a lender's determination of a consumer's ability to repay is reasonable 
only if the lender determines that the consumer will have sufficient 
residual income during the term of the loan and for a period thereafter 
to repay the loan and still meet basic living expenses. Proposed Sec.  
1041.5(b)(2) thus carries with it the requirement for a lender to make 
projections with respect to the consumer's net income and major 
financial obligations--the components of residual income--during the 
relevant period of time. And, proposed Sec.  1041.5(b)(2) further 
provides that to be reasonable such projections must be made in 
accordance with proposed Sec.  1041.5(c).
    Proposed Sec.  1041.5(c)(1) would provide that for a lender's 
projection of the amount and timing of net income or payments for major 
financial obligations to be reasonable, the lender must obtain both a 
written statement from the consumer as provided for in proposed Sec.  
1041.5(c)(3)(i), and verification evidence as provided for in proposed 
Sec.  1041.5(c)(3)(ii), each of which are discussed below. Proposed 
Sec.  1041.5(c)(1) further provides that for a lender's projection of 
the amount and timing of net income or payments for major financial 
obligations to be reasonable it may be based on a consumer's statement 
of the amount and timing only to the extent the stated amounts and 
timing are consistent with the verification evidence.
    The Bureau believes verification of consumers' net income and 
payments for major financial obligations is an important component of 
the reasonable ability-to-repay determination. Consumers seeking a loan 
may be in financial distress and inclined to overestimate net income or 
to underestimate payments under major financial obligations to improve 
their chances of being approved. Lenders have an incentive to encourage 
such misestimates to the extent that as a result consumers find it 
necessary to reborrow. This result is especially likely if a consumer 
perceives that, for any given loan amount, lenders offer only one-size-
fits-all loan repayment structure and will not offer an alternative 
loan with payments that are within the consumer's ability to repay. An 
ability-to-repay determination that is based on unrealistic factual 
assumptions will yield unrealistic and unreliable results, leading to 
the consumer harms that the Bureau's proposal is intended to prevent.
    Accordingly, proposed Sec.  1041.5(c)(1) would permit a lender to 
base its projection of the amount and timing of a consumer's net income 
or payments under major financial obligations on a consumer's written 
statement of amounts and timing under proposed Sec.  1041.5(c)(3)(i) 
only to the extent the stated amounts and timing are consistent with 
verification evidence of the type specified in proposed Sec.  
1041.5(c)(3)(ii). Proposed Sec.  1041.5(c)(1) would further provide 
that in determining whether and the extent to which such stated amounts 
and timing are consistent with verification evidence, a lender may 
reasonably consider other reliable evidence the lender obtains from or 
about the consumer, including any explanations the lender obtains from 
the consumer. The Bureau believes the proposed approach would 
appropriately ensure that the projections of a consumer's net income 
and payments for major financial obligations will generally be 
supported by objective, third-party documentation or other records.
    However, the proposed approach also recognizes that reasonably 
available verification evidence may sometimes contain ambiguous, out-
of-date, or missing information. For example, the net income of 
consumers who seek covered loans may vary over time, such as for a 
consumer who is paid an hourly wage and whose work hours vary from week 
to week. In fact, a consumer is more likely to experience financial 
distress, which may be a consumer's reason for seeking a covered loan, 
immediately following a temporary decrease in net income from their 
more typical levels. Accordingly, the proposed approach would not 
require a lender to base its projections exclusively on the consumer's 
most recent net income receipt shown in the verification evidence. 
Instead, it allows the lender reasonable flexibility in the inferences 
the lender draws about, for example, a consumer's net income during the 
term of the covered loan, based on the consumer's net income payments 
shown in the verification evidence, including net income for periods 
earlier than the most recent net income receipt. At the same time, the 
proposed approach would not allow a lender to mechanically assume that 
a consumer's immediate past income as shown in the verification 
evidence will continue into the future if, for example, the lender has 
reason to believe that the consumer has been laid off or is no longer 
employed.

[[Page 47953]]

    In this regard, the proposed approach recognizes that a consumer's 
own statements, explanations, and other evidence are important 
components of a reliable projection of future net income and payments 
for major financial obligations. Proposed comment 5(c)(1)-1 includes 
several examples applying the proposed provisions to various scenarios, 
illustrating reliance on consumer statements to the extent they are 
consistent with verification evidence and how a lender may reasonably 
consider consumer explanations to resolve ambiguities in the 
verification evidence. It includes examples of when a major financial 
obligation in a consumer report is greater than the amount stated by 
the consumer and of when a major financial obligation stated by the 
consumer does not appear in the consumer report at all.
    The Bureau anticipates that lenders would develop policies and 
procedures, in accordance with proposed Sec.  1041.18, for how they 
project consumer net income and payments for major financial 
obligations in compliance with proposed Sec.  1041.5(c)(1) and that a 
lender's policies and procedures would reflect its business model and 
practices, including the particular methods it uses to obtain consumer 
statements and verification evidence. The Bureau believes that many 
lenders and vendors would develop methods of automating projections, so 
that for a typical consumer, relatively little labor would be required.
    The Bureau invites comments on the proposed approach to 
verification and to making projections based upon verified evidence, 
including whether the Bureau should permit projections that vary from 
the most recent verification evidence and, if so, whether the Bureau 
should be more prescriptive with respect to the permissible range of 
such variances.
5(c)(2) Changes Not Supported by Verification Evidence
    Proposed Sec.  1041.5(c)(2) would provide an exception to the 
requirement in proposed Sec.  1041.5(c)(1) that projections must be 
consistent with the verification evidence that a lender would be 
required to obtain under proposed 1041.5(c)(3)(ii). As discussed below, 
the required verification evidence will normally consist of third-party 
documentation or other reliable records of recent transactions or of 
payment amounts. Proposed Sec.  1041.5(c)(2) would permit a lender to 
project a net income amount that is higher than an amount that would 
otherwise be supported under proposed Sec.  1041.5(c)(1), or a payment 
amount under a major financial obligation that is lower than an amount 
that would otherwise be supported under proposed Sec.  1041.5(c)(1), 
only to the extent and for such portion of the term of the loan that 
the lender obtains a written statement from the payer of the income or 
the payee of the consumer's major financial obligation of the amount 
and timing of the new or changed net income or payment.
    The exception would accommodate situations in which a consumer's 
net income or payment for a major financial obligation will differ from 
the amount supportable by the verification evidence. For example, a 
consumer who has been unemployed for an extended period of time but who 
just accepted a new job may not be able to provide the type of 
verification evidence of net income generally required under proposed 
Sec.  1041.5(c)(3)(ii)(A). Proposed Sec.  1041.5(c)(2) would permit a 
lender to project a net income amount based on, for example, an offer 
letter from the new employer stating the consumer's wage, work hours 
per week, and frequency of pay. The lender would be required to retain 
the statement in accordance with proposed Sec.  1041.18.
    The Bureau invites comments as to whether lenders should be 
permitted to rely on such evidence in projecting residual income.
5(c)(3) Evidence of Net Income and Payments for Major Financial 
Obligations
5(c)(3)(i) Consumer Statements
    Proposed Sec.  1041.5(c)(3)(i) would require a lender to obtain a 
consumer's written statement of the amount and timing of the consumer's 
net income, as well as of the amount and timing of payments required 
for categories of the consumer's major financial obligations (e.g., 
credit card payments, automobile loan payments, housing expense 
payments, child support payments, etc.). The lender would then use the 
statements as an input in projecting the consumer's net income and 
payments for major financial obligations during the term of the loan. 
The lender would also be required to retain the statements in 
accordance with proposed Sec.  1041.18. As discussed above, the Bureau 
believes it is important to require lenders to obtain this information 
directly from consumers in addition to obtaining reasonably available 
verification evidence under proposed Sec.  1041.5(c)(3)(ii) because the 
latter sources of information may sometimes contain ambiguous, out-of-
date, or missing information. Accordingly, the Bureau believes that 
projections based on both sources of information will be more reliable 
than either one standing alone.
    Proposed comment 5(c)(3)(i)-1 clarifies that a consumer's written 
statement includes a statement the consumer writes on a paper 
application or enters into an electronic record, or an oral consumer 
statement that the lender records and retains or memorializes in 
writing and retains. It further clarifies that a lender complies with a 
requirement to obtain the consumer's statement by obtaining information 
sufficient for the lender to project the dates on which a payment will 
be received or paid through the period required under proposed Sec.  
1041.5(b)(2). Proposed comment 5(c)(3)(i)-1 includes the example that a 
lender's receipt of a consumer's statement that the consumer is 
required to pay rent every month on the first day of the month is 
sufficient for the lender to project when the consumer's rent payments 
are due. Proposed Sec.  1041.5(c)(3)(i) would not specify any 
particular form or even particular questions or particular words that a 
lender must use to obtain the required consumer statements.
    The Bureau invites comments on whether to require a lender to 
obtain a written statement from the consumer with respect to the 
consumer's income and major financial obligations, including whether 
the Bureau should establish any procedural requirements with respect to 
securing such a statement and the weight that should be given to such a 
statement. The Bureau also invites comments on whether a written 
memorialization by the lender of a consumer's oral statement should not 
be considered sufficient.
5(c)(3)(ii) Verification Evidence
    Proposed Sec.  1041.5(c)(3)(ii) would require a lender to obtain 
verification evidence for the amounts and timing of the consumer's net 
income and payments for major financial obligations for a period of 
time prior to consummation. It would specify the type of verification 
evidence required for net income and each component of major financial 
obligations. The proposed requirements are intended to provide 
reasonable assurance that the lender's projections of a consumer's net 
income and payments for major financial obligations are based on 
accurate and objective information, while also allowing lenders to 
adopt innovative, automated, and less burdensome methods of compliance.
5(c)(3)(ii)(A)
    Proposed Sec.  1041.5(c)(3)(ii)(A) would specify that for a 
consumer's net

[[Page 47954]]

income, the applicable verification evidence would be a reliable record 
(or records) of an income payment (or payments) covering sufficient 
history to support the lender's projection under proposed Sec.  
1041.5(c)(1). It would not specify a minimum look-back period or number 
of net income payments for which the lender must obtain verification 
evidence. The Bureau does not believe it is necessary or appropriate to 
require verification evidence covering a lookback period of a 
prescribed length. Rather, sufficiency of the history for which a 
lender obtains verification evidence may depend upon the source or type 
of income, the length of the prospective covered longer-term loan, and 
the consistency of the income shown in the verification evidence the 
lender initially obtains, if applicable. Lenders would be required to 
develop and maintain policies and procedures for establishing the 
sufficient history of net income payments in verification evidence, in 
accordance with proposed Sec.  1041.18.
    Proposed comment 5(c)(3)(ii)(A)-1 would clarify that a reliable 
transaction record includes a facially genuine original, photocopy, or 
image of a document produced by or on behalf of the payer of income, or 
an electronic or paper compilation of data included in such a document, 
stating the amount and date of the income paid to the consumer. It 
would further clarify that a reliable transaction record also includes 
a facially genuine original, photocopy, or image of an electronic or 
paper record of depository account transactions, prepaid account 
transactions (including transactions on a general purpose reloadable 
prepaid card account, a payroll card account, or a government benefits 
card account), or money services business check-cashing transactions 
showing the amount and date of a consumer's receipt of income.
    The Bureau believes that the proposed requirement would be 
sufficiently flexible to provide lenders with multiple options for 
obtaining verification evidence for a consumer's net income. For 
example, a paper paystub would generally satisfy the requirement, as 
would a photograph of the paystub uploaded from a mobile phone to an 
online lender. In addition, the requirement would also be satisfied by 
use of a commercial service that collects payroll data from employers 
and provides it to creditors for purposes of verifying a consumer's 
employment and income. Proposed comment 5(c)(3)(ii)(A)-1 would also 
allow verification evidence in the form of electronic or paper bank 
account statements or records showing deposits into the account, as 
well as electronic or paper records of deposits onto a prepaid card or 
of check-cashing transactions. Data derived from such sources, such as 
from account data aggregator services that obtain and categorize 
consumer deposit account and other account transaction data, would also 
generally satisfy the requirement. During outreach, service providers 
informed the Bureau that they currently provide such services to 
lenders.
    Several SERs expressed concern during the SBREFA process that the 
Bureau's approach to income verification described in the Small 
Business Review Panel Outline was too burdensome and inflexible. 
Several other lender representatives expressed similar concerns during 
the Bureau's outreach to industry. Many perceived that the Bureau would 
require outmoded or burdensome methods of obtaining verification 
evidence, such as always requiring a consumer to submit a paper paystub 
or transmit it by facsimile (fax) to a lender. Others expressed concern 
about the Bureau requiring income verification at all, stating that 
many consumers are paid in cash and therefore have no employer-
generated records of income.
    The Bureau's proposed approach is intended to respond to many of 
these concerns by providing for a wide range of methods for obtaining 
verification evidence for a consumer's net income, including electronic 
methods that can be securely automated through third-party vendors with 
a consumer's consent. In developing this proposal, Bureau staff met 
with more than 30 lenders, nearly all of which stated they already use 
some method--though not necessarily the precise methods the Bureau is 
proposing--to verify consumers' income as a condition of making a 
covered loan. The Bureau's proposed approach thus would accommodate 
most of the methods they described and that the Bureau is aware of from 
other research and outreach. It is also intended to provide some 
accommodation for making covered loans to many consumers who are paid 
in cash. For example, under the Bureau's proposed approach, a lender 
may be able to obtain verification evidence of net income for a 
consumer who is paid in cash by using deposit account records (or data 
derived from deposit account transactions), if the consumer deposits 
income payments into a deposit account. Lenders often require consumers 
to have deposit accounts as a condition of obtaining a covered loan, so 
the Bureau believes that lenders would be able to obtain verification 
evidence for many consumers who are paid in cash in this manner.
    The Bureau recognizes that there are some consumers who receive a 
portion of their income in cash and also do not deposit their cash 
income into a deposit account or prepaid card account. For such 
consumers, a lender may not be able to obtain verification evidence for 
that portion of a consumer's net income, and therefore generally could 
not base its projections and ability-to-repay determinations on that 
portion of such consumers' income. The Bureau, however, does not 
believe it is appropriate to make an ability-to-repay determination for 
a covered loan based on income that cannot be reasonably substantiated 
through any verification evidence. When there is no verification 
evidence for a consumer's net income, the Bureau believes the risk is 
too great that projections of net income would be overstated and that 
payments under a covered short-term loan consequently would exceed the 
consumer's ability to repay, resulting in the harms targeted by this 
proposal.
    For similar reasons, the Bureau is not proposing to permit the use 
of predictive models designed to estimate a consumer's income or to 
validate the reasonableness of a consumer's statement of her income. 
Given the risks associated with unaffordable short-term loans, the 
Bureau believes that such models--which the Bureau believes typically 
are used to estimate annual income--lack the precision required to 
reasonably project an individual consumer's net income for a short 
period of time.
    The Bureau notes that it has received recommendations from the 
Small Dollar Roundtable, comprised of a number of lenders making loans 
the Bureau proposes to cover in this rulemaking and a number of 
consumer advocates, recommending that the Bureau require income 
verification.
    The Bureau invites comment on the types of verification evidence 
permitted by the proposed rule and what, if any, other types of 
verification evidence should be permitted, especially types of 
verification evidence that would be at least as objective and reliable 
as the types provided for in proposed Sec.  1041.5(c)(3)(ii)(A) and 
comment 5(c)(3)(ii)(A)-1. For example, the Bureau is aware of service 
providers who are seeking to develop methods to verify a consumer's 
stated income based upon extrinsic data about the consumer or the area 
in which the consumer lives. The Bureau invites comment on the 
reliability of such methods, their ability to provide information that 
is sufficiently current and granular to

[[Page 47955]]

address a consumer's stated income for a particular and short period of 
time, and, if they are able to do so, whether income amounts determined 
under such methods should be a permissible as a form of verification 
evidence. The Bureau also invites comments on whether the requirements 
for verification evidence should be relaxed for a consumer whose 
principal income is documented but who reports some amount of 
supplemental cash income and, if so, what approach would be appropriate 
to guard against the risk of consumers' overstating their income and 
obtaining an unaffordable loan.
5(c)(3)(ii)(B)
    Proposed Sec.  1041.5(c)(3)(ii)(B) would specify that for a 
consumer's required payments under debt obligations, the applicable 
verification evidence would be a national consumer report, the records 
of the lender and its affiliates, and a consumer report obtained from 
an information system currently registered pursuant to Sec.  
1041.17(c)(2) or Sec.  1041.17(d)(2), if available. The Bureau believes 
that most typical consumer debt obligations other than covered loans 
would appear in a national consumer report. Many covered loans are not 
included in reports generated by the national consumer reporting 
agencies, so the lender would also be required to obtain, as 
verification evidence, a consumer report from a currently registered 
information system. As discussed above, proposed Sec.  1041.5(c)(1) 
would permit a lender to base its projections on consumer statements of 
amounts and timing of payments for major financial obligations 
(including debt obligations) only to the extent the statements are 
consistent with the verification evidence. Proposed comment 5(c)(1)-1 
includes examples applying that proposed requirement in scenarios when 
a major financial obligation shown in the verification evidence is 
greater than the amount stated by the consumer and of when a major 
financial obligation stated by the consumer does not appear in the 
verification evidence at all.
    Proposed comment 5(c)(3)(ii)(B)-1 would clarify that the amount and 
timing of a payment required under a debt obligation are the amount the 
consumer must pay and the time by which the consumer must pay it to 
avoid delinquency under the debt obligation in the absence of any 
affirmative act by the consumer to extend, delay, or restructure the 
repayment schedule. The Bureau anticipates that in some cases, the 
national consumer report the lender obtains will not include a 
particular debt obligation stated by the consumer, or that the national 
consumer report may include, for example, the payment amount under the 
debt obligation but not the timing of the payment. Similar anomalies 
could occur with covered loans and a consumer report obtained from a 
registered information system. To the extent the national consumer 
report and consumer report from a registered information system omit 
information for a payment under a debt obligation stated by the 
consumer, the lender would simply base its projections on the amount 
and timing stated by the consumer.
    The Bureau notes that proposed Sec.  1041.5(c)(3)(ii)(B) does not 
require a lender to obtain a credit report unless the lender is 
otherwise prepared to make a loan to a particular consumer, Because 
obtaining a credit report will add some cost, the Bureau expects that 
lenders will order such reports only after determining that the 
consumer otherwise satisfies the ability-to-repay test so as to avoid 
incurring these costs for applicants who would be declined without 
regard to the contents of the credit report. For the reasons previously 
discussed, the Bureau believes that verification evidence is critical 
to ensuring that consumers in fact have the ability to repay a loan, 
and that therefore the costs are justified to achieve the objectives of 
the proposal.
    The Bureau invites comment on whether to require lenders to obtain 
credit reports from a national credit reporting agency and from a 
registered information system. In particular, and in accordance with 
the recommendation of the Small Business Review Panel, the Bureau 
invites comments on ways of reducing the operational burden for small 
businesses of verifying consumers' payments under major financial 
obligations.
5(c)(3)(ii)(C)
    Proposed Sec.  1041.5(c)(3)(ii)(C) would specify that for a 
consumer's required payments under court- or government agency-ordered 
child support obligations, the applicable verification evidence would 
be a national consumer report, which also serves as verification 
evidence for a consumer's required payments under debt obligations, in 
accordance with proposed Sec.  1041.5(c)(3)(ii)(B). The Bureau 
anticipates that some required payments under court- or government 
agency-ordered child support obligations will not appear in a national 
consumer report. To the extent the national consumer report omits 
information for a required payment, the lender could simply base its 
projections on the amount and timing stated by the consumer, if any. 
The Bureau intends this clarification to address concerns from some 
lenders, including from SERs, that a requirement to obtain verification 
evidence for payments under court- or government agency-ordered child 
support obligations from sources other than a national consumer report 
would be onerous and create great uncertainty.
5(c)(3)(ii)(D)
    Proposed Sec.  1041.5(c)(3)(ii)(D) would specify that for a 
consumer's housing expense (other than a payment for a debt obligation 
that appears on a national consumer report obtained by the lender), the 
applicable verification evidence would be either a reliable transaction 
record (or records) of recent housing expense payments or a lease, or 
an amount determined under a reliable method of estimating a consumer's 
housing expense based on the housing expenses of consumers with 
households in the locality of the consumer.
    Proposed comment 5(c)(3)(ii)(D)-1 explains that the proposed 
provision means a lender would have three methods that it could choose 
from for complying with the requirement to obtain verification evidence 
for a consumer's housing expense. Proposed comment 5(c)(3)(ii)(D)-1.i 
explains that under the first method, which could be used for a 
consumer whose housing expense is a mortgage payment, the lender may 
obtain a national consumer report that includes the mortgage payment. A 
lender would be required to obtain a national consumer report as 
verification evidence of a consumer's payments under debt obligations 
generally, pursuant to proposed Sec.  1041.5(c)(3)(ii)(B). A lender's 
compliance with that requirement would satisfy the requirement in 
proposed Sec.  1041.5(c)(3)(ii)(D), provided the consumer's housing 
expense is a mortgage payment and that mortgage payment appears in the 
national consumer report the lender obtains.
    Proposed comment 5(c)(3)(ii)(D)-1.ii explains that the second 
method is for the lender to obtain a reliable transaction record (or 
records) of recent housing expense payments or a rental or lease 
agreement. It clarifies that for purposes of this method, reliable 
transaction records include a facially genuine original, photocopy or 
image of a receipt, cancelled check, or money order, or an electronic 
or paper record of depository account transactions or prepaid account 
transactions (including transactions on a general purpose reloadable 
prepaid card account, a payroll card account, or a government

[[Page 47956]]

benefits card account), from which the lender can reasonably determine 
that a payment was for housing expense as well as the date and amount 
paid by the consumer. This method mirrors options a lender would have 
for obtaining verification evidence for net income. Accordingly, data 
derived from a record of depository account transactions or of prepaid 
account transactions, such as data from account data aggregator 
services that obtain and categorize consumer deposit account and other 
account transaction data, would also generally satisfy the requirement. 
Bureau staff have met with service providers that state that they 
currently provide services to lenders and are typically able to 
identify, for example, how much a particular consumer expends on 
housing expense as well as other categories of expenses.
    Proposed comment 5(c)(3)(ii)(D)-1.iii explains that the third 
method is for a lender to use an amount determined under a reliable 
method of estimating a consumer's share of housing expense based on the 
individual or household housing expenses of similarly situated 
consumers with households in the locality of the consumer seeking a 
covered loan. Proposed comment 5(c)(3)(ii)(D)-1.iii provides, as an 
example, that a lender may use data from a statistical survey, such as 
the American Community Survey of the United States Census Bureau, to 
estimate individual or household housing expense in the locality (e.g., 
in the same census tract) where the consumer resides. It provides that, 
alternatively, a lender may estimate individual or household housing 
expense based on housing expense and other data (e.g., residence 
location) reported by applicants to the lender, provided that it 
periodically reviews the reasonableness of the estimates that it relies 
on using this method by comparing the estimates to statistical survey 
data or by another method reasonably designed to avoid systematic 
underestimation of consumers' shares of housing expense. It further 
explains that a lender may estimate a consumer's share of household 
expense based on estimated household housing expense by reasonably 
apportioning the estimated household housing expense by the number of 
persons sharing housing expense as stated by the consumer, or by 
another reasonable method.
    Several SERs expressed concern during the SBREFA process that the 
Bureau's approach to housing expense verification described in the 
Small Business Review Panel Outline was burdensome and impracticable 
for many consumers and lenders. Several lender representatives 
expressed similar concerns during the Bureau's outreach to industry. 
The Small Business Review Panel Outline referred to lender verification 
of a consumer's rent or mortgage payment using, for example, receipts, 
cancelled checks, a copy of a lease, and bank account records. But some 
SERs and other lender representatives stated many consumers would not 
have these types of documents readily available. Few consumers receive 
receipts or cancelled checks for rent or mortgage payments, they 
stated, and bank account statements may simply state the check number 
used to make a payment, providing no way of confirming the purpose or 
nature of the payment. Consumers with a lease would not typically have 
a copy of the lease with them when applying for a covered loan, they 
stated, and subsequently locating and transmitting or delivering a copy 
of the lease to a lender would be unduly burdensome, if not 
impracticable, for both consumers and lenders.
    The Bureau believes that many consumers would have paper or 
electronic records that they could provide to a lender to establish 
their housing expense. In addition, as discussed above, information 
presented to the Bureau during outreach suggests that data aggregator 
services may be able to electronically and securely obtain and 
categorize, with a consumer's consent, the consumer's deposit account 
or other account transaction data to reliably identify housing expenses 
payments and other categories of expenses.
    Nonetheless, the Bureau intends its proposal to be responsive to 
these concerns by providing lenders with multiple options for obtaining 
verification evidence for a consumer's housing expense, including by 
using estimates based on the housing expenses of similarly situated 
consumers with households in the locality of the consumer seeking a 
covered loans. The Bureau's proposal also is intended to facilitate 
automation of the methods of obtaining the verification evidence, 
making projections of a consumer's housing expense, and calculating the 
amounts for an ability-to-repay determination, such as residual income.
    A related concern raised by SERs is that a consumer may be the 
person legally obligated to make a rent or mortgage payment but may 
receive contributions toward it from other household members, so that 
the payment the consumer makes, even if the consumer can produce a 
record of it, is much greater than the consumer's own housing expense. 
Similarly, a consumer may make payments in cash to another person, who 
then makes the payment to a landlord or mortgage servicer covering the 
housing expenses of several residents. During outreach with industry, 
one lender stated that many of its consumers would find requests for 
documentation of housing expense to be especially intrusive or 
offensive, especially consumers with informal arrangements to pay rent 
for a room in someone else's home.
    To address these concerns, the Bureau is proposing the option of 
estimating a consumer's housing expense based on the individual or 
apportioned household housing expenses of similarly situated consumers 
with households in the locality. The Bureau believes the proposed 
approach would address the concerns raised by SERs and other lenders 
while also reasonably accounting for the portion of a consumer's net 
income that is consumed by housing expenses and, therefore, not 
available for payments under a prospective loan. The Bureau notes that 
if the method the lender uses to obtain verification evidence of 
housing expense for a consumer--including the estimated method--
indicates a higher housing expense amount than the amount in the 
consumer's statement under proposed Sec.  1041.5(c)(3)(i), then 
proposed Sec.  1041.5(c)(1) would generally require a lender to rely on 
the higher amount indicated by the verification evidence. Accordingly, 
a lender may prefer use one of the other two methods for obtaining 
verification evidence, especially if doing so would result in 
verification evidence indicating a housing expense equal to that in the 
consumer's written statement of housing expense.
    The Bureau recognizes that in some cases the consumer's actual 
housing expense may be lower than the estimation methodology would 
suggest but may not be verifiable through documentation. For example, 
some consumers may live for a period of time rent-free with a friend or 
relative. However, the Bureau does not believe it is possible to 
accommodate such situations without permitting lenders to rely solely 
on the consumer's statement of housing expenses, and for the reasons 
previously discussed the Bureau believes that doing so would jeopardize 
the objectives of the proposal. The Bureau notes that the approach it 
is proposing is consistent with the recommendation of the Small Dollar 
Roundtable which recommended that the Bureau permit rent to be verified

[[Page 47957]]

through a ``geographic market-specific . . . valid, reliable proxy.''
    The Bureau invites comment on whether the proposed methods of 
obtaining verification evidence for housing expense are appropriate and 
adequate.
Sec.  1041.6 Additional Limitations on Lending--Covered Short-Term 
Loans
Background
    Proposed Sec.  1041.6 would augment the basic ability-to-repay 
determination required by proposed Sec.  1041.5 in circumstances in 
which the consumer's recent borrowing history or current difficulty 
repaying an outstanding loan provides important evidence with respect 
to the consumer's financial capacity to afford a new covered short-term 
loan. In these circumstances, proposed Sec.  1041.6 would require the 
lender to factor this evidence into the ability-to-repay determination 
and, in certain instances, would prohibit a lender from making a new 
covered short-term loan under proposed Sec.  1041.5 to the consumer for 
30 days. The Bureau proposes the additional requirements in Sec.  
1041.6 for the same basic reason that it proposes Sec.  1041.5: To 
prevent the unfair and abusive practice identified in proposed Sec.  
1041.4, and the consumer injury that results from it. The Bureau 
believes that these additional requirements may be needed in 
circumstances in which proposed Sec.  1041.5 alone may not be 
sufficient to prevent a lender from making a covered short-term loan 
that the consumer might not have the ability to repay.
    Proposed Sec.  1041.6 would generally impose a presumption of 
unaffordability on continued lending where evidence suggests that the 
prior loan was not affordable for the consumer such that the consumer 
may have particular difficulty repaying a new covered short-term loan. 
Specifically, such a presumption would apply when a consumer seeks a 
covered short-term loan during the term of a covered short-term loan 
made under proposed Sec.  1041.5 or a covered longer-term balloon-
payment loan made under proposed Sec.  1041.9 and for 30 days 
thereafter, or seeks to take out a covered short-term loan when there 
are indicia that an outstanding loan with the same lender or its 
affiliate is unaffordable for the consumer. Proposed Sec.  1041.6 would 
also impose a mandatory cooling-off period prior to a lender making a 
fourth loan covered short-term loan in a sequence and would prohibit 
lenders from making a covered short-term loan under proposed Sec.  
1041.5 during the term of and for 30 days thereafter a covered short-
term loan made under proposed Sec.  1041.7.
    A central component of the preventive requirements in proposed 
Sec.  1041.6 is the concept of a reborrowing period--a period following 
the payment date of a prior loan during which a consumer's borrowing of 
a covered short-term loan is deemed evidence that the consumer is 
seeking additional credit because the prior loan was unaffordable. When 
consumers have the ability to repay a covered short-term loan, the loan 
should not cause consumers to have the need to reborrow shortly after 
repaying the loan. As discussed in Market Concerns--Short-Term Loans, 
however, the Bureau believes that the fact that covered short-term 
loans require repayment so quickly after consummation makes such loans 
more difficult for consumers to repay the loan consistent with their 
other major financial obligations and basic living expenses without 
needing to reborrow. Moreover, most covered short-term loans--including 
payday loans and short-term vehicle title loans--also require payment 
in a single lump sum, thus exacerbating the challenge of repaying the 
loan without needing to reborrow.
    For these loans, the Bureau believes that the fact that a consumer 
returns to take out another covered short-term loan shortly after 
having a previous covered short-term loan outstanding frequently 
indicates that the consumer did not have the ability to repay the prior 
loan and meet the consumer's other major financial obligations and 
basic living expenses. This also may provide strong evidence that the 
consumer will not be able to afford a new covered short-term loan. A 
second covered short-term loan shortly following a prior covered short-
term loan may result from a financial shortfall caused by repayment of 
the prior loan.
    Frequently, reborrowing occurs on the same day that a loan is due, 
either in the form of a rollover (where permitted by State law) or a 
new loan taken out on the same day that the prior loan was repaid. Some 
States require a cooling-off period between loans, typically 24 hours, 
and the Bureau has found that in those States, if consumers take out 
successive loans, they generally do so at the earliest time that is 
legally permitted.\559\ The Bureau interprets these data to indicate 
that these consumers could not afford to repay the full amount of the 
loan when due and still meet their financial obligations and basic 
living expenses.
---------------------------------------------------------------------------

    \559\ CFPB Report on Supplemental Findings, at ch. 4.
---------------------------------------------------------------------------

    Whether a particular loan taken after a consumer has repaid a prior 
loan (and after the expiration of any mandated cooling-off period) is a 
reborrowing prompted by unaffordability of the prior payment is less 
facially evident. The fact that consumers may cite a particular income 
or expense shock is not dispositive since a prior unaffordable loan may 
be the reason that the consumer cannot absorb the new change. On 
balance, the Bureau believes that for new loans taken within a short 
period of time after a prior loan ceases to be outstanding, the most 
likely explanation is the unaffordability of the prior loan, i.e., the 
fact that the size of the payment obligation on the prior loan left 
these consumers with insufficient income to make it through their 
monthly expense cycle.
    To provide a structured process that accounts for the likelihood 
that the unaffordability of an existing or prior loan is driving 
reborrowing and that ensures a rigorous analysis of consumers' 
individual circumstances, the Bureau believes that the most appropriate 
approach may be a presumptions framework rather than an open-ended 
inquiry. The Bureau is thus proposing to delineate a specific 
reborrowing period--i.e., a period during which a new loan will be 
presumed to be a reborrowing.\560\
---------------------------------------------------------------------------

    \560\ Reborrowing takes several forms in the market for covered 
short-term loans. As used throughout this proposal, reborrowing and 
the reborrowing period include any rollovers or renewals of a loan, 
as well as new extensions of credit. A loan may be a ``rollover'' 
if, at the end of a loan term, a consumer only pays a fee or finance 
charge in order to ``roll over'' a loan rather than repaying the 
loan. Similarly, the laws of some States permit a lender to 
``renew'' a consumer's outstanding loan with the payment of a 
finance charge. More generally, a consumer may repay a loan and then 
return to take out a new loan within a fairly short period of time. 
The Bureau thus considers rollovers, renewals, and reborrowing 
within a short period of time after repaying the prior loan to be 
functionally the same sort of transaction with regard to the 
presumptions of unaffordability--and other lending restrictions in 
proposed Sec.  1041.6--and generally uses the term reborrowing to 
cover all three scenarios, along with concurrent borrowing by a 
consumer whether from the same lender or its affiliate or from 
different, unaffiliated lenders.
---------------------------------------------------------------------------

    In determining the appropriate length of the reborrowing period, 
the Bureau considered several time periods. In particular, in addition 
to the 30-day period being proposed, the Bureau considered periods of 
14, 45, 60, or 90 days in length. The Bureau also considered an option 
that would tie the length of the reborrowing period to the term of the 
preceding loan. In evaluating the alternative options for defining the 
reborrowing period (and in turn the loan

[[Page 47958]]

sequence definition), the Bureau sought to strike a balance between a 
reborrowing period that would be too short, thereby not capturing 
substantial numbers of subsequent loans that are in fact the result of 
the spillover effect of the unaffordability of the prior loan and 
inadequately preventing consumer injury, and a reborrowing period that 
would be too long, thereby covering substantial numbers of subsequent 
loans that are the result of a new need for credit, independent of such 
effects. This concept of a reborrowing period is intertwined with the 
definition of loan sequence. Under proposed Sec.  1041.2(a)(12), loan 
sequence is defined as a series of consecutive or concurrent covered 
short-term loans in which each of the loans is made while the consumer 
currently has an outstanding covered short-term loan or within 30 days 
after the consumer ceased to have a covered short-term loan 
outstanding.
    The Bureau's 2014 Data Point analyzed repeated borrowing on payday 
loans using a 14-day reborrowing period reflecting a bi-weekly pay 
cycle, the most common pay cycle for consumers in this market.\561\ For 
the purposes of the 2014 Data Point, a loan was considered part of a 
sequence if it was made within 14 days of the prior loan. The Bureau 
adopted this approach in the Bureau's early research in order to obtain 
a relatively conservative measure of reborrowing activity relative to 
the most frequent date for the next receipt of income. However, the 14-
day definition had certain disadvantages, including the fact that many 
consumers are paid on a monthly cycle, and a 14-day definition thus 
does not adequately reflect how different pay cycles can cause slightly 
different reborrowing patterns.
---------------------------------------------------------------------------

    \561\ CFPB Data Point: Payday Lending, at 7.
---------------------------------------------------------------------------

    Upon further consideration of what benchmarks would sufficiently 
protect consumers from reborrowing harm, the Bureau turned to the 
typical consumer expense cycle, rather than the typical income cycle, 
as the most appropriate metric.\562\ Consumer expense cycles are 
typically a month in length with housing expenses, utility payments, 
and other debt obligations generally paid on a monthly basis. Thus, 
where repaying a loan causes a shortfall, the consumer may seek to 
return during the same expense cycle to get funds to cover downstream 
expenses.
---------------------------------------------------------------------------

    \562\ Researchers in an industry-funded study also concluded 
that ``an entire billing cycle of most bills--rent, other loans, 
utilities, etc.--and at least one paycheck'' is the ``appropriate 
measurement'' for purposes of determining whether a payday loan 
leads to a ``cycle of debt.'' Marc Anthony Fusaro & Patricia J. 
Cirillo, Do Payday Loans Trap Consumers in a Cycle of Debt, 
(November 16, 2011), available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1960776.
---------------------------------------------------------------------------

    The proposals under consideration in the Small Business Review 
Panel Outline relied on a 60-day reborrowing period based upon the 
premise that consumers for whom repayment of a loan was unaffordable 
may nonetheless be able to juggle their expenses for a period of time 
so that the spillover effects of the loan may not manifest until the 
second expense cycle following repayment. Upon additional analysis and 
extensive feedback from a broad range of stakeholders, the Bureau has 
now tentatively concluded that the 30-day definition incorporated into 
the Bureau's proposal may strike a more appropriate balance between 
competing considerations.
    Because so many expenses are paid on a monthly basis, the Bureau 
believes that loans obtained during the same expense cycle are 
relatively likely to indicate that repayment of a prior loan may have 
caused a financial shortfall. Additionally, in analysis of supervisory 
data, the Bureau has found that a considerable segment of consumers who 
repay a loan without an immediate rollover or reborrowing nonetheless 
return within the ensuing 30 days to reborrow.\563\ Accordingly, if the 
consumer returns to take out another covered short-term loan--or, as 
described with regard to proposed Sec.  1041.10, certain types of 
covered longer-term loans--within the same 30-day period, the Bureau 
believes that this pattern of reborrowing indicates that the prior loan 
was unaffordable and that the following loan may likewise be 
unaffordable.
---------------------------------------------------------------------------

    \563\ CFPB Report on Supplemental Findings, at ch. 5.
---------------------------------------------------------------------------

    On the other hand, the Bureau believes that for loans obtained more 
than 30 days after a prior loan, there is an increased possibility that 
the loan is prompted by a new need on the part of the borrower, not 
directly related to potential financial strain from repaying the prior 
loan. While a previous loan's unaffordability may cause some consumers 
to need to take out a new loan as many as 45 days or even 60 days 
later, the Bureau believes that the effects of the previous loan are 
more likely to dissipate once the consumer has completed a full expense 
cycle following the previous loan's conclusion. Accordingly, the Bureau 
believes that a 45-day or 60-day definition may be too broad. A 
reborrowing period which varies with the length of the preceding loan 
term would be operationally complex for lenders to implement and, for 
consumers paid weekly or bi-weekly, may also be too narrow.
    Accordingly, using this 30-day reborrowing window, the Bureau is 
proposing a presumption of unaffordability in situations in which the 
Bureau believes that the fact that the consumer is seeking to take out 
a new covered short-term loan during the term of, or shortly after 
repaying, a prior loan generally suggests that the new loan, like the 
prior loan, will exceed the consumer's ability to repay. The 
presumption is based on concerns that the prior loan may have triggered 
the need for the new loan because it exceeded the consumer's ability to 
repay, and that, absent a sufficient improvement of the consumer's 
financial capacity, the new loan will also be unaffordable for the 
consumer.
    The presumption can be overcome, however, in circumstances that 
suggest that there is sufficient reason to believe that the consumer 
would, in fact, be able to afford the new loan even though he or she is 
seeking to reborrow during the term of or shortly after a prior loan. 
The Bureau recognizes, for example, that there may be situations in 
which the prior loan would have been affordable but for some unforeseen 
disruption in income that occurred during the prior expense cycle and 
which is not reasonably expected to recur during the term of the new 
loan. The Bureau also recognizes that there may be circumstances, 
albeit less common, in which even though the prior loan proved to be 
unaffordable, a new loan would be affordable because of a reasonably 
projected increase in net income or decrease in major financial 
obligations--for example, if the consumer has obtained a second job 
that will increase the consumer's residual income going forward or the 
consumer has moved since obtaining the prior loan and will have lower 
housing expenses going forward.
    Proposed Sec.  1041.6(b) through (d) define a set of circumstances 
in which the Bureau believes that a consumer's recent borrowing history 
makes it unlikely that the consumer can afford a new covered short-term 
loan, including concurrent loans.\564\ In such

[[Page 47959]]

circumstances, a consumer would be presumed to not have the ability to 
repay a covered short-term loan under proposed Sec.  1041.5. Proposed 
Sec.  1041.6(e) would define the additional determinations that a 
lender would be required to make in cases where the presumption applies 
in order for the lender's determination under proposed Sec.  1041.5 
that the consumer will have the ability to repay a new covered short-
term loan to be reasonable despite the unaffordability of the prior 
loan.
---------------------------------------------------------------------------

    \564\ The Bureau notes that the proposed ability-to-repay 
requirements do not prohibit a consumer from taking out a covered 
short-term loan when the consumer has one or more covered short-term 
loans outstanding, but instead account for the presence of 
concurrent loans in two ways: (1) A lender would be required to 
obtain verification evidence about required payments on debt 
obligations, which are defined under proposed Sec.  1041.5(a)(2) to 
include outstanding covered loans, and (2) any concurrent loans 
would be counted as part of the loan sequence for purposes of 
applying the presumptions and prohibitions under proposed Sec.  
1041.6. This approach differs from the conditional exemption for 
covered short-term loans under proposed Sec.  1041.7 (i.e., the 
alternative to the ability-to-repay requirements), which generally 
prohibits a Section 7 loan if the consumer has an outstanding 
covered loan. See the section-by-section analysis of proposed Sec.  
1041.7(c)(1) for further discussion, including explanation of the 
different approaches and notation of third party data regarding the 
prevalence of concurrent borrowing in this market.
---------------------------------------------------------------------------

    The Bureau believes that it is extremely unlikely that a consumer 
who twice in succession returned to reborrow during the reborrowing 
period and who seeks to reborrow again within 30 days of having the 
third covered short-term loan outstanding would be able to afford 
another covered short-term loan. Because of lenders' strong incentives 
to facilitate reborrowing that is beyond the consumer's ability to 
repay, the Bureau believes it is appropriate, in proposed Sec.  
1041.6(f), to impose a mandatory 30-day cooling-off period after the 
third covered short-term loan in a sequence, during which time the 
lender cannot make a new covered short-term loan under proposed Sec.  
1041.5 to the consumer. This period would ensure that after three 
consecutive ability-to-repay determinations have proven inconsistent 
with the consumer's actual experience, the lender could not further 
worsen the consumer's financial situation by encouraging the consumer 
to take on additional unaffordable debt. Additionally, proposed Sec.  
1041.6(g) would prohibit a lender from combining sequences of covered 
short-term loans made under proposed Sec.  1041.5 with loans made under 
the conditional exemption in proposed Sec.  1041.7, as discussed 
further below.
    The Bureau notes that this overall proposed approach is fairly 
similar to the framework included in the Small Business Review Panel 
Outline. There, the Bureau included a presumption of inability to repay 
for the second and third covered short-term loan and covered longer-
term balloon-payment loan in a loan sequence and a mandatory cooling-
off period following the third loan in a sequence. The Bureau 
considered a ``changed circumstances'' standard for overcoming the 
presumption that would have required lenders to obtain and verify 
evidence of a change in consumer circumstances indicating that the 
consumer had the ability to repay the new loan according to its terms. 
The Bureau also, as noted above, included a 60-day reborrowing period 
(and corresponding definition of loan sequence) in the Small Business 
Review Panel Outline.
    SERs and other stakeholders that offered feedback on the Outline 
urged the Bureau to provide greater flexibility with regard to using a 
presumptions framework to address concerns about repeated borrowing 
despite the contemplated requirement to determine ability to repay. The 
SERs and other stakeholders also urged the Bureau to provide greater 
clarity and flexibility in defining the circumstances that would permit 
a lender to overcome the presumption of unaffordability.
    The Small Business Review Panel Report recommended that the Bureau 
request comment on whether a loan sequence could be defined with 
reference to a period shorter than the 60 days under consideration 
during the SBREFA process. The Small Business Review Panel Report 
further recommended that the Bureau consider additional approaches to 
regulation, including whether existing State laws and regulations could 
provide a model for elements of the Bureau's proposed interventions. In 
this regard, the Bureau notes that some States have cooling-off periods 
of one to seven days, as well as longer periods that apply after a 
longer sequence of loans. The Bureau's prior research has examined the 
effectiveness of these cooling-off periods \565\ and, in the CFPB 
Report on Supplemental Findings, the Bureau is publishing research 
showing how different definitions of loan sequence affect the number of 
loan sequences and the number of loans deemed to be part of a 
sequence.\566\ In the CFPB Report on Supplemental Findings, the Bureau 
is publishing additional analysis on the impacts of State cooling-off 
periods.\567\ The latter analysis is also discussed in Market 
Concerns--Short-Term Loans.
---------------------------------------------------------------------------

    \565\ See CFPB Data Point: Payday Lending, at 8.
    \566\ CFPB Report on Supplemental Findings, at ch. 5.
    \567\ CFPB Report on Supplemental Findings, at ch. 4.
---------------------------------------------------------------------------

    The Bureau has made a number of adjustments to the presumptions 
framework in response to this feedback. For instance, the Bureau is 
proposing a 30-day definition of loan sequence and 30-day cooling-off 
period rather than a 60-day definition of loan sequence and 60-day 
cooling-off period. The Bureau has also provided greater specificity 
and flexibility about when a presumption of unaffordability would 
apply, for example, by proposing certain exceptions to the presumption 
of unaffordability for a sequence of covered short-term loans. The 
proposal also would provide somewhat more flexibility about when a 
presumption of unaffordability could be overcome by permitting lenders 
to determine that there would be sufficient improvement in financial 
capacity for the new loan because of a one-time drop in income since 
obtaining the prior loan (or during the prior 30 days, as applicable). 
The Bureau has also continued to assess potential alternative 
approaches to the presumptions framework, discussed below.
    The Bureau solicits comment on all aspects of the proposed 
presumptions of unaffordability and mandatory cooling-off periods, and 
other aspects of proposed Sec.  1041.6, including the circumstances in 
which the presumptions apply (e.g., the appropriate length of the 
reborrowing period and the appropriateness of other circumstances 
giving rise to the presumptions), the requirements for overcoming a 
presumption of unaffordability, and the circumstances in which a lender 
would be prohibited from making a covered short-term loan under 
proposed Sec.  1041.5 during a 30-day cooling-off period or cooling-off 
period of a different length. In addition, and consistent with the 
recommendations of the Small Business Review Panel Report, the Bureau 
solicits comment on whether the 30-day reborrowing period is 
appropriate for the presumptions and prohibitions, or whether a longer 
or shorter period would better address the Bureau's concerns about 
repeat borrowing. The Bureau also seeks comment on whether lenders 
should be required to provide disclosures as part of the origination 
process for covered loans and, if so, whether an associated model form 
would be appropriate; on the specific elements of such disclosures; and 
on the burden and benefits to consumers and lenders of providing 
disclosures as described above.
Alternatives Considered
    The Bureau has considered a number of alternative approaches to 
address reborrowing on covered short-term loans in circumstances 
indicating the consumer was unable to afford the prior loan.\568\ One 
possible approach would

[[Page 47960]]

be to limit the overall number of covered short-term loans that a 
consumer could take within a specified period of time, rather than 
using the loan sequence and presumption concepts as part of the 
determination of consumers' ability to repay subsequent loans in a 
sequence and when and if a mandatory cooling-off period should apply. 
By imposing limits on reborrowing while avoiding the complexity of the 
presumptions, this approach could provide a more flexible way to 
protect consumers whose borrowing patterns suggest that they may not 
have the ability to repay their loans. This approach could, for 
example, limit the number of covered short-term loans to three within a 
120-day period when the loan has a duration of 15 days or less. For 
loans with a longer duration, the applicable period of time 
correspondingly could be longer. However, depending on individual 
consumers' usage patterns, such an approach could also result in much 
longer cooling-off periods for individuals who borrow several times 
early in the designated period. Alternatively, a similar approach could 
impose a cooling-off period of varying lengths depending on the 
consumer's time in debt during a specified period.
---------------------------------------------------------------------------

    \568\ In addition to the alternatives discussed, the Bureau 
tested draft disclosure forms in preparing for the rulemaking. These 
are discussed in the FMG report and in part III above. Among other 
forms, the consumer testing obtained feedback on disclosure forms 
that provided information about certain restrictions on reborrowing 
covered short-term loans made under proposed Sec.  1041.5. In 
particular, the forms explained to consumers that they might not be 
able to roll over or take out a new loan shortly after paying off 
the loan for which the consumer was applying. The forms also 
provided the loan payment date and amount due, along with a warning 
that consumers should not take out the loan if they could not pay it 
back by the payment date. During testing, participants were asked 
about the purpose of the form and whether they believed that their 
future ability to roll over or take out another loan would be 
limited. A few participants understood that borrowing would be 
restricted, but others had further questions about the restrictions 
and appeared to have difficulty understanding the restrictions. 
Based on these results, the Bureau is not proposing disclosures 
regarding the origination of loans under proposed Sec.  1041.5 and 
the reborrowing restrictions under proposed Sec.  1041.6.
---------------------------------------------------------------------------

    The Bureau has also considered an alternative approach under which, 
instead of defining the circumstances in which a formal presumption of 
unaffordability applies and the determinations that a lender must make 
when such a presumption applies to a transaction, the Bureau would 
identify circumstances indicative of a consumer's inability to repay 
that would be relevant to whether a lender's determination under 
proposed Sec.  1041.5 is reasonable. This approach would likely involve 
a number of examples of indicia requiring greater caution in 
underwriting and examples of countervailing factors that might support 
the reasonableness of a lender's determination that the consumer could 
repay a subsequent loan despite the presence of such indicia. This 
alternative approach would be less prescriptive than the proposed 
framework, and thus leave more discretion to lenders to make such a 
determination. However, it would also provide less certainty as to when 
a lender's particular ability-to-repay determination is reasonable.
    In addition, the Bureau has considered whether there is a way to 
account for unusual expenses within the presumptions framework without 
creating an exception that would swallow the rule. In particular, the 
Bureau considered permitting lenders to overcome the presumptions of 
unaffordability in the event that the consumer provided evidence that 
the reason the consumer was struggling to repay the outstanding loan or 
was seeking to reborrow was due to a recent unusual and non-recurring 
expense. For example, under such an approach, a lender could overcome 
the presumption of unaffordability by finding that the reason the 
consumer was seeking a new covered short-term loan was as a result of 
an emergency car repair or furnace replacement or an unusual medical 
expense during the term of the prior loan or the reborrowing period, so 
long as the expense is not reasonably likely to recur during the period 
of the new loan. The Bureau considered including such circumstances as 
an additional example of sufficient improvement in financial capacity, 
as described with regard to proposed Sec.  1041.6(e) below.
    While such an addition could provide more flexibility to lenders 
and to consumers to overcome the presumptions of unaffordability, an 
unusual and non-recurring expense test would also present several 
challenges. To effectuate this test, the Bureau would need to define, 
in ways that lenders could implement, what would be a qualifying 
``unusual and non-recurring expense,'' a means of assessing whether a 
new loan was attributable to such an expense rather than to the 
unaffordability of the prior loan, and standards for how such an 
unusual and non-recurring expense could by documented (e.g., through 
transaction records). Such a test would have substantial implications 
for the way in which the ability-to-repay requirements in proposed 
Sec.  1041.5 (and proposed Sec.  1041.9 for covered longer-term loans) 
address the standards for basic living expenses and accounting for 
potential volatility over the term of a loan. Most significantly, the 
Bureau is concerned that if a lender were permitted to overcome the 
presumption of unaffordability by finding that the consumer faced an 
unusual and non-recurring expense during repayment of the prior or 
outstanding loan, this justification would be invoked in cases in which 
the earlier loan had, in fact, been unaffordable. As discussed above, 
the fact that a consumer may cite a particular expense shock when 
seeking to reborrow does not necessarily mean that a recent prior loan 
was affordable; if a consumer, in fact, lacked the ability to repay the 
prior loan, it would be a substantial factor in why the consumer could 
not absorb the expense. Accordingly, the Bureau believes that it may be 
difficult to parse out causation and to differentiate between types of 
expense shocks and the reasonableness of lenders' ability-to-repay 
determinations where such shocks are asserted to have occurred.
    In light of these competing considerations, the Bureau has chosen 
to propose the approach of supplementing the proposed Sec.  1041.5 
determination with formal presumptions. The Bureau is, however, broadly 
seeking comment on alternative approaches to addressing the issue of 
repeat borrowing in a more flexible manner, including the alternatives 
described above and on any other framework for assessing consumers' 
borrowing history as part of an overall determination of ability to 
repay. The Bureau specifically seeks comment on whether to apply a 
presumption of unaffordability or mandatory cooling-off period based on 
the total number of loans that a consumer has obtained or the total 
amount of time in which a consumer has been in debt during a specified 
period of time. The Bureau also solicits comment on the alternative of 
defining indicia of unaffordability, as described above. For such 
alternatives, the Bureau solicits comment on the appropriate time 
periods and on the manner in which such frameworks would address 
reborrowing on loans of different lengths. In addition, the Bureau 
specifically seeks comment on whether to permit lenders to overcome a 
presumption of unaffordability by finding that the consumer had 
experienced an unusual and non-recurring expense and, if so, on 
measures to address the challenges described above.
Legal Authority
    As discussed in the section-by-section analysis of proposed Sec.  
1041.4 above, the Bureau believes that it may be an unfair and abusive 
practice to make a covered

[[Page 47961]]

short-term loan without determining that the consumer will have the 
ability to repay the loan. Accordingly, in order to prevent that unfair 
and abusive practice, proposed Sec.  1041.5 would require lenders prior 
to making a covered short-term loan--other than a loan made under the 
conditional exemption to the ability-to-repay requirements in proposed 
Sec.  1041.7--to make a reasonable determination that the consumer has 
sufficient income after meeting major financial obligations, to make 
payments under a prospective covered short-term loan and to continue 
meeting basic living expenses. Proposed Sec.  1041.6 would augment the 
basic ability-to-repay determination required by proposed Sec.  1041.5 
in circumstances in which the consumer's recent borrowing history or 
current difficulty repaying an outstanding loan provides important 
evidence with respect to the consumer's financial capacity to afford a 
new covered short-term loan. The Bureau is proposing Sec.  1041.6 based 
on the same source of authority that serves as the basis for proposed 
Sec.  1041.5: The Bureau's authority under section 1031(b) of the Dodd-
Frank Act, which provides that the Bureau's rules may include 
requirements for the purposes of preventing unfair, deceptive, or 
abusive acts or practices.\569\
---------------------------------------------------------------------------

    \569\ 12 U.S.C. 5531(b).
---------------------------------------------------------------------------

    As with proposed Sec.  1041.5, the Bureau proposes the requirements 
in Sec.  1041.6 to prevent the unfair and abusive practice identified 
in proposed Sec.  1041.4, and the consumer injury that results from it. 
The Bureau believes that the additional requirements of proposed Sec.  
1041.6 may be needed in circumstances in which proposed Sec.  1041.5 
alone may not be sufficient to prevent a lender from making a covered 
short-term loan that would exacerbate the impact of an initial 
unaffordable loan. Accordingly, the Bureau believes that the 
requirements set forth in proposed Sec.  1041.6 bear a reasonable 
relation to preventing the unfair and abusive practice identified in 
proposed Sec.  1041.4. In addition, as further discussed in the 
section-by-section analysis of proposed Sec.  1041.6(h), the Bureau 
proposes that provision pursuant to both the Bureau's authority under 
section 1031(b) of the Dodd-Frank Act and the Bureau's authority under 
section 1022(b)(1) of the Dodd-Frank Act to prevent evasions of the 
purposes and objectives of Federal consumer financial laws, including 
Bureau rules issued pursuant to rulemaking authority provided by Title 
X of the Dodd-Frank Act.\570\
---------------------------------------------------------------------------

    \570\ 12 U.S.C. 5512(b)(1).
---------------------------------------------------------------------------

6(a) Additional Limitations on Making a Covered Short-Term Loan Under 
Sec.  1041.5
    Proposed Sec.  1041.6(a) would set forth the general additional 
limitations on making a covered short-term loan under proposed Sec.  
1041.5. Proposed Sec.  1041.6(a) would provide that when a consumer is 
presumed not to have the ability to repay a covered short-term loan 
under proposed Sec.  1041.6(b), (c), or (d), a lender's determination 
that the consumer will have the ability to repay the loan is not 
reasonable, unless the lender can overcome the presumption of 
unaffordability. Proposed Sec.  1041.6(a) would further provide that a 
lender is prohibited from making a covered short-term loan to a 
consumer if the mandatory cooling-off periods in proposed Sec.  
1041.6(f) or (g) apply. In order to determine whether the presumptions 
and prohibitions in proposed Sec.  1041.6 apply to a particular 
transaction, proposed Sec.  1041.6(a)(2) would require a lender to 
obtain and review information about the consumer's borrowing history 
from its own records, the records of its affiliates, and a consumer 
report from an information system currently registered under proposed 
Sec.  1041.17(c)(2) or (d)(2), if one is available.
    The Bureau notes that, as drafted, the proposed presumptions and 
prohibitions in Sec.  1041.6 would apply only to making specific 
additional covered short-term loans. The Bureau solicits comment on 
whether a presumption of unaffordability, mandatory cooling-off 
periods, or other additional limitations on lending also would be 
appropriate for transactions involving an increase in the credit 
available under an existing covered loan, making an advance on a line 
of credit under a covered short-term loan, or other circumstances that 
may evidence repeated borrowing. If such limitations would be 
appropriate, the Bureau requests comment on how they should be tailored 
in light of relevant considerations.
    In this regard, the Bureau further notes that the presumptions of 
unaffordability depend on the definition of outstanding loan in 
proposed Sec.  1041.2(a)(15) and therefore would not cover 
circumstances in which the consumer is more than 180 days delinquent on 
the prior loan. The Bureau solicits comment on whether additional 
requirements should apply to the ability-to-repay determination for a 
covered short-term loan in these circumstances; for instance, whether 
to generally prohibit lenders from making a new covered short-term loan 
to a consumer for the purposes of satisfying a delinquent obligation on 
an existing loan with the same lender or its affiliate. In addition, 
the Bureau solicits comment on whether additional requirements should 
apply to covered short-term loans that are lines of credit; for 
instance, whether a presumption of unaffordability should apply at the 
time of the ability-to-repay determination required under Sec.  
1041.5(b)(1)(ii) for a consumer to obtain an advance under a line of 
credit more than 180 days after the date of a prior ability-to-repay 
determination.
    The Bureau also solicits comment on the proposed standard in Sec.  
1041.6(a) and on any alternative approaches to the relationship between 
proposed Sec.  1041.5 and proposed Sec.  1041.6 that would prevent 
consumer harm while reducing the burden on lenders. In particular, the 
Bureau solicits comment on whether the formal presumption and 
prohibition approach in Sec.  1041.6 is an appropriate supplement to 
the Sec.  1041.5 determination.
6(a)(1) General
    Proposed Sec.  1041.6(a)(1) would provide that if a presumption of 
unaffordability applies, a lender's determination that the consumer 
will have the ability to repay a covered short-term loan is not 
reasonable unless the lender makes the additional determination set 
forth in proposed Sec.  1041.6(e), and discussed in detail below, and 
the requirements set forth in proposed Sec.  1041.5 are satisfied. 
Under proposed Sec.  1041.6(e), a lender can make a covered short-term 
loan notwithstanding the presumption of unaffordability if the lender 
reasonably determines, based on reliable evidence, that there will be 
sufficient improvement in the consumer's financial capacity such that 
the consumer would have the ability to repay the new loan according to 
its terms despite the unaffordability of the prior loan. Proposed Sec.  
1041.6(a)(1) would further provide that a lender must not make a 
covered short-term loan under proposed Sec.  1041.5 to a consumer 
during the mandatory cooling-off periods specified in proposed Sec.  
1041.6(f) and (g).
    Proposed comment 6(a)(1)-1 clarifies that the presumptions and 
prohibitions would apply to making a covered short-term loan and are 
triggered, if applicable, at the time of consummation of the new 
covered short-term loan. Proposed comment 6(a)(1)-2 clarifies that the 
presumptions and prohibitions would apply to rollovers and renewals of 
a covered short-term loan when such transactions are permitted under 
State

[[Page 47962]]

law. Proposed comment 6(a)(1)-3 clarifies that a lender's determination 
that a consumer will have the ability to repay a covered short-term 
loan is not reasonable within the meaning of proposed Sec.  1041.5 if 
under proposed Sec.  1041.6 the consumer is presumed to not have the 
ability to repay the loan and that presumption of unaffordability has 
not been overcome in the manner set forth in proposed Sec.  1041.6(e). 
Thus, if proposed Sec.  1041.6 prohibits a lender from making a covered 
short-term loan, then the lender must not make the loan, regardless of 
the lender's determination under proposed Sec.  1041.5. Nothing in 
proposed Sec.  1041.6 would displace the requirements of Sec.  1041.5; 
on the contrary, the determination under proposed Sec.  1041.6 would 
be, in effect, an additional component of the proposed Sec.  1041.5 
determination of ability to repay in situations in which the basic 
requirements of proposed Sec.  1041.5 alone would be insufficient to 
prevent the unfair and abusive practice.
6(a)(2) Borrowing History Review
    Proposed Sec.  1041.6(a)(2) would require a lender to obtain and 
review information about a consumer's borrowing history from the 
records of the lender and its affiliates, and from a consumer report 
obtained from an information system currently registered pursuant to 
Sec.  1041.17(c)(2) or (d)(2), if available, and to use this 
information to determine a potential loan's compliance with the 
requirements of proposed Sec.  1041.6. Proposed comment 6(a)(2)-1 
clarifies that a lender satisfies its obligation under Sec.  
1041.6(a)(2) to obtain a consumer report obtained from an information 
system currently registered pursuant to Sec.  1041.17(c)(2) or (d)(2), 
if available, when it complies with the requirement in Sec.  
1041.5(c)(3)(ii)(B) to obtain this same consumer report. Proposed 
comment 6(a)(2)-2 clarifies that if no information systems currently 
registered pursuant to Sec.  1041.17(c)(2) or (d)(2) are currently 
available, the lender is nonetheless required to obtain information 
about a consumer's borrowing history from the records of the lender and 
its affiliates.
    Based on outreach to lenders, including feedback from SERs, the 
Bureau believes that lenders already generally review their own records 
for information about a consumer's history with the lender prior to 
making a new loan to the consumer. The Bureau understands that some 
lenders in the market for covered short-term loans also pull a consumer 
report from a specialty consumer reporting agency as part of 
standardized application screening, though practices in this regard 
vary widely across the market.
    As detailed below in the section-by-section analysis of proposed 
Sec. Sec.  1041.16 and 1041.17, the Bureau believes that information 
regarding the consumer's borrowing history is important to facilitate 
reliable ability-to-repay determinations. If the consumer already has a 
relationship with a lender or its affiliates, the lender can obtain 
some historical information regarding borrowing history from its own 
records. However, without obtaining a report from an information system 
currently registered pursuant to Sec.  1041.17(c)(2) or (d)(2), the 
lender will not know if its existing customers or new customers have 
obtained covered short-term loans or a prior covered longer-term 
balloon-payment loan from other lenders, as such information generally 
is not available in national consumer reports. Accordingly, the Bureau 
is proposing in Sec.  1041.6(a)(2) to require lenders to obtain a 
report from an information system currently registered pursuant to 
Sec.  1041.17(c)(2) or (d)(2), if one is available.
    The section-by-section analysis of proposed Sec.  1041.16 and 
1041.17, and part VI below explain the Bureau's attempts to minimize 
burden in connection with furnishing information to and obtaining a 
consumer report from an information system currently registered 
pursuant to proposed Sec.  1041.17(c)(2) or (d)(2). Specifically, the 
Bureau estimates that each report would cost approximately $0.50. 
Consistent with the recommendations of the Small Business Review Panel 
Report, the Bureau requests comment on the cost to small entities of 
obtaining information about consumer borrowing history and on potential 
ways to further reduce the operational burden of obtaining this 
information.
6(b) Presumption of Unaffordability for Sequence of Covered Short-Term 
Loans Made Under Sec.  1041.5
6(b)(1) Presumption
    Proposed Sec.  1041.6(b)(1) would provide that a consumer is 
presumed not to have the ability to repay a covered short-term loan 
under proposed Sec.  1041.5 during the time period in which the 
consumer has a covered short-term loan made under proposed Sec.  1041.5 
outstanding and for 30 days thereafter. Proposed comment 6(b)(1)-1 
clarifies that a lender cannot make a covered short-term loan under 
Sec.  1041.5 during the time period in which the consumer has a covered 
short-term loan made under Sec.  1041.5 outstanding and for 30 days 
thereafter unless the exception to the presumption applies or the 
lender can overcome the presumption. A lender would be permitted to 
overcome the presumption of unaffordability in accordance with proposed 
Sec.  1041.6(e) for the second and third loan in a sequence, as defined 
in proposed Sec.  1041.2(a)(12); as noted in proposed comment 6(b)(1)-
1, prior to the fourth covered short-term loan in a sequence, proposed 
Sec.  1041.6(f) would impose a mandatory cooling-off period, as 
discussed further below.
    Proposed Sec.  1041.6(b)(1) would apply to situations in which, 
notwithstanding a lender's determination prior to consummating an 
earlier covered short-term loan that the consumer would have the 
ability to repay the loan according to its terms, the consumer seeks to 
take out a new covered short-term loan during the term of the prior 
loan or within 30 days thereafter.
    As discussed above in the background to the section-by-section 
analysis of Sec.  1041.6, the Bureau believes that when a consumer 
seeks to take out a new covered short-term loan during the term of or 
within 30 days of having a prior covered short-term loan outstanding, 
there is substantial reason for concern that the need to reborrow is 
caused by the unaffordability of the prior loan. The Bureau proposes to 
use the 30-day reborrowing period discussed above to define the 
circumstances in which a new loan would be considered a reborrowing. 
The Bureau believes that even in cases where the determination of 
ability to repay was reasonable based upon what was known at the time 
that the prior loan was originated, the fact that the consumer is 
seeking to reborrow in these circumstances is relevant in assessing 
whether a new and similar loan--or rollover or renewal of the existing 
loan--would be affordable for the consumer. For example, the 
reborrowing may indicate that the consumer's actual basic living 
expenses exceed what the lender projected for the purposes of Sec.  
1041.5 for the prior loan. In short, the Bureau believes that when a 
consumer seeks to take out a new covered short-term loan that would be 
part of a loan sequence, there is substantial reason to conduct a 
particularly careful review to determine whether the consumer can 
afford to repay the new covered short-term loan.
    In addition, the fact that the consumer is seeking to reborrow in 
these circumstances may indicate that the initial determination of 
affordability was unreasonable when made. Indeed, the Bureau believes 
that if, with respect to a particular lender making covered short-term 
loans pursuant to proposed Sec.  1041.5, a substantial percentage of

[[Page 47963]]

consumers returned within 30 days to obtain a second loan, that fact 
would provide evidence that the lender's determinations under proposed 
Sec.  1041.5 were not reasonable. And this would be even more so the 
case where a substantial percentage of consumers returned within 30 
days of the second loan to obtain a third loan.
    Given these considerations, to prevent the unfair and abusive 
practice identified in proposed Sec.  1041.4, proposed Sec.  1041.6(b) 
would create a presumption of unaffordability for a covered short-term 
loan during the time period in which the consumer has a covered short-
term loan made under Sec.  1041.5 outstanding and for 30 days 
thereafter unless the exception in proposed Sec.  1041.6(b)(2) applies. 
As a result of this presumption, it would not be reasonable for a 
lender to determine that the consumer will have the ability to repay 
the new covered short-term loan without taking into account the fact 
that the consumer did need to reborrow after obtaining a prior loan and 
making a reasonable determination that the consumer will be able to 
repay the new covered short-term loan without reborrowing. Proposed 
Sec.  1041.6(e), discussed below, defines the elements for such a 
determination.
    The Bureau solicits comment on the appropriateness of the proposed 
presumption to prevent the unfair and abusive practice and on any 
alternatives that would adequately prevent consumer harm while reducing 
the burden on lenders. In particular, the Bureau solicits comment on 
alternative approaches to preventing consumer harm from repeat 
borrowing on covered short-term loans, including other methods of 
supplementing the basic ability-to-repay determination required for a 
covered short-term loan shortly following a prior covered short-term 
loan.
    The Bureau also solicits comment on whether there are other 
circumstances--such as a pattern of heavy usage of covered short-term 
loans that would not meet the proposed definition of a loan sequence or 
the overall length of time in which a consumer is in debt on covered 
short-term loans over a specified period of time--that would also 
warrant a presumption of unaffordability.
6(b)(2) Exception
    Proposed Sec.  1041.6(b)(2) would provide an exception to the 
presumption in proposed Sec.  1041.6(b)(1) where the subsequent covered 
short-term loan would meet specific conditions. The conditions under 
either proposed Sec.  1041.6(b)(2)(i)(A) or (B) must be met, along with 
the condition under proposed Sec.  1041.6(b)(2)(ii). First, under 
proposed Sec.  1041.6(b)(2)(i)(A), the consumer must have paid the 
prior covered short-term loan in full and the amount that would be owed 
by the consumer for the new covered short-term loan could not exceed 50 
percent of the amount that the consumer paid on the prior loan. Second, 
under proposed Sec.  1041.6(b)(2)(i)(B), in the event of a rollover the 
consumer would not owe more on the new covered short-term loan (i.e., 
the rollover) than the consumer paid on the prior covered short-term 
loan (i.e., the outstanding loan that is being rolled over). Third, 
under proposed Sec.  1041.6(b)(2)(ii), the new covered short-term loan 
would have to be repayable over a period that is at least as long as 
the period over which the consumer made payment or payments on the 
prior loan. Proposed comment 6(b)(2)-1 provides general clarification 
for the proposed provision.
    The rationale for the presumption defined in proposed Sec.  
1041.6(b)(1) is generally that the consumer's need to reborrow in the 
specified circumstances evidences the unaffordability of the prior loan 
and thus warrants a presumption that the new loan will likewise be 
unaffordable for the consumer.
    But when a consumer is seeking to reborrow no more than half of the 
amount that the consumer has already paid on the prior loan, including 
situations in which the consumer is seeking to roll over no more than 
the amount the consumer repays, the Bureau believes that the predicate 
for the presumption may no longer apply. For example, if a consumer 
paid off a prior $400, 45-day duration loan and later returns within 30 
days to request a new $100, 45-day duration loan, the lender may be 
able to reasonably infer that such second $100 loan would be affordable 
for the consumer, even if a second $400 loan would not be. Given that 
result, assuming that the lender satisfies the requirements of proposed 
Sec.  1041.5, the lender may be able to reasonably infer that the 
consumer will have the ability to repay the new loan for $100. Thus, 
the Bureau believes that an exception to the presumption of 
unaffordability may be appropriate in this situation.
    However, this is not the case when the amount owed on the new loan 
would be greater than 50 percent of the amount paid on the prior loan, 
the consumer would roll over an amount greater than he or she repays, 
or the term of the new loan would be shorter than the term of the prior 
loan. For example, if the consumer owes $450 on a covered short-term 
loan, pays only $100 and seeks to roll over the remaining $350, this 
result would not support an inference that the consumer will have the 
ability to repay $350 for the new loan. Accordingly, the new loan would 
be subject to the presumption of unaffordability. Similarly, with the 
earlier example, the lender could not infer based on the payment of 
$400 over 45 days that a consumer could afford $200 in one week. 
Rather, the Bureau believes that it would be appropriate in such 
circumstances for the lender to go through the process to overcome the 
presumption in the manner set forth in proposed Sec.  1041.6(e).
    On the basis of the preceding considerations, the Bureau is 
proposing this exception to the presumption in proposed Sec.  
1041.6(b). The Bureau's rationale is the same for the circumstances in 
both proposed Sec.  1041.6(b)(2)(i)(A) and (B); as explained below, the 
formula is slightly modified in order to account for the particular 
nature of the rollover transaction when permitted under applicable 
State law (termed a renewal in some States).
    The Bureau solicits comment on the appropriateness of the proposed 
exception to the presumption of unaffordability and on any other 
circumstances that would also warrant an exception to the presumption. 
In particular, the Bureau solicits comment on the specific thresholds 
in proposed Sec.  1041.6(b)(2)(i)(A) and (B). In addition, the Bureau 
solicits comment on the timing requirement in proposed Sec.  
1041.6(b)(2)(ii) and whether alternative formulations of the timing 
requirement would be appropriate; for instance, whether an exception 
should be available if the new covered short-term loan would be 
repayable over a period that is proportional to the prior payment 
history.
6(b)(2)(i)(A)
    Proposed Sec.  1041.6(b)(2)(i)(A) would set out the formula for 
transactions in which the consumer has paid off the prior loan in full 
and is then returning for a new covered short-term loan during the 
reborrowing period. Proposed Sec.  1041.6(b)(2)(i)(A) would define paid 
in full to include the amount financed, charges included in the total 
cost of credit, and charges excluded from the total cost of credit such 
as late fees. Proposed Sec.  1041.6(b)(2)(i)(A) would further specify 
that to be eligible for the exception, the consumer would not owe, in 
connection with the new covered short-term loan, more than 50 percent 
of the amount that the consumer paid on the prior covered short-term 
loan (including the amount financed

[[Page 47964]]

and charges included in the total cost of credit, but excluding any 
charges excluded from the total cost of credit such as late fees). 
Proposed comment 6(b)(2)(i)(A)-1 clarifies that a loan is considered 
paid in full whether or not the consumer's obligations were satisfied 
timely under the loan contract and also clarifies how late fees are 
treated for purposes of the exception requirements. Proposed comment 
6(b)(2)(i)(A)-2 provides illustrative examples. The Bureau solicits 
comment on whether a consumer should be eligible for the exception 
under proposed Sec.  1041.6(b)(2)(i)(A) when the prior loan was paid in 
full but the consumer had previously triggered late fees or otherwise 
was delinquent on payments for the prior loan, as such history of late 
payments could be a relevant consideration toward whether the consumer 
has the ability to repay a similarly-structured loan.
6(b)(2)(i)(B)
    Proposed Sec.  1041.6(b)(2)(i)(B) would set out the formula for 
transactions in which the consumer provides partial payment on a 
covered short-term loan and is seeking to roll over the remaining 
balance into a new covered short-term loan. Proposed Sec.  
1041.6(b)(2)(i)(B) would specify that to be eligible for the exception, 
the consumer would not owe more on the new covered short-term loan than 
the consumer paid on the prior covered short-term loan that is being 
rolled over (including the amount financed and charges included in the 
total cost of credit, but excluding any charges that are excluded from 
the total cost of credit such as late fees). Proposed comment 
6(b)(2)(i)(B)-1 clarifies that rollovers are subject to applicable 
State law (sometimes called renewals) and cross-references proposed 
comment 6(a)(1)-2. Proposed comment 6(b)(2)(i)(B)-1 also clarifies that 
the prior covered short-term loan is the outstanding loan being rolled 
over, the new covered short-term loan is the rollover, and that for the 
conditions of Sec.  1041.6(b)(2)(i)(B) to be satisfied, the consumer 
will repay at least 50 percent of the amount owed on the loan being 
rolled over. Proposed comment 6(b)(2)(i)(B)-2 provides an illustrative 
example.
    As discussed above with regard to the reborrowing period, the 
Bureau considers rollovers and other forms of reborrowing within 30 
days of the prior loan outstanding to be the same. Given the particular 
nature of the rollover transaction when permitted by State law, 
slightly different calculations are needed for the exception to 
effectuate this equal treatment.
6(b)(2)(ii)
    Proposed Sec.  1041.6(b)(2)(ii) would set forth the condition that 
the new covered short-term loan be repayable over a period that is at 
least as long as the period over which the consumer made payment or 
payments on the prior covered short-term loan. The Bureau believes that 
both the amount of the new loan and the duration of the new loan 
relative to the prior loan are important to determining whether there 
is a risk that the second loan would be unaffordable and thus whether a 
presumption should be applied. Absent this condition, situations could 
arise in which the 50 percent condition were satisfied but where the 
Bureau would still have concern about not applying the presumption. As 
noted above, from the fact that the consumer paid in full a $450 loan 
with a term of 45 days, it does not follow that the consumer can afford 
a $200 loan with a term of one week, even though $200 is less than 50 
percent of $450. In that instance, the consumer would owe $200 in only 
a week, which may be very difficult to repay.
6(c) Presumption of Unaffordability for a Covered Short-Term Loan 
Following a Covered Longer-Term Balloon-Payment Loan Made Under Sec.  
1041.9
    Proposed Sec.  1041.6(c) would provide that a consumer is presumed 
not to have the ability to repay a covered short-term loan under 
proposed Sec.  1041.5 during the time period in which the consumer has 
a covered longer-term balloon-payment loan made under proposed Sec.  
1041.9 outstanding and for 30 days thereafter. The presumption in 
proposed Sec.  1041.6(c) uses the same 30-day reborrowing period used 
in proposed Sec.  1041.6(b) and discussed in the background to the 
section-by-section analysis of Sec.  1041.6 to define when there is 
sufficient risk that the need for the new loan was triggered by the 
unaffordability of the prior loan and, as a result, warrants a 
presumption that the new loan would be unaffordable.
    The Bureau believes that when a consumer seeks to take out a new 
covered short-term loan that would be part of a loan sequence, there is 
substantial reason for concern that the need to reborrow is being 
triggered by the unaffordability of the prior loan. Similarly, covered 
longer-term balloon-payment loans, by definition, require a large 
portion of the loan to be paid at one time. As discussed below in 
Market Concerns--Longer-Term Loans, the Bureau's research suggests that 
the fact that a consumer seeks to take out another covered longer-term 
balloon-payment loan shortly after having a previous covered longer-
term balloon-payment loan outstanding will frequently indicate that the 
consumer did not have the ability to repay the prior loan and meet the 
consumer's other major financial obligations and basic living expenses. 
The Bureau found that the approach of the balloon payment coming due is 
associated with significant reborrowing.\571\ However, the need to 
reborrow caused by an unaffordable covered longer-term balloon is not 
necessarily limited to taking out a new loan of the same type. If the 
borrower takes out a new covered short-term loan in such circumstances, 
it also is a reborrowing. Accordingly, in order to prevent the unfair 
and abusive practice identified in proposed Sec.  1041.4, the Bureau 
proposes a presumption of unaffordability for a covered short-term loan 
that would be concurrent with or shortly following a covered longer-
term balloon-payment loan.
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    \571\ CFPB Report on Supplemental Findings, at ch. 1. The 
findings in the CFPB Report on Supplemental Findings refer to both 
``refinancing'' and ``reborrowing.'' Consistent with the Bureau's 
approach to defining reborrowing for the purposes of this proposal, 
both refinancing and reborrowing, as reported in the CFPB Report on 
Supplemental Findings, are considered reborrowing.
---------------------------------------------------------------------------

    Unlike the presumption in Sec.  1041.6(b), the Bureau does not 
propose an exception to the presumption based on the amount to be 
repaid on each loan. The rationale for that exception relies on the 
consumer repaying the new covered short-term loan over a period of time 
that is at least as long as the time that the consumer repaid the prior 
covered short-term loan. By definition, a covered longer-term balloon-
payment loan has a longer duration than a covered short-term loan, so 
the circumstances for which the Bureau believes an exception is 
appropriate in Sec.  1041.6(b)(2) would not be applicable to the 
transactions governed by proposed Sec.  1041.6(c).
    The Bureau solicits comment on the appropriateness of the proposed 
presumption to prevent the unfair and abusive practice and on any 
alternatives that would adequately prevent consumer harm while reducing 
the burden on lenders. The Bureau also solicits comment on whether 
proposed Sec.  1041.6(c) and the provisions of proposed Sec.  1041.6 
more generally would adequately protect against the potential for 
lenders to make covered loans of different lengths (e.g., a covered 
short-term loan immediately followed by a 46-day covered longer-term 
balloon-payment loan) in order to avoid operation of the presumptions 
and prohibitions in proposed Sec.  1041.6, and

[[Page 47965]]

whether the Bureau should impose any additional lending restrictions to 
address this concern. Relatedly, the Bureau seeks comment on whether to 
impose a tolling requirement similar to that under proposed Sec.  
1041.6(h) that would apply where the lender or its affiliate are 
making, in close proximity, covered short-term loans and covered 
longer-term balloon-payment loans with a duration of 90 days or fewer. 
Further, the Bureau requests comment on whether additional provisions 
or commentary examples should be added to proposed Sec.  1041.19, which 
would prohibit lender actions taken with the intent of evading the 
proposed rule, to address such concerns.
6(d) Presumption of Unaffordability for a Covered Short-Term Loan 
During an Unaffordable Outstanding Loan
    While the Bureau's research suggests that reborrowing harms are 
most acute when consumers take out a series of covered short-term loans 
or covered longer-term balloon-payment loans, the Bureau also has 
concerns about other reborrowing scenarios. In particular, no matter 
the loan types involved, the Bureau is concerned about the potential 
for abuse when a lender or its affiliate offers to make a new loan to 
an existing customer in circumstances that suggest that the consumer 
may lack the ability to repay an outstanding loan. The Bureau believes 
that in addition to the robust residual income analysis that would be 
required by proposed Sec.  1041.5, applying a presumption may be 
appropriate in order to specify in more detail how lenders should 
evaluate whether such consumers have the ability to repay a new loan in 
certain situations.
    Accordingly, the Bureau is proposing to apply a presumption of 
unaffordability when a lender or its affiliate seeks to make a covered 
short-term loan to an existing consumer in which there are indicia that 
the consumer cannot afford an outstanding loan with that same lender or 
its affiliate. If the outstanding loan does not trigger the presumption 
of unaffordability in proposed Sec.  1041.6(b) or (c) and is not 
subject to the prohibitions in Sec.  1041.6(f) or (g), the presumption 
in proposed Sec.  1041.6(d) would apply to a new covered short-term 
loan if, at the time of the lender's determination under Sec.  1041.5, 
one or more of the indicia of unaffordability are present.
    The triggering conditions would include a delinquency of more than 
seven days within the preceding 30 days, expressions by the consumer 
within the preceding 30 days that he or she cannot afford the 
outstanding loan, certain circumstances indicating that the new loan is 
motivated by a desire to skip one or more payments on the outstanding 
loan, and certain circumstances indicating that the new loan is solely 
to obtain cash to cover upcoming payment or payments on the outstanding 
loan.
    Unlike the presumptions applicable to covered longer-term loans in 
proposed Sec.  1041.10(c), proposed Sec.  1041.6(d) would not provide 
an exception to the presumption for cases in which the new loan would 
result in substantially smaller payments or would substantially lower 
the total cost of credit for the consumer relative to the outstanding 
loan. This distinction reflects the Bureau's concerns discussed in 
Market Concerns--Short-Term Loans about the unique risk of consumer 
injury posed by covered short-term loans because of the requirement 
that a covered short-term loan be repaid shortly after consummation.
    The proposed regulatory text and commentary are very similar for 
Sec.  1041.6(d) and for Sec.  1041.10(c)(1): The main difference is 
that proposed Sec.  1041.6(d) would apply where the new loan would be a 
covered short-term loan, whereas proposed Sec.  1041.10(c)(1) would 
apply where the new loan would be a covered longer-term loan. A 
detailed explanation of each element of the presumption and of related 
commentary is provided below in the section-by-section analysis of 
proposed Sec.  1041.10(c)(1); because of the similarity between the 
sections, the discussion is not repeated in this section-by-section 
analysis.
    The Bureau believes that the analysis required by proposed Sec.  
1041.6(d) may provide greater protection to consumers and certainty to 
lenders than simply requiring that such transactions be analyzed under 
proposed Sec.  1041.5 alone. Proposed Sec.  1041.5 would require 
generally that the lender make a reasonable determination that the 
consumer will have the ability to repay the contemplated covered short-
term loan, taking into account existing major financial obligations 
that would include the outstanding loan from the same lender or its 
affiliate. However, the presumption in proposed Sec.  1041.6(d) would 
provide a more detailed roadmap as to when a new covered short-term 
loan would not meet the reasonable determination test.
    The Bureau solicits comment on the appropriateness of the proposed 
presumption to prevent the unfair and abusive practice, on each of the 
particular circumstances indicating unaffordability as proposed in 
Sec.  1041.6(d)(1) through (4), and on any alternatives that would 
adequately prevent consumer harm while reducing the burden on lenders. 
The Bureau also solicits comment on whether the specified conditions 
sufficiently capture circumstances in which consumers indicate distress 
in repaying an outstanding loan and on whether there are additional 
circumstances in which it may be appropriate to trigger the presumption 
of unaffordability. In particular, the Bureau solicits comment on 
whether to include a specific presumption of unaffordability in the 
event that the lender or its affiliate has recently contacted the 
consumer for collections purposes, received a returned check or payment 
attempt, or has an indication that the consumer's account lacks funds 
prior to making an attempt to collect payment. The Bureau also solicits 
comment on the timing elements of the proposed indications of 
unaffordability, such as whether to trigger the presumption after seven 
days of delinquency and whether to consider the prior 30 days, and on 
whether alternative timing conditions, such as considering the 
consumer's performance over the prior 60 days, would better prevent 
consumer harm. In addition, the Bureau solicits comment on whether the 
presumption should be modified in particular ways with regard to 
covered short-term loans that would not be appropriate for covered 
longer-term loans.
6(e) Overcoming the Presumption of Unaffordability
    Proposed Sec.  1041.6(e) would set forth the elements required for 
a lender to overcome the presumptions of unaffordability in proposed 
Sec.  1041.6(b), (c), or (d). Proposed Sec.  1041.6(e) would provide 
that a lender can overcome the presumption of unaffordability only if 
the lender reasonably determines, based on reliable evidence, that the 
consumer will have sufficient improvement in financial capacity such 
that the consumer will have the ability to repay the new loan according 
to its terms despite the unaffordability of the prior loan. Proposed 
Sec.  1041.6(e) would require lenders to assess sufficient improvement 
in financial capacity by comparing the consumer's financial capacity 
during the period for which the lender is required to make an ability-
to-repay determination for the new loan pursuant to Sec.  1041.5(b)(2) 
to the consumer's financial capacity since obtaining the prior loan or, 
if the prior loan was not a covered short-term loan or covered longer-
term balloon-payment loan, during the 30 days prior to the lender's 
determination.

[[Page 47966]]

    The Bureau proposes several comments to clarify the requirements 
for a lender to overcome a presumption of unaffordability. Proposed 
comment 6(e)-1 clarifies that proposed Sec.  1041.6(e) would permit the 
lender to overcome the presumption in limited circumstances evidencing 
a sufficient improvement in the consumer's financial capacity for the 
new loan relative to the prior loan or, in some circumstances, during 
the prior 30 days. Proposed comments 6(e)-2 and -3 provide illustrative 
examples of these circumstances. Proposed comment 6(e)-2 clarifies that 
a lender may overcome a presumption of unaffordability where there is 
reliable evidence that the need to reborrow is prompted by a decline in 
income since obtaining the prior loan (or, if the prior loan was not a 
covered short-term loan or covered longer-term balloon-payment loan, 
during the 30 days prior to the lender's determination) that is not 
reasonably expected to recur for the period during which the lender is 
underwriting the new covered short-term loan. Proposed comment 6(e)-3 
clarifies that a lender may overcome a presumption of unaffordability 
where there is reliable evidence that the consumer's financial capacity 
has sufficiently improved since the prior loan (or, if the prior loan 
was not a covered short-term loan or covered longer-term balloon-
payment loan, during the 30 days prior to the lender's determination) 
because of an increase in net income or a decrease in major financial 
obligations for the period during which the lender is underwriting the 
new covered short-term loan. Proposed comment 6(e)-4 clarifies that 
reliable evidence consists of verification evidence regarding the 
consumer's net income and major financial obligations sufficient to 
make the comparison required under Sec.  1041.6(e). Proposed comment 
6(e)-4 further clarifies that a self-certification by the consumer does 
not constitute reliable evidence unless the lender verifies the facts 
certified by the consumer through other reliable means.
    With respect to comment 6(e)-2, the Bureau believes that if the 
reborrowing is prompted by a decline in income since obtaining the 
prior loan (or during the prior 30 days, as applicable) that is not 
reasonably expected to recur during the period for which the lender is 
underwriting the new covered short-term loan, the unaffordability of 
the prior loan, including difficulty repaying an outstanding loan, may 
not be probative as to the consumer's ability to repay a new covered 
short-term loan. Similarly, with respect to comment 6(e)-3, the Bureau 
believes that permitting a lender to overcome the presumption of 
unaffordability in these circumstances would be appropriate because an 
increase in the consumer's expected net income or decrease in the 
consumer's expected payments on major financial obligations since 
obtaining the prior loan may materially impact the consumer's financial 
capacity such that a prior unaffordable loan, including difficulty 
repaying an outstanding loan, may not be probative as to the consumer's 
ability to repay a new covered short-term loan. The Bureau notes, 
however, that if, with respect to any given lender, a substantial 
percentage of consumers who obtain a loan pursuant to proposed Sec.  
1041.5 return for a new loan during the reborrowing period, that 
pattern may provide persuasive evidence that the lender's 
determinations to make initial loans were not consistent with the 
ability-to-repay determinations under proposed Sec.  1041.5. As 
discussed above, the presumptions in proposed Sec.  1041.6 supplement 
the basic ability-to-repay requirements in proposed Sec.  1041.5 in 
certain circumstances where a consumer's recent borrowing indicates 
that a consumer would not have the ability to repay a new covered 
short-term loan. Accordingly, the procedure in proposed Sec.  1041.6(e) 
for overcoming the presumption of unaffordability would address only 
the presumption; lenders would still need to determine ability to repay 
in accordance with proposed Sec.  1041.5 before making the new covered 
short-term loan.
    Under proposed Sec.  1041.6(e), the same requirement would apply 
with respect to both the second and third covered short-term loan in a 
sequence subject to the presumption in proposed Sec.  1041.6(b). 
However, the Bureau expects that if, with respect to any given lender, 
a substantial percentage of consumers who obtain a second loan in a 
sequence return for a third loan, that pattern may provide persuasive 
evidence that the lender's determinations to make second loans 
notwithstanding the presumption were not consistent with proposed Sec.  
1041.6(e) and the ability-to-repay determinations were not reasonable 
under proposed Sec.  1041.5. The Bureau further expects that even when 
a lender determines that the presumption of unaffordability can be 
overcome pursuant to proposed Sec.  1041.6(e) for the second loan in a 
sequence, it will be a relatively unusual case in which the consumer 
will encounter multiple rounds of unexpected income or major financial 
obligation disruptions such that the lender will be able to reasonably 
determine that the consumer will have the ability to repay a third 
covered short-term loan notwithstanding the consumer's need to reborrow 
after each of the prior loans.
    The Bureau recognizes that the standard in proposed Sec.  1041.6(e) 
would permit a lender to overcome a presumption of unaffordability only 
in a narrow set of circumstances that are reflected in certain aspects 
of a consumer's financial capacity and can be verified through reliable 
evidence. As discussed above with regard to alternatives considered for 
proposed Sec.  1041.6, the Bureau considered including an additional 
set of circumstances permitting lenders to overcome the presumptions of 
unaffordability in the event that the lender determined that the need 
to reborrow was prompted by an unusual and non-recurring expense rather 
than by the unaffordability of the prior loan. In light of the 
challenges with such an approach, described above, the Bureau elected 
instead to propose Sec.  1041.6(e) without permitting an unusual and 
non-recurring expense to satisfy the conditions of the test. However, 
the Bureau solicits comment on including an unusual and non-recurring 
expense as a third circumstance in which lenders could overcome the 
presumptions of unaffordability.
    The Bureau solicits comment on all aspects of the proposed standard 
for overcoming the presumptions of unaffordability. In particular, the 
Bureau solicits comment on the circumstances that would permit a lender 
to overcome a presumption of unaffordability; on whether other or 
additional circumstances should be included in the standard; and, if 
so, how to define such circumstances. In addition, the Bureau solicits 
comment on the appropriate time period for comparison of the consumer's 
financial capacity between the prior and prospective loans, including, 
specifically, the different requirements for prior loans of different 
types. The Bureau solicits comment on the types of information that 
lenders would be permitted to use as reliable evidence to make the 
determination in proposed Sec.  1041.6(e).
    The Bureau also solicits comment on any alternatives that would 
adequately prevent consumer injury while reducing the burden on 
lenders, including any additional circumstances that should be deemed 
sufficient to overcome a presumption of unaffordability. The Bureau 
also solicits comment on how to address unexpected and non-recurring 
increases in expenses, such as major

[[Page 47967]]

vehicle repairs or emergency appliance replacements, including on the 
alternative discussed above with regard to alternatives considered for 
proposed Sec.  1041.6.
6(f) Prohibition on Loan Sequences of More Than Three Covered Short-
Term Loans Made Under Sec.  1041.5
    Proposed Sec.  1041.6(f) would prohibit lenders from making a 
covered short-term loan under proposed Sec.  1041.5 to a consumer 
during the time period in which the consumer has a covered short-term 
loan made under proposed Sec.  1041.5 outstanding and for 30 days 
thereafter if the new covered short-term loan would be the fourth loan 
in a sequence of covered short-term loans made under proposed Sec.  
1041.5.\572\ Proposed comment 6(f)-1 clarifies that the prohibition in 
proposed Sec.  1041.6(f) does not limit a lender's ability to make a 
covered longer-term loan under proposed Sec.  1041.9, Sec.  1041.11, or 
Sec.  1041.12.
---------------------------------------------------------------------------

    \572\ Proposed Sec.  1041.6(f) provides that it applies 
notwithstanding the presumption of unaffordability under proposed 
Sec.  1041.6(b). If a covered short-term loan would be the fourth 
covered short-term loan in a sequence, then the prohibition in 
proposed Sec.  1041.6(f) would apply, rather than the presumption 
under proposed Sec.  1041.6(b).
---------------------------------------------------------------------------

    As discussed above, the ability-to-repay determination required by 
proposed Sec.  1041.5 is intended to protect consumers from what the 
Bureau believes may be the unfair and abusive practice of making a 
covered short-term loan without making a reasonable determination of 
the consumer's ability to repay the loan. If a consumer who obtains 
such a loan seeks a second loan when, or shortly after, the payment on 
the first loan is due, that suggests that the prior loan payments were 
not affordable and triggered the new loan application, and that a new 
covered short-term loan will lead to the same result. The Bureau 
believes that if a consumer has obtained three covered short-term loans 
in quick succession and seeks to obtain yet another covered short-term 
loan when or shortly after payment on the last loan is due, the fourth 
loan will almost surely be unaffordable for the consumer.
    The Bureau's research underscores the risk that consumers who reach 
the fourth loan in a sequence of covered short-term loans will wind up 
in a long cycle of debt. Most significantly, the Bureau found that 66 
percent of loan sequences that reach a fourth loan end up having at 
least seven loans, and 47 percent of loan sequences that reach a fourth 
loan end up having at least 10 loans.\573\ For consumers paid weekly, 
bi-weekly, or semimonthly, 12 percent of loan sequences that reach a 
fourth loan end up having at least 20 loans during a 10-month 
period.\574\ And for loans taken out by consumers who are paid monthly, 
more than 40 percent of all loans to these borrowers were in sequences 
that, once begun, persisted for the rest of the year for which data 
were available.\575\
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    \573\ Results calculated using data described in Chapter 5 of 
the CFPB Report on Supplemental Findings.
    \574\ Results calculated using data described in Chapter 5 of 
the CFPB Report on Supplemental Findings.
    \575\ CFPB Report on Supplemental Findings, at 32.
---------------------------------------------------------------------------

    Further, the opportunity to overcome the presumption for the second 
and third loan in a sequence means that by the time that the mandatory 
cooling-off period in proposed Sec.  1041.6(f) would apply, three prior 
ability-to-repay determinations will have proven inconsistent with the 
consumer's actual experience, including two determinations that the 
consumer had overcome the presumption of unaffordability. If the 
consumer continues reborrowing during the term of or shortly after 
repayment of each loan, the pattern suggests that the consumer's 
financial circumstances do not lend themselves to reliable 
determinations of ability to repay a covered short-term loan. After 
three loans in a sequence, the Bureau believes it would be all but 
impossible under the proposed framework for a lender to accurately 
determine that a fourth covered short-term loan in a sequence would be 
affordable for the consumer. The Bureau believes this is particularly 
the case because the presumption of unaffordability under proposed 
Sec.  1041.6(b) would escalate the scrutiny for each subsequent loan in 
a three-loan sequence. The consumer keeps returning to reborrow in 
spite of a lender or lenders having determined on two prior occasions 
that the consumer's financial capacity had sufficiently improved to 
overcome the presumption of unaffordability, further evidencing a 
pattern of reborrowing that could spiral into a debt cycle.
    In light of the data described above, the Bureau believes that by 
the time a consumer reaches the fourth loan in a sequence of covered 
short-term loans, the likelihood of the consumer returning for 
additional covered short-term loans within a short period of time 
warrants additional measures to mitigate the risk that the lender is 
not furthering a cycle of debt on unaffordable covered short-term 
loans. To prevent the unfair and abusive practice identified in 
proposed Sec.  1041.4, the Bureau believes that it may be appropriate 
to impose a mandatory cooling-off period for 30 days following the 
third covered short-term loan in a sequence. Accordingly, proposed 
Sec.  1041.6(f) would prohibit lenders from making a covered short-term 
loan under Sec.  1041.5 during the time period in which the consumer 
has a covered short-term loan made under Sec.  1041.5 outstanding and 
for 30 days thereafter if the new covered short-term loan would be the 
fourth loan in a sequence of covered short-term loans made under Sec.  
1041.5.
    The Bureau believes that given the requirements set forth in 
proposed Sec.  1041.5 to determine ability to repay before making an 
initial covered short-term loan (other than a loan made under the 
conditional exemption in proposed Sec.  1041.7), and given the further 
requirements set forth in proposed Sec.  1041.6(b) with respect to 
additional covered short-term loans in a sequence, few consumers will 
actually reach the point where they have obtained three covered short-
term loans in a sequence and even fewer will reach that point and still 
need to reborrow. Such a three-loan sequence can occur only if the 
consumer turned out to not be able to afford a first loan, despite a 
lender's determination of ability to repay, and that the same occurred 
for the second and third loans as well, despite a second and third 
determination of ability to repay, including a determination that the 
presumption of unaffordability for the second loan and then the third 
loan could be overcome. However, to provide a backstop in the event 
that the consumer does obtain three covered short-term loans made under 
Sec.  1041.5 within a short period of time proposed Sec.  1041.6(f) 
would impose a prohibition on continued lending to protect consumers 
from further unaffordable loans. For consumers who reach that point, 
the Bureau believes that terminating a loan sequence after three loans 
may enable the consumer to escape from the cycle of indebtedness. At 
the same time, if any such consumers needed to continue to borrow, they 
could obtain a covered longer-term loan, provided that a lender 
reasonably determined that such a loan was within the consumer's 
ability to repay, pursuant to Sec. Sec.  1041.9 and 1041.10, or a 
covered longer-term loan under either of the conditional exemptions in 
proposed Sec. Sec.  1041.11 and 1041.12.
    During the SBREFA process, the Bureau received substantial feedback 
about the proposal under consideration to impose a conclusive 
presumption of unaffordability following the third covered short-term 
loan in a sequence.

[[Page 47968]]

Most notably, many SERs provided feedback to the Bureau indicating that 
they rely heavily on consumers who regularly take out a chain of short-
term loans and that the limit of three loans would cause a significant 
decrease in revenue and profit for their businesses. A study submitted 
by several of the SERs provides evidence to substantiate their claim. 
Similarly, as discussed further at Market Concerns--Short-Term Loans, 
the Bureau's examination of data obtained from larger lenders likewise 
indicates that a large percentage of the loan volume of payday lenders 
comes from consumers trapped in prolonged loan sequences.\576\
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    \576\ CFPB Report on Supplemental Findings, at ch. 5.
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    As explained with regard to proposed Sec.  1041.6(b)(1) above, the 
Bureau believes that, even without the mandatory cooling-off period 
under proposed Sec.  1041.6(f), there would be relatively few instances 
in which lenders could reasonably determine that a consumer had the 
ability to repay successive loans in a sequence. As discussed in part 
VI, the Bureau believes that the primary impact on loan volume and 
lender revenue from the ability-to-repay requirements would be the 
decline in initial covered short-term loans made under the ability-to-
repay requirements. Moreover, the fact that the proposal would have 
such a disruptive impact on these lenders' current source of revenue 
does not, in the Bureau's view, detract from the appropriateness of 
these provisions to prevent the unfair and abusive practice that the 
Bureau has preliminarily identified. Indeed, the Bureau believes that 
the lenders' concern about the revenue impact of limiting extended 
cycles of reborrowing confirms the Bureau's reasons for believing that 
these provisions may be appropriate to prevent the unfair and abusive 
practice. The proposed cooling-off period would last 30 days for the 
same reason that the Bureau is using that time frame to draw the line 
as to when a new loan is likely the result of the unaffordability of 
the prior loan.
    The Small Business Review Panel Report recommended that the Bureau 
request comment on whether permitting a sequence of more than three 
covered short-term loans would enable the Bureau to fulfill its stated 
objectives for the rulemaking while reducing the revenue impact on 
small entities. Conversely, during the SBREFA process and associated 
outreach following publication of the Small Business Review Panel 
Report, other stakeholders suggested that the mandatory cooling-off 
period should apply in additional circumstances, such as based on a 
pattern of sustained usage of covered short-term loans or covered 
longer-term balloon-payment loans over a period of time, even if the 
usage pattern did not involve three-loan sequences.
    The Bureau solicits comment on the necessity of the proposed 
prohibition and on any alternatives that would adequately prevent 
consumer harm while reducing the burden on lenders. In particular, the 
Bureau solicits comment on whether a presumption of unaffordability 
rather than a mandatory cooling-off period would be sufficient to 
prevent the targeted harms and, if so, whether such presumptions should 
be structured to match proposed Sec.  1041.6(b) and (e), or should be 
tailored in some other way. Additionally, consistent with the Small 
Business Review Panel Report, the Bureau solicits comment on whether 
three loans is the appropriate threshold for the prohibition or whether 
permitting lenders to overcome the presumption of unaffordability for a 
greater number of loans before the mandatory cooling-off period would 
provide the intended consumer protection while mitigating the burden on 
lenders. The Bureau also solicits comment on whether the mandatory 
cooling-off period should extend for a period greater than 30 days or 
should apply in any other circumstances, such as based on the total 
number of covered short-term loans a consumer has obtained during a 
specified period of time or the number of days the consumer has been in 
debt during a specified period of time. Additionally, the Bureau 
solicits comment on whether there is a pattern of reborrowing on a mix 
of covered short-term loans and covered longer-term balloon-payment 
loans for which a mandatory cooling-off period would be appropriate 
and, if so, what refinements to the prohibition in proposed Sec.  
1041.6(f) would be appropriate for such an approach.
6(g) Prohibition on Making a Covered Short-Term Loan Under Sec.  1041.5 
Following a Covered Short-Term Loan Made Under Sec.  1041.7
    Proposed Sec.  1041.6(g) would prohibit a lender from making a 
covered short-term loan under proposed Sec.  1041.5 during the time 
period in which the consumer has a covered short-term loan made under 
proposed Sec.  1041.7 outstanding and for 30 days thereafter. The 
proposed prohibition corresponds to the condition in proposed Sec.  
1041.7(c)(2) that would prohibit making a covered short-term loan under 
proposed Sec.  1041.7 during the time period in which the consumer has 
a covered short-term loan made under proposed Sec.  1041.5 (or a 
covered longer-term balloon-payment loan made under proposed Sec.  
1041.9) outstanding and for 30 days thereafter. The Bureau is including 
this provision in proposed Sec.  1041.6 for ease of reference for 
lenders so that they can look to a single provision of the rule for a 
list of prohibitions and presumptions that affect the making of covered 
short-term loans under proposed Sec.  1041.5, but discusses the 
underlying rationale in additional detail in the section-by-section 
analysis for proposed Sec.  1041.7(c)(2) below.
    Proposed Sec.  1041.7 sets forth numerous protective conditions for 
a covered short-term loan conditionally exempt from the ability-to-
repay requirements of proposed Sec. Sec.  1041.5 and 1041.6; these 
conditions are discussed in depth in connection with that section. As a 
parallel provision to proposed Sec.  1041.7(c)(2), the Bureau proposes 
the prohibition in proposed Sec.  1041.6(g) in order to prevent 
undermining the protections of proposed Sec.  1041.7, most 
significantly, the principal reduction requirements of proposed Sec.  
1041.7(b)(1). As discussed with regard to that provision, the Bureau 
believes that the principal reduction requirements of proposed Sec.  
1041.7(b)(3) are an essential component of the proposed conditional 
exemption. Additionally, as discussed in the section-by-section 
analysis of proposed Sec.  1041.7(c)(2), the Bureau believes that 
providing separate ``paths'' for making covered short-term loans under 
proposed Sec.  1041.5 and proposed Sec.  1041.7 would facilitate a more 
consistent framework for regulation in this market and make the rule 
simpler for both consumers and lenders.
    The Bureau solicits comment on the necessity of the proposed 
prohibition and on any alternatives that would achieve the Bureau's 
objectives here while reducing the burden on lenders.
6(h) Determining Period Between Consecutive Covered Loans
    Proposed Sec.  1041.6(h) would define how a lender must determine 
the number of days between covered loans for the purposes of proposed 
Sec.  1041.6(b), (c), (f), and (g). In particular, proposed Sec.  
1041.6(h) would specify that days on which a consumer had a non-covered 
bridge loan outstanding do not count toward the determination of time 
periods specified by proposed Sec.  1041.6(b), (c), (f), and (g). 
Proposed comment 6(h)-1 clarifies that Sec.  1041.6(h) would apply if 
the lender or its affiliate makes a non-covered bridge loan to a

[[Page 47969]]

consumer during the time period in which any covered short-term loan or 
covered longer-term balloon-payment loan made by a lender or its 
affiliate is outstanding and for 30 days thereafter. Proposed comment 
6(h)-2 provides an example.
    As discussed in more detail in the section-by-section of proposed 
Sec.  1041.2(a)(13), defining non-covered bridge loan, the Bureau is 
concerned that there is some risk that lenders might seek to evade the 
proposed rule designed to prevent unfair and abusive practices by 
making certain types of loans that fall outside the scope of the 
proposed rule during the 30-day period following repayment of a covered 
short-term loan or covered longer-term balloon-payment loan. Since the 
due date of such a loan would be beyond that 30-day period, the lender 
would be free to make another covered short-term loan subsequent to the 
non-covered bridge loan without having to comply with proposed Sec.  
1041.6. Proposed Sec.  1041.2(a)(13) would define non-covered bridge 
loan as a non-recourse pawn loan made within 30 days of an outstanding 
covered short-term loan and that the consumer is required to repay 
within 90 days of its consummation. The Bureau is seeking comment under 
that provision as to whether additional non-covered loans should be 
added to the definition.
    As with all of the provisions of proposed Sec.  1041.6, in 
proposing Sec.  1041.6(g) and its accompanying commentary, the Bureau 
is relying on its authority to prevent unfair, deceptive, and abusive 
acts and practices under the Dodd-Frank Act.\577\ For purposes of 
proposed Sec.  1041.6(g) in particular, the Bureau is also relying on 
its anti-evasion authority under section 1022(b)(1) of the Dodd-Frank 
Act. As discussed at part IV, Dodd-Frank Act section 1022(b)(1) 
provides that the Bureau's director may prescribe rules ``as may be 
necessary or appropriate to enable the Bureau to administer and carry 
out the purposes and objectives of the Federal consumer financial laws, 
and to prevent evasions thereof.'' \578\ The Bureau believes that the 
requirements of proposed Sec.  1041.6(g) would prevent evasions of the 
reborrowing restrictions under proposed Sec.  1041.6 by not counting 
the days on which a non-covered bridge loan is outstanding toward the 
determination of whether a subsequent covered short-term loan made by 
the lender or its affiliate is part of the same loan sequence as the 
prior covered short-term loan, or is made within 30 days of the prior 
loan outstanding, as applicable. This would prevent evasion insofar as, 
in the absence of this proposed restriction, a lender or its affiliate 
could make a non-covered bridge loan to keep a consumer in debt on a 
non-covered bridge loan during the reborrowing period and so wait to 
make the new covered short-term loan more than 30 calendar days, but 
with fewer days without non-covered bridge loan, after the prior loan, 
which would evade the reborrowing restrictions in proposed Sec.  
1041.6. The Bureau is concerned that this type of circumvention of the 
reborrowing restrictions could lead to lenders making covered short-
term loans that consumers do not have the ability to repay.
---------------------------------------------------------------------------

    \577\ 12 U.S.C. 5531(b).
    \578\ 12 U.S.C. 5512(b)(1).
---------------------------------------------------------------------------

    Accordingly, the Bureau proposes to exclude from the period of time 
between affected loans, those days on which a consumer has a non-
covered bridge loan outstanding. The Bureau believes that defining the 
period of time between covered loans in this manner may be appropriate 
to prevent lenders from making covered short-term loans for which the 
consumer does not have the ability to repay.
    The Bureau solicits comment on the appropriateness of the standard 
in proposed Sec.  1041.6(h) and on any alternatives that would 
adequately prevent consumer harm while reducing burden on lenders.
Section 1041.7 Conditional Exemption for Certain Covered Short-Term 
Loans
    For the reasons discussed below, the Bureau is proposing to exempt 
covered short-term loans under proposed Sec.  1041.7 (also referred to 
herein as a Section 7 loan) from proposed Sec. Sec.  1041.4, 1041.5, 
and 1041.6. Proposed Sec.  1041.7 includes a number of screening and 
structural protections for consumers who are receiving loans not 
subject to the proposed ability-to-repay determination. These 
provisions would reduce the likelihood and magnitude of consumer harms 
from unaffordable payments on covered short-term loans, including 
addressing the common occurrence that such loans lead to sequences of 
reborrowing by consumers.
Background
    Based on its own and outside research, the Bureau recognizes that, 
even without ability-to-repay assessments, some consumers repay a 
short-term loan when due without further reborrowing. These consumers 
avoid some, if not all, of the harms with which the Bureau is 
concerned. For example, as described in the CFPB Report on Supplemental 
Findings, approximately 22 percent of new payday loan sequences do not 
result in any reborrowing within the ensuing 30 days.\579\ While the 
Bureau believes that most of these consumers would be able to 
demonstrate their ability to repay and thus continue to obtain loans 
under the Bureau's proposal, the Bureau recognizes that there may be a 
sub-segment of consumers for whom this is not true and who would be 
denied loans even though they could, in fact, afford the payment. These 
consumers, for example, may be paid, in whole or in part, in cash and 
may not deposit their wages into a transaction account, preventing 
verification of their income.
---------------------------------------------------------------------------

    \579\ CFPB Report on Supplemental Findings. The Bureau's finding 
may overstate the extent to which payday borrowers are able to avoid 
re-borrowing since the Bureau's study looks at borrowing from a 
single lender. A recent study which tracks borrowers across five 
large lenders who together make up 20 percent of the storefront 
payday market finds that 21 percent of borrowers switch lenders and 
that of those roughly two-thirds did so within 14 days of paying off 
a prior loan. See Clarity Services, Finding the Silver Lining in 
Regulatory Storm Clouds: Consumer Behavior and Borrowing Capacity in 
the New Payday Market at 4, 9 (2015) [hereinafter Finding the Silver 
Lining in Regulatory Storm Clouds: Consumer Behavior and Borrowing 
Capacity in the New Payday Market], available at https://www.nonprime101.com/wp-content/uploads/2015/10/FISCA-10-15.pdf.
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    Some of these consumers may take out a payday loan, repay it on the 
contractual due date, and never again use a payday loan. Others may 
return on another occasion, when a new need arises, likely for another 
short sequence.\580\ Further, even among those who do reborrow, the 
Bureau's research indicates that about 16 percent of payday sequences 
ended with repayment within three loans, without either reborrowing 
within 30 days after the last payment or defaulting.\581\
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    \580\ The study described in the previous footnote, using data 
over a four-year time frame, found that 16 percent of borrowers took 
out one payday loan, repaid it on the contractual due date, and did 
not return again during the period reviewed; that the median 
borrower had 2 sequences over four years; and that the average 
borrower had 3.37 sequences. (This study defined sequence, as did 
the Bureau's 2014 Data Point, by using a 14-day time period.) 
Finding the Silver Lining in Regulatory Storm Clouds: Consumer 
Behavior and Borrowing Capacity in the New Payday Market, at 8, 14.
    \581\ CFPB Report on Supplemental Findings, at 125.
---------------------------------------------------------------------------

    In addition, the Bureau's research suggests that even consumers who 
reborrow many times might have shorter loan sequences if they were 
offered the option of taking out smaller loans each time they returned 
to reborrow--instead of being presented only with the option of rolling 
over the loan (in States where it is permitted) or repaying the full 
amount of the loan plus the finance

[[Page 47970]]

charge, which often leads to taking out another loan in the same 
amount.\582\
---------------------------------------------------------------------------

    \582\ Id. at 133.
---------------------------------------------------------------------------

    Finally, the Bureau recognizes that the verification and ability-
to-repay requirements in proposed Sec. Sec.  1041.5 and 1041.6 would 
impose compliance costs that some lenders, especially smaller lenders, 
may find difficult to absorb for covered short-term loans, particularly 
those relatively small in amount.
    In light of these considerations, the Bureau believes that it would 
further the purposes and objectives of the Dodd-Frank Act, to provide a 
simpler alternative to the ability-to-repay requirements in proposed 
Sec. Sec.  1041.5 and 1041.6 for covered short-term loans, but with 
robust alternative protections against the harms from loans with 
unaffordable payments. As described in more detail below, proposed 
Sec.  1041.7 would permit lenders to extend consumers a sequence of up 
to three loans, in which the principal is reduced by one-third at each 
stage and certain other conditions are met, without following the 
ability-to-repay requirements specified in proposed Sec. Sec.  1041.5 
and 1041.6.
    The Bureau recognizes that this alternative approach for covered 
short-term loans in proposed Sec.  1041.7 has drawn criticism from a 
variety of stakeholders. During the SBREFA process and the Bureau's 
general outreach following the Bureau's release of the Small Business 
Review Panel Outline, many lenders and other industry stakeholders 
argued that the alternative requirements for covered short-term loans 
presented in the Small Business Review Panel Outline would not provide 
sufficient flexibility.\583\ Several SERs whose companies make covered 
short-term loans expressed the view that, despite the reduction in 
burdens associated with the ability-to-repay requirements, the 
alternative requirements discussed in the Small Business Review Panel 
Outline would not provide for sufficient loan volume to sustain their 
profitability.\584\ A group of SERs submitted a report by third party 
consultants that projected significant revenue loss and reductions in 
profitability for small lenders if they made covered short-term loans 
solely under the alternative approach.\585\
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    \583\ During and after the SBREFA process, the Bureau was 
considering two options, one of which would have allowed three-loan 
sequences with a subsequent off-ramp stage for consumers who had not 
been able to repay the principal, and one that would have required 
principal step-downs similar to the approach the Bureau is now 
proposing. SERs and other industry stakeholders criticized both 
approaches because they would have limited lending to three-loan 
sequences and imposed limits on how many alternative loans could be 
taken out per year.
    \584\ See Small Business Panel Report, at 22.
    \585\ See id. (``Five of the SERs submitted to the Panel the 
findings of a report commissioned by a trade association 
representing six of the SERs. Examining store-level data from these 
small businesses that make payday loans, the report found that the 
alternative requirements for covered short-term loans would cause 
lender revenues to decline by 82 percent. The report found that five 
of the six lenders considered would become unprofitable and that the 
sixth lender would experience a 70-percent decline in 
profitability.'').
---------------------------------------------------------------------------

    In contrast, consumer advocates, during the Bureau's outreach 
following its release of the Small Business Review Panel Outline, have 
argued that permitting covered short-term loans to be made without an 
ability-to-repay determination would weaken the overall rule framework. 
A letter signed by several hundred national and State consumer 
advocates urged the Bureau, before the release of the Small Business 
Review Panel Outline, not to create any alternatives to the ability-to-
repay requirement that would sanction a series of repeat loans.\586\
---------------------------------------------------------------------------

    \586\ Letter from Americans for Financial Reform, to Richard 
Cordray, Director, Consumer Fin. Protection Bureau (Oct. 23, 2014), 
available at http://www.nclc.org/images/pdf/high_cost_small_loans/payday_loans/payday_letter_director_cordray_cfpb_102314.pdf.
---------------------------------------------------------------------------

    The Bureau has carefully considered this feedback in developing the 
proposed rule. With regard to the industry argument that the proposal 
considered in the Small Business Review Panel Outline would not allow 
for lenders to remain profitable, the Bureau believes that this concern 
is the product of many lenders' reliance on long sequences of covered 
short-term loans to consumers. Since the Bureau began studying the 
market for payday, vehicle title, and similar loans several years ago, 
the Bureau has noted its significant concern with the amount of long-
term reborrowing observed in the market and on the apparent dependence 
of many lenders on such reborrowing for a significant portion of their 
revenues.\587\ Proposed Sec.  1041.7 would permit consumers with 
emergencies or occasional financial shortfalls to receive a limited 
number of covered short-term loans without the protection of an 
ability-to-repay determination under proposed Sec. Sec.  1041.5 and 
1041.6. For this very reason, proposed Sec.  1041.7 would provide these 
consumers with an alternative set of protective requirements.
---------------------------------------------------------------------------

    \587\ See Market Concerns--Short-Term Loans. See also, e.g., 
Richard Cordray, Director, Consumer Fin. Protection Bureau, Prepared 
Remarks of CFPB Director Richard Cordray at the Field Hearing on 
Payday Lending, Mar. 26, 2015, Richmond, Virginia), available at 
http://www.consumerfinance.gov/newsroom/prepared-remarks-of-cfpb-director-richard-cordray-at-the-field-hearing-on-payday-lending/.
---------------------------------------------------------------------------

    The Bureau notes that, as discussed in Market Concerns--Short-Term 
Loans, covered short-term loans are frequently marketed to consumers as 
loans that are intended for short-term, infrequent use. The dependency 
of many lenders on long-term reborrowing is in tension with this 
marketing and exploits consumers' behavioral biases.\588\ The Bureau is 
sensitive to the impacts that the proposed rule would have on small 
entities. To the extent small lenders are relying on repeated 
reborrowing and long loan sequences, however, the Bureau has the same 
concerns it has expressed more generally with this market.
---------------------------------------------------------------------------

    \588\ See Market Concerns--Short-Term Loans.
---------------------------------------------------------------------------

    In proposing Sec.  1041.7, the Bureau does not mean to suggest that 
lenders would generally be able to maintain their current business 
model by making loans permitted by proposed Sec.  1041.7. To the 
contrary, the Bureau acknowledges that a substantial fraction of loans 
currently made would not qualify for the exemption under proposed Sec.  
1041.7 because they are a part of extended cycles of reborrowing that 
are very harmful to consumers. Some lenders may be able to capture 
scale economies and build a business model that relies solely on making 
loans under proposed Sec.  1041.7. For other lenders, the Bureau 
expects that loans made under proposed Sec.  1041.7 would become one 
element of a business model that would also incorporate covered short-
term and covered longer-term loans made using an ability-to-repay 
determination under proposed Sec. Sec.  1041.5 and 1041.6 and 
Sec. Sec.  1041.9 and 1041.10, respectively.
    With respect to the argument from consumer advocates, the Bureau 
does not believe that providing a carefully constructed alternative to 
the proposed ability-to-repay requirements in Sec. Sec.  1041.5 and 
1041.6 would undermine the consumer protections in this proposed 
rulemaking. As discussed above, the exemption would provide a simpler 
means of obtaining a covered short-term loan for consumers for whom the 
loan is less likely to prove harmful. Moreover, the Bureau has built 
into proposed Sec.  1041.7 a number of safeguards, including the 
principal stepdown requirements and the limit on the number of loans in 
a sequence of Section 7 loans, to ensure that consumers cannot become 
trapped in long-term debt on an ostensibly short-term loan and to 
reduce the risk of harms from reborrowing, default, and collateral 
harms from making

[[Page 47971]]

unaffordable loan payments during a short sequence of Section 7 loans. 
The proposal reflects the Bureau's belief that the requirements in 
proposed Sec.  1041.7 would appropriately balance the interest of 
providing strong consumer protections with the aim of permitting access 
to less risky credit.
    By including an alternative set of requirements under proposed 
Sec.  1041.7, the Bureau is not suggesting that regulation of covered 
short-term loans at the State, local, or tribal level should encompass 
only the provisions of proposed Sec.  1041.7. Proposed Sec.  1041.7(a) 
would not provide an exemption from any other provision of law. Many 
States and other non-Federal jurisdictions have made and likely will 
continue to make legislative and regulatory judgments to impose usury 
limits, prohibitions on making high cost covered short-term loans 
altogether, and other strong consumer protections under legal 
authorities that in some cases extend beyond those of the Bureau. The 
proposed regulation would coexist with--rather than supplant--State, 
local, and tribal regulations that impose a stronger protective 
framework. Proposed Sec.  1041.7 would also not permit loans to 
servicemembers and their dependents that would violate the Military 
Lending Act and its implementing regulations. (See discussion in part 
IV.)
    The Bureau seeks comment generally on whether to provide an 
alternative to the ability-to-repay requirements under proposed 
Sec. Sec.  1041.5 and 1041.6 for covered short-term loans that satisfy 
certain requirements. The Bureau also seeks comment on whether proposed 
Sec.  1041.7 would appropriately balance the considerations discussed 
above regarding consumer protection and access to credit that presents 
a lower risk of harm to consumers. The Bureau, further, seeks comment 
on whether covered short-term loans could be made in compliance with 
proposed Sec.  1041.7 in States and other jurisdictions that permit 
covered short-term loans. The Bureau also seeks comment generally on 
the costs and other burdens that would be imposed on lenders, including 
small entities, by proposed Sec.  1041.7.
Legal Authority
    Proposed Sec.  1041.7 would establish an alternative set of 
requirements for covered short-term loans that, if complied with by 
lenders, would conditionally exempt them from the unfair and abusive 
practice identified in proposed Sec.  1041.4 and the ability-to-repay 
requirements under proposed Sec. Sec.  1041.5 and 1041.6.\589\ The 
Bureau is proposing the requirements of proposed Sec.  1041.7 pursuant 
to the Bureau's authority under Dodd-Frank Act section 1022(b)(3)(A) to 
grant conditional exemptions in certain circumstances from rules issued 
by the Bureau under the Bureau's Dodd-Frank Act legal authorities. With 
respect to proposed Sec.  1041.7(e), the Bureau is relying on the 
Bureau's authority under sections 1032(a) of the Dodd-Frank Act, which 
allows the Bureau to prescribe rules to ensure that the features of a 
consumer financial product or service are fully, accurately, and 
effectively disclosed to consumers, and section 1032(b) of the Dodd-
Frank Act, which provides for the use of model forms.
---------------------------------------------------------------------------

    \589\ As described in the section-by-section analysis of 
proposed Sec. Sec.  1041.4 through 1041.6, the Bureau is proposing 
those provisions pursuant to the Bureau's separate authority under 
Dodd-Frank Act section 1031(b) to ``prescribe rules identifying as 
unlawful unfair, deceptive or abusive acts or practices'' and to 
include in such rules ``requirements for the purpose of preventing 
such acts or practices.''
---------------------------------------------------------------------------

Section 1022(b)(3)(A) of the Dodd-Frank Act--Exemption Authority
    Dodd-Frank Act section 1022(b)(3)(A) authorizes the Bureau to, by 
rule, ``conditionally or unconditionally exempt any class of . . . 
consumer financial products or services'' from any provision of Title X 
of the Dodd-Frank Act or from any rule issued under Title X as the 
Bureau determines ``necessary or appropriate to carry out the purposes 
and objectives'' of Title X. The purposes of Title X are set forth in 
Dodd-Frank Act section 1021(a),\590\ which provides that the Bureau 
shall implement and, where applicable, enforce Federal consumer 
financial law consistently ``for the purpose of ensuring that all 
consumers have access to markets for consumer financial products and 
services and that [such markets] are fair, transparent and 
competitive.''
---------------------------------------------------------------------------

    \590\ 12 U.S.C. 5511(a).
---------------------------------------------------------------------------

    The objectives of Title X are set forth in Dodd-Frank Act section 
1021(b).\591\ Section 1021(b) of the Dodd-Frank Act authorizes the 
Bureau to exercise its authorities under Federal consumer financial law 
for the purposes of ensuring that, with respect to consumer financial 
products and services: (1) Consumers ``are provided with timely and 
understandable information to make responsible decisions about 
financial transactions'' (see Dodd-Frank Act section 1021(b)(1) \592\); 
(2) consumers ``are protected from unfair, deceptive, or abusive acts 
and practices and from discrimination'' (see Dodd-Frank Act section 
1021(b)(2) \593\); (3) ``outdated, unnecessary, or unduly burdensome 
regulations are regularly identified and addressed in order to reduce 
unwarranted regulatory burdens'' (see Dodd-Frank Act section 1021(b)(3) 
\594\); (4) ``Federal consumer financial law is enforced consistently, 
without regard to the status of a person as a depository institution, 
in order to promote fair completion'' (see Dodd-Frank Act section 
1021(b)(4) \595\); and ``markets for consumer financial products and 
services operate transparently and efficiently to facilitate access and 
innovation'' (see Dodd-Frank Act section 1021(b)(5) \596\).
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    \591\ 12 U.S.C. 5511(b).
    \592\ 12 U.S.C. 5511(b)(1).
    \593\ 12 U.S.C. 5511(b)(2).
    \594\ 12 U.S.C. 5511(b)(3).
    \595\ 12 U.S.C. 5511(b)(4).
    \596\ 12 U.S.C. 5511(b)(5).
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    When issuing an exemption under Dodd-Frank Act section 
1022(b)(3)(A), the Bureau is required under Dodd-Frank Act section 
1022(b)(3)(B) to take into consideration, as appropriate, three 
factors. These enumerated factors are: (1) The total assets of the 
class of covered persons; \597\ (2) the volume of transactions 
involving consumer financial products or services in which the class of 
covered persons engages; \598\ and (3) existing provisions of law which 
are applicable to the consumer financial product or service and the 
extent to which such provisions provide consumers with adequate 
protections.\599\
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    \597\ 12 U.S.C. 5512(b)(3)(B)(i).
    \598\ 12 U.S.C. 5512(b)(3)(B)(ii).
    \599\ 12 U.S.C. 5512(b)(3)(B)(iii).
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    The Bureau believes that the proposed conditional exemption for 
covered short-term loans is appropriate to carry out the purposes and 
objectives of Title X of the Dodd-Frank Act, for three primary reasons. 
First, proposed Sec.  1041.7 is consistent with both the Bureau's 
statutory purpose under Dodd-Frank Act section 1021(a) of seeking to 
implement consumer financial law consistently to ensure consumers' 
access to fair, transparent, and competitive markets for consumer 
financial products and services and the Bureau's related statutory 
objective under Dodd-Frank Act section 1021(b)(5) of ensuring that such 
markets operate transparently and efficiently to facilitate access with 
respect to consumer financial products and services. As described in 
more detail in the section-by-section analysis below, proposed Sec.  
1041.7 would help to preserve access to credit by providing lenders an 
option for making covered short-term loans that is an alternative to--
and a conditional exemption from--

[[Page 47972]]

the proposed ability-to-repay requirements. Because lenders making 
Section 7 loans would be conditionally exempt from complying with the 
ability-to-repay requirements under Sec. Sec.  1041.5 and 1041.6, 
making loans under proposed Sec.  1041.7 would reduce the compliance 
costs for lenders that make covered short-term loans relative to the 
costs of complying with the ability-to-repay requirements under 
proposed Sec. Sec.  1041.5 and 1041.6. This reduction in compliance 
costs would help facilitate access. Moreover, consumers who lack the 
necessary verification evidence to qualify for a covered short-term 
loan under the proposed ability-to-repay requirements (for example, 
those consumers who are paid in cash and thus cannot document income 
through a pay stub) would be able to receive a covered short-term loan 
under this option subject to the requirements set forth in proposed 
Sec.  1041.7. This further advances the statutory purposes and 
objective related to facilitating consumers' access to credit.
    Second, the proposed conditional exemption for covered short-term 
loans is consistent with the Bureau's statutory objective under Dodd-
Frank Act section 1021(b)(2) of ensuring that consumers are protected 
from unfair or abusive acts and practices. The Bureau is proposing in 
Sec.  1041.4 that it is an unfair and abusive practice for a lender to 
make a covered short-term loan without making a reasonable 
determination that the consumer has the ability to repay the loan. In 
Sec. Sec.  1041.5 and 1041.6, the Bureau is proposing to prevent that 
unfair and abusive practice by prescribing ability-to-repay 
requirements for lenders making covered short-term loans. Although 
lenders making Section 7 loans would not be required to satisfy these 
ability-to-repay requirements, they would be required to satisfy the 
requirements for the conditional exemption under proposed Sec.  1041.7. 
As described in more detail in this section-by-section analysis below, 
the requirements for proposed Sec.  1041.7 are designed to protect 
consumers from the harms that result from lenders making short-term, 
small-dollar loans with unaffordable payments--namely, repeat 
borrowing, but also defaults and collateral harms from making 
unaffordable loan payments. These are the same types of harms that the 
ability-to-repay requirements under proposed Sec. Sec.  1041.5 and 
1041.6 aim to address.
    Third, the conditional exemption in proposed Sec.  1041.7 is 
consistent with the Bureau's statutory objective under Dodd-Frank Act 
section 1021(b)(1) of ensuring that consumers are provided with timely 
and understandable information to make responsible decisions about 
financial transactions. Under proposed Sec.  1041.7(e), the Bureau 
would impose a series of disclosure requirements in connection with the 
making of Section 7 loans. These disclosures would notify the consumer 
of important aspects of the operation of these transactions, and would 
contribute significantly to consumers receiving timely and 
understandable information about taking out Section 7 loans.
    The Bureau, furthermore, has taken the statutory factors listed in 
Dodd-Frank Act section 1022(b)(3)(B) into consideration, as 
appropriate. The first two factors are not materially relevant because 
these factors pertain to exempting a class of covered persons, whereas 
proposed Sec.  1041.7 would conditionally exempt a class of 
transactions--Section 7 loans--from certain requirements of the 
proposed rule. Nor is the Bureau basing the proposed conditional 
exemption on the third factor. Certain proposed requirements under 
Sec.  1041.7 are similar to requirements under certain applicable State 
laws and local laws, as discussed below in the section-by-section 
analysis. However, the Bureau is not aware of any State or locality 
that has combined all of the elements that the Bureau believes are 
needed to adequately protect consumers from the harms associated with 
unaffordable payments in absence of an ability-to-repay 
requirement.\600\
---------------------------------------------------------------------------

    \600\ See also the discussion in Market Concerns--Short-Term 
Loans regarding the prevalence of harms in the short-term loan 
market in spite of existing regulatory approaches.
---------------------------------------------------------------------------

    The Bureau emphasizes that the proposed conditional exemption in 
proposed Sec.  1041.7 would be a partial exemption. That is, Section 7 
loans would still be subject to all of the requirements of the Bureau's 
proposed rule other than the ability-to-repay requirements under 
proposed Sec. Sec.  1041.5 and 1041.6.
    The Bureau seeks comment on whether the Bureau should rely upon the 
Bureau's statutory exemption authority under Dodd-Frank Act section 
1022(b)(3)(A) to exempt loans that satisfy the requirements of proposed 
Sec.  1041.7 from the unfair and abusive practice identified in 
proposed Sec.  1041.4 and from the ability-to-repay requirements 
proposed under Sec. Sec.  1041.5 and 1041.6. Alternatively, the Bureau 
seeks comment on whether the requirements under proposed Sec.  1041.7 
should instead be based on the Bureau's authority under Dodd-Frank Act 
section 1031(b) to prescribe rules identifying as unlawful unfair, 
deceptive, or abusive practices and to include in such rules 
requirements for the purpose of preventing such acts or practices.
Dodd-Frank Act Sections 1032(a) and 1032(b)
    The Bureau is proposing to require disclosures in Sec.  1041.7(e) 
related to covered short-term loans made under proposed Sec.  1041.7 
pursuant to the Bureau's authority under sections 1032(a) and (b) of 
the Dodd-Frank Act. Section 1032(a) of the Dodd-Frank Act provides that 
the Bureau ``may prescribe rules to ensure that the features of any 
consumer financial product or service, both initially and over the term 
of the product or service, are fully, accurately, and effectively 
disclosed to consumers in a manner that permits consumers to understand 
the costs, benefits, and risks associated with the product or service, 
in light of the facts and circumstances.'' The authority granted to the 
Bureau in section 1032(a) is broad, and empowers the Bureau to 
prescribe rules regarding the disclosure of the features of consumer 
financial products and services generally. Accordingly, the Bureau may 
prescribe disclosure requirements in rules regarding particular 
features even if other Federal consumer financial laws do not 
specifically require disclosure of such features. Specifically, the 
Bureau is proposing to require a lender to provide notices before 
making the first and third loan in a sequence of Section 7 loans that 
would inform consumers of the risk of taking such a loan and 
restrictions on taking subsequent Section 7 loans in a sequence.
    Under Dodd-Frank Act section 1032(b)(1), ``any final rule 
prescribed by the Bureau under [section 1032] requiring disclosures may 
include a model form that may be used at the option of the covered 
person for provision of the required disclosures.'' Any model form must 
contain a clear and conspicuous disclosure according to Dodd-Frank Act 
section 1032(b)(2). At a minimum, this clear and conspicuous disclosure 
must use plain language comprehensible to consumers, contain a clear 
format and design, and succinctly explain the information that must be 
communicated to the consumer. Dodd-Frank Act section 1032(b)(3) 
provides that any model form the Bureau issues pursuant to Dodd-Frank 
Act section 1032(b) shall be validated through consumer testing. In 
developing the model forms for the proposed notices, the Bureau 
conducted two rounds of qualitative consumer testing in September and 
October of 2015. The

[[Page 47973]]

testing results are provided in the FMG Report. Dodd-Frank Act section 
1032(d) provides that, ``Any covered person that uses a model form 
included with a rule issued under this section shall be deemed to be in 
compliance with the disclosure requirements of this section with 
respect to such model form.''
7(a) Conditional Exemption for Certain Covered Short-Term Loans
    Proposed Sec.  1041.7(a) would establish a conditional exemption 
for certain covered short-term loans. Under proposed Sec.  1041.7(a), a 
covered short-term loan that is made in compliance with the 
requirements set forth in proposed Sec.  1041.7(b) through (e) could 
make a covered short-term loan would be exempt from Sec. Sec.  1041.4, 
1041.5, and 1041.6. Proposed Sec.  1041.7(a), like other sections of 
proposed part 1041, would not pre-empt State, local, or tribal 
restrictions that impose further limits on covered short-term loans, or 
that prohibit high-cost, covered short-term loans altogether. Proposed 
Sec.  1041.7(a) would require the lender, in determining whether the 
proposed requirements in paragraphs (b), (c), and (d) are satisfied, to 
obtain information about the consumer's borrowing history from the 
records of the lender, the records of the lender's affiliates, and a 
consumer report from an information system registered under proposed 
Sec.  1041.17(c)(2) or proposed Sec.  1041.17(d)(2).
    Proposed comment 7(a)-1 explains that a lender could make a covered 
short-term loan without making the ability-to-repay determination under 
proposed Sec. Sec.  1041.5 and 1041.6, provided it complied with the 
requirements set forth in proposed Sec.  1041.7(b) through (e). 
Proposed comment 7(a)-2 clarifies that a lender cannot make a covered 
short-term loan under proposed Sec.  1041.7 if no information system is 
registered under proposed Sec.  1041.17(c)(2) or proposed Sec.  
1041.17(d)(2) and available when the lender seeks to make the loan. 
Proposed comment 7(a)-2 also clarifies that a lender may be unable to 
obtain a report on the consumer's borrowing history if, for example, 
information systems have been registered under proposed Sec.  
1041.17(c)(2) or proposed Sec.  1041.17(d)(2) but are not yet 
operational or registered information systems are operational but all 
are temporarily unavailable.
    The Bureau believes it is appropriate to condition the exemption in 
proposed Sec.  1041.7 on the ability of a lender to obtain and review 
of a consumer report from a registered information system. The Bureau 
believes that this approach is warranted because making a covered 
short-term loan under proposed Sec.  1041.7 does not require a detailed 
analysis of the consumer's ability to repay the loan under proposed 
Sec. Sec.  1041.5 and 1041.6. Rather, proposed Sec.  1041.7 protects 
consumers through a carefully calibrated system of requirements to 
ensure, among other things, that a consumer can reduce principal 
amounts over the course of a loan sequence. Because lenders are not 
required to conduct an ability-to-repay determination under proposed 
Sec. Sec.  1041.5 and 1041.6, holistic information about the consumer's 
recent borrowing history with the lender, as well as other lenders, is 
especially important for ensuring the integrity of the requirements in 
proposed Sec.  1041.7.
    While the Bureau had proposed an income verification requirement in 
the Small Business Review Panel Outline, the proposed rule would not 
require a lender to verify a consumer's income before making a loan 
under proposed Sec.  1041.7. Upon further consideration, the Bureau 
believes that an income verification requirement is not necessary in 
proposed Sec.  1041.7. Because lenders would know at the outset that 
they would have to recoup the entire principal amount and finance 
charges within a loan sequence of no more than three loans, the Bureau 
believes that lenders would have strong incentives to verify that 
consumers have sufficient income to repay within that window. In 
addition, as discussed above, the Bureau believes that there are 
meaningful advantages to providing flexibility both for consumers who, 
in fact, have capacity to repay one or more covered short-term loans 
but cannot easily provide the income documentation required in proposed 
Sec.  1041.5(c), and for lenders in reducing compliance costs relative 
to the income documentation requirement in proposed Sec.  1041.5(c). In 
light of these considerations, the Bureau believes that it is 
appropriate to allow lenders flexibility to adapt their current income 
verification processes without dictating a specific approach under 
proposed Sec.  1041.7.\601\
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    \601\ As noted above and in part II.B, the Bureau believes that 
most lenders already have some processes in place to verify that 
applicants are not so lacking in income that they will default on a 
first loan. See, e.g., Small Business Review Panel Report, at 16 
(SERs' discussion of their practices).
---------------------------------------------------------------------------

    Consistent with the recommendations of the Small Business Review 
Panel Report, the Bureau seeks comment on the cost to small entities of 
obtaining information about consumer borrowing history and on potential 
ways to reduce the operational burden of obtaining this information. 
The Bureau also seeks comment on not requiring lenders to verify a 
consumer's income when making a covered short-term loan under Sec.  
1041.7. In particular, the Bureau seeks comment on whether lenders 
should be required to verify a consumer's income when making a covered 
short-term loan under proposed Sec.  1041.7, and if so how to craft a 
standard that would offer additional protection for consumers and yet 
preserve the advantages of a more flexible system relative to proposed 
Sec.  1041.5(c).
7(b) Loan Term Requirements
    Proposed Sec.  1041.7(b) would require a covered short-term loan 
that is made under proposed Sec.  1041.7 to comply with certain 
requirements as to the loan terms and structure. The requirements under 
proposed Sec.  1041.7(b), in conjunction with the other requirements 
set forth in proposed Sec.  1041.7(c) through (e), would reduce the 
likelihood that consumers who take Section 7 loans would end up in 
extended loan sequences, default, or suffer substantial collateral 
harms from making unaffordable loan payments on covered short-term 
loans. Furthermore, these proposed requirements would limit the harm to 
consumers in the event they are unable to repay the initial loan as 
scheduled. Discussion of each of these loan term requirements is 
contained in the section-by-section analysis below. If the loan term 
requirements set forth in proposed Sec.  1041.7(b) are not satisfied, 
the lender would not be able to make a loan under proposed Sec.  
1041.7.
7(b)(1)
    Proposed Sec.  1041.7(b)(1) would require a covered short-term loan 
made under proposed Sec.  1041.7 to be subject to certain principal 
amount limitations. Specifically, proposed Sec.  1041.7(b)(1)(i) would 
require that the first loan in a loan sequence of Section 7 loans have 
a principal amount that is no greater than $500. Proposed Sec.  
1041.7(b)(1)(ii) would require that the second loan in a loan sequence 
of Section 7 loans have a principal amount that is no greater than two-
thirds of the principal amount of the first loan in the loan sequence. 
Proposed Sec.  1041.7(b)(1)(iii) would require that the third loan in a 
loan sequence of Section 7 loans have a principal amount that is no 
greater than one-third of the principal amount of the first loan in the 
loan sequence.
    Proposed comment 7(b)(1)-1 cross-references the definition and 
commentary regarding loan sequences. Proposed comment 7(b)(1)-2 
clarifies that the principal amount limitations apply regardless of 
whether the loans are made by the same lender, an

[[Page 47974]]

affiliate, or unaffiliated lenders. Proposed comment 7(b)(1)-3 notes 
that the principal amount limitations under proposed Sec.  1041.7 apply 
to both rollovers of an existing loan when they are permitted under 
State law and new loans that are counted as part of the same loan 
sequence. Proposed comment 7(b)(1)-4 gives an example of a loan 
sequence in which the principal amount is stepped down in thirds.
    The Bureau believes that the principal cap and principal reduction 
requirements under proposed Sec.  1041.7(b)(1) are critical to reducing 
both the risk of extended loan sequences and the risk that the loan 
payments over limited shorter loan sequence would prove unaffordable 
for consumers. Because proposed Sec.  1041.7 would not require an 
ability-to-repay determination under proposed Sec. Sec.  1041.5 and 
1041.6 for a covered short-term loan, some consumers may not be able to 
repay these loans as scheduled. Absent protections, these consumers 
would be in the position of having to reborrow or default on the loan 
or fail to meet other major financial obligations or basic living 
expenses as the loan comes due--that is, the same position faced by 
consumers in the market today. As discussed in Market Concerns--Short-
Term Loans, the Bureau has found that when that occurs, consumers 
generally reborrow for the same amount as the prior loan, rather than 
pay off a portion of the loan amount on the previous loan and reduce 
their debt burden. As a result, consumers may face a similar situation 
when the next loan comes due, except that they have fallen further into 
debt. The Bureau has found that this lack of principal reduction, or 
``self-amortization,'' over the course of a loan sequence is correlated 
with higher rates of reborrowing and default.\602\
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    \602\ See CFPB Data Point: Payday Lending, at 16.
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    Proposed Sec.  1041.7(b)(1) would work in tandem with proposed 
Sec.  1041.7(c)(3), which would limit a loan sequence of Section 7 
loans to no more than three loans. The proposed requirements together 
would ensure that a consumer may not receive more than three 
consecutive covered short-term loans under proposed Sec.  1041.7 and 
that the principal would decrease from a maximum of $500 in the first 
loan over the course of a loan sequence. Without the principal 
reduction requirements, consumers could reborrow twice and face 
difficulty in repaying the third loan in the loan sequence, similar to 
the difficulty that they had faced when the first loan was due. The 
proposed principal reduction feature is intended to steadily reduce 
consumers' debt burden and permit consumers to pay off the original 
loan amount in more manageable increments over the course of a loan 
sequence with three loans.
    The Bureau believes that the proposed $500 limit for the first loan 
is appropriate in light of current State regulatory limits and would 
reduce the risks that unaffordable payments cause consumers to 
reborrow, fail to meet other major financial obligations or basic 
living expenses, or default during a loan sequence. As noted in part 
II.B above, many State statutes authorizing payday loans impose caps on 
the loan amount, with $500 being a common limit.\603\ In States that 
have lower limits on loan amounts, these lower limits would prevail. In 
addition, empirical research has found that average loan sizes are well 
under this threshold.\604\
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    \603\ E.g., Ala Code Sec.  5-18A-12(a); Iowa Code Sec.  
533D.10(1)(b).
    \604\ The Bureau's analysis of supervisory data indicates that 
the median loan amount for payday loans is around $350. See CFPB 
Payday Loans and Deposit Advance Products White Paper, at 15. As 
noted in part II.B above, another study found that the average loan 
amount borrowed was $375. See Pew Charitable Trusts, Payday Lending 
in America: Policy Solutions at 53 (2013), available at http://
www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2013/
pewpaydaypolicysolutionsoct2013pdf.pdf.
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    In the absence of an ability-to-repay determination under proposed 
Sec. Sec.  1041.5 and 1041.6, the Bureau believes that loans with a 
principal amount larger than $500 would carry a significant risk of 
having unaffordable payments. A loan with a principal amount of $1,000, 
for example, would be much harder for consumers to pay off in a single 
payment, and even with the stepdown features of Sec.  1041.7(b)(1), 
would require the consumer to pay at least $333 plus finance charges on 
each of the second and third loans in the loan sequence. In contrast, 
on a loan with a principal amount of $500 (the largest permissible 
amount under proposed Sec.  1041.7(b)(1)), a minimum of $166.66 in 
principal reduction would be required with each loan. For consumers who 
are turning to covered short-term loans because they are already 
struggling to meet their major financial obligations and basic living 
expenses,\605\ the difference between payments of $333 and $167 may be 
quite substantial and distinguish a loan with affordable payments from 
a loan with unaffordable payments.
---------------------------------------------------------------------------

    \605\ See Market Concerns--Short-Term Loans.
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    The proposed principal reduction requirements are consistent with 
the guidance of a Federal prudential regulator and ordinances adopted 
by a number of municipalities across the country. The FDIC, in its 
``Affordable Small-Dollar Loan Guidelines'' in 2007, stated that, 
``Institutions are encouraged to structure payment programs in a manner 
that fosters the reduction of principal owed. For closed-end products, 
loans should be structured to provide for affordable and amortizing 
payments.'' \606\ Several Oregon municipalities, including Eugene and 
Portland, impose a 25 percent principal stepdown requirement on 
renewals.\607\ A number of cities in Texas, including Dallas, El Paso, 
Houston, and San Antonio, have also adopted similar principal stepdown 
requirements.\608\
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    \606\ FDIC Financial Institution Letter FIL-50-2007, Affordable 
Small-Dollar Loan Guidelines, (June 19, 2007), available at https://www.fdic.gov/news/news/financial/2007/fil07050a.html.
    \607\ Eugene Code, Sec.  3.556, available at https://www.eugene-or.gov/DocumentCenter/Home/View/2165; Portland City Code, Ch. 
7.25.050, available at http://www.portlandonline.com/auditor/?c=41523.
    \608\ See City Regulation of Payday and Auto Title Lenders, 
Texas Municipal League, http://www.tml.org/payday-updates (last 
updated Jan. 15, 2016).
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    The Bureau also has given extensive consideration to proposing an 
``off-ramp'' for consumers struggling to repay a covered short-term 
loan, in lieu of the principal reduction structure.\609\ The Bureau 
identified this approach as an alternative in its Small Business Review 
Panel Outline. Under this approach, lenders would be required to 
provide a no-cost extension of the third loan in a sequence (the off-
ramp) if a consumer is unable to repay the loan according to its terms. 
As specifically proposed in the Outline, the third loan would be repaid 
over an additional four installments without incurring additional cost. 
As discussed above in Market Concerns--Short-Term Loans and in the 
Small Business Review Panel Outline, similar extended payment plans are 
required to be offered in some States and are a feature of some 
industry trade association best practices. In light of concerns that 
lenders may be failing to inform consumers of their options and 
actively discouraging the use of off-ramps, the Bureau noted in the 
Small Business Review Panel Outline that it was considering whether 
additional features would be needed to facilitate access to the off-
ramp and prevent lender discouragement of off-ramp usage. The Small 
Business Review Panel Outline listed examples of possible additional 
conditions on the off-ramp, such as requiring lenders to notify 
consumers of their right to take the off-ramp and prohibiting lenders 
from initiating collections activity on the loan before offering the 
consumer an off-ramp.
---------------------------------------------------------------------------

    \609\ See Small Business Review Panel Report, at 8.
---------------------------------------------------------------------------

    During the SBREFA process, the Bureau received feedback from the 
SERs

[[Page 47975]]

regarding the off-ramp option, as well as the principal reduction 
option discussed in the Small Business Review Panel Outline. Some SERs 
noted that the proposed principal reduction requirement could present 
compliance challenges. For example, these SERs stated that both the 
principal reduction requirement and the off-ramp requirement under 
consideration could conflict with State law requiring single payment 
transactions. As an alternative, one SER recommended that the Bureau 
adopt a provision in Washington State law that requires lenders to 
offer an installment plan to consumers who are unable to repay their 
loan.\610\ During broader outreach with stakeholders following the 
release of the Small Business Review Panel Outline, industry 
stakeholders suggested that the Bureau should consider requiring an 
off-ramp option for borrowers unable to repay a covered short-term 
loan, in lieu of the proposed ability-to-repay requirements coupled 
with the alternative requirements. When discussing the principal 
reduction and off-ramp options in the context of the framework laid out 
in the Small Business Review Panel Outline, industry stakeholders were 
critical of both approaches and did not state a preference. Consumer 
advocates have expressed support for the principal reduction approach 
based on their view that off-ramps have been ineffective at the State 
level.
---------------------------------------------------------------------------

    \610\ See Small Business Review Panel Report, at 22.
---------------------------------------------------------------------------

    The Bureau has carefully considered the SERs' comments and the 
broader stakeholder feedback following the release of the Small 
Business Review Panel Outline. The Bureau does not believe the 
principal reduction requirements under proposed Sec.  1041.7(b)(1) 
would conflict with State law requiring single payment transactions. 
The proposed requirement would not mandate payment of the loan in 
installments or amortization of the initial loan in the sequence. 
Rather, a lender that makes a series of covered short-term loans under 
proposed Sec.  1041.7 would be required to reduce the principal amount 
over a sequence of three loans so that a loan sequence would be 
functionally similar to an amortizing loan.
    After gathering substantial input and careful consideration, the 
Bureau believes that the off-ramp approach would have three significant 
disadvantages relative to the principal reduction structure outlined 
above. First, the Bureau, in proposing an alternative to the 
requirement to assess a consumer's ability to repay under proposed 
Sec. Sec.  1041.5 and 1041.6, seeks to ensure that Section 7 loans do 
not encumber consumers with unaffordable loan payments for an extended 
period. As discussed in Market Concerns--Short-Term Loans, the Bureau 
has found that consumers who reborrow generally reborrow for the same 
amount as the prior loan, rather than pay off a portion of the loan 
amount on the previous loan and reduce their debt burden. Given these 
borrowing patterns, an off-ramp, which began after a sequence of three 
loans, would delay the onset of the principal reduction and compel 
consumers to carry the burden of unaffordable payments for a longer 
period of time, raising the likelihood of default and collateral harms 
from making unaffordable loan payments.
    Second, the Bureau believes that an off-ramp provision likely could 
not be designed in a way to ensure that consumers actually receive the 
off-ramp. As discussed in part II.B above, the Bureau's analysis of 
State regulator reports indicates that consumer use of available off-
ramps has been limited.\611\ In addition, anecdotal evidence suggests 
that lenders discourage consumers from using State-imposed off-
ramps.\612\ Consumers can obtain an off-ramp only if they request it or 
make statements indicating that they, for example, lack the ability to 
repay the loan. If lenders are able to induce or pressure consumers 
into repaying the third loan in a loan sequence made under proposed 
Sec.  1041.7, the off-ramp provision would never be triggered. 
Consumers who repay the loan when they cannot afford to repay it may 
miss payments on other major financial obligations or forgo basic 
living expenses. Thus, the Bureau remains extremely concerned that an 
off-ramp would not, in fact, function as an important protection 
against the harms from unaffordable payments because it could be so 
easily circumvented.
---------------------------------------------------------------------------

    \611\ The experience in Florida also suggests that off-ramps are 
not likely to be made available to all consumers who struggle to 
repay covered short-term loans. For borrowers who indicate that they 
are unable to repay the loan when due and agree to attend credit 
counseling, Florida law requires lenders to extend the loan term on 
the outstanding loan by 60 days at no additional cost. Although 84 
percent of loans were made to borrowers with seven or more loans in 
2014, fewer than 0.5 percent of all loans were granted a cost-free 
term extension. See Brandon Coleman & Delvin Davis, Perfect Storm: 
Payday Lenders Harm Florida Consumers Despite State Law, Center for 
Responsible Lending at 4 (2016), available at http://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/crl_perfect_storm_florida_mar2016_0.pdf.
    \612\ The Bureau is also aware of lender self-reported evidence 
from Colorado State reports that lenders imposed their own cooling-
off periods on borrowers who took an off-ramp as a way to dissuade 
borrowers from using the off-ramp mandated by Colorado State law. 
The report concerns a 2007 statute which required lenders to offer 
borrowers a no-cost repayment plan after the third balloon loan. See 
Colo. Rev. Stat. Sec.  5-3.1-108(5). The law was changed in 2010 to 
require a minimum six-month loan term for what Colorado law calls 
``deferred deposit loans and maximum per annum interest rate of 45 
percent.'' See Colo. Rev. Stat. Sec. Sec.  5-3.1-103 and 5-3.1-105.
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    Third, to make an off-ramp approach less susceptible to such 
defects, the Bureau continues to believe that additional provisions 
would be necessary, including disclosures alerting consumers to their 
rights to take the off-ramp and prohibitions on false or misleading 
information regarding off-ramp usage and collections activity prior to 
completion of the full loan sequence. These measures would be of 
uncertain effectiveness and would increase complexity, burdens on 
lenders, and challenges for enforcement and supervision. In contrast, 
the proposed principal reduction requirements would be much simpler: 
The principal of the first loan could be no greater than $500, and each 
successive loan in the loan sequence would have a principal amount that 
is reduced by at least one-third. The Bureau believes this approach 
would both provide greater protection for consumers and offer easier 
compliance for lenders.
    The Bureau seeks comment on whether the principal reduction 
requirements are appropriate under proposed Sec.  1041.7; whether $500 
is the appropriate principal limit for the first loan in the sequence; 
and whether a one-third reduction for each loan made under proposed 
Sec.  1041.7 over the course of a three-loan sequence is the 
appropriate principal reduction amount and appropriate length for a 
loan sequence. The Bureau also seeks comment on whether the proposed 
principal reduction requirements would conflict with any State, local, 
or tribal laws and regulations. The Bureau separately seeks comment on 
whether, in lieu of the principal reduction requirements, the Bureau 
should adopt an off-ramp approach and, if so, what specific features 
should be included. In particular, the Bureau seeks comment on whether 
it should adopt the same parameters discussed in the Small Business 
Review Panel Outline--a cost-free extension of the third loan in the 
sequence over four installments--and additional measures to prevent 
lenders from discouraging usage of the off-ramp, such as a disclosure 
requirement, restrictions on collections activity prior to offering an 
off-ramp during a loan sequence, and prohibitions on false and 
misleading statements regarding

[[Page 47976]]

consumers' use of the off-ramp. The Bureau seeks comment on whether 
there are other approaches that could encourage the use of an off-ramp. 
The Bureau also seeks comment generally on whether an off-ramp could be 
structured in a way that is relatively simple for compliance but still 
ensures that it would be made available to all consumers who qualify 
for it.
7(b)(2)
    The Bureau expects that a covered short-term loan under proposed 
Sec.  1041.7 would generally involve a single payment structure, 
consistent with industry practice today. The Bureau also expects that 
the principal reduction would typically be achieved via a sequence of 
single-payment loans each for progressively smaller amounts. Proposed 
Sec.  1041.7(b)(2), however, would provide certain safeguards in the 
event that a lender chose to structure the loan with multiple payments, 
such as a 45-day loan with three required payments. Under the proposed 
requirement, the loan must have payments that are substantially equal 
in amount, fall due in substantially equal intervals, and amortize 
completely during the term of the loan. The proposed requirements under 
Sec.  1041.7(b)(2) are consistent with the requirements for covered 
longer-term loans that are made under proposed Sec. Sec.  1041.11 and 
1041.12, the two conditional exemptions to proposed Sec. Sec.  1041.8, 
1041.9, 1041.10 and 1041.15 for covered longer-term loans. Proposed 
comment 7(b)(2)-1 provides an example of a loan with an interest-only 
payment followed by a balloon payment, which would not satisfy the loan 
structure requirement under proposed Sec.  1041.7(b)(2).
    The requirement under proposed Sec.  1041.7(b)(2) is intended to 
address covered short-term loans made under proposed Sec.  1041.7 that 
are structured to have multiple payments. Absent the requirements in 
proposed Sec.  1041.7(b)(2), the Bureau is concerned that lenders could 
structure loans to pair multiple interest-only payments with a 
significantly larger payment of the principal amount at the end of the 
loan term. The Bureau believes that consumers are better able to manage 
repayment obligations for payments that are due with reasonable 
frequency, in substantially equal amounts, and within substantially 
equal intervals. The Bureau believes that, in the absence of an 
ability-to-repay determination under proposed Sec. Sec.  1041.5 and 
1041.6, multi-payment loans with a final balloon payment are much more 
likely to trigger default and up to two reborrowings than comparable 
loans with amortizing payments. In the comparable context of longer-
term vehicle title installment loans, for example, the Bureau has found 
that loans with final balloon payments are associated with much higher 
rates of default, compared to loans with fully amortizing 
payments.\613\ Furthermore, the balloon payment at the loans' maturity 
date appears to trigger significant reborrowing activity.\614\
---------------------------------------------------------------------------

    \613\ CFPB Report on Supplemental Findings, at 31-32.
    \614\ Id. at 32-33.
---------------------------------------------------------------------------

    The Small Business Review Panel Outline indicated that the Bureau 
was considering whether the alternative requirements for covered short-
term loans should prohibit a lender from charging more than one finance 
charge for the duration of the loan. The Bureau did not receive 
feedback from the SERs regarding the specific requirement.\615\ 
Proposed Sec.  1041.7(b)(2) would differ from the Small Business Review 
Panel Outline because it would require Section 7 loans with multiple 
payments to have payments that are substantially equal in amount, fall 
due within substantially equal intervals, and amortize completely 
during the term of the loan.
---------------------------------------------------------------------------

    \615\ Small Business Review Panel Report, at 22.
---------------------------------------------------------------------------

    The Bureau seeks comment on whether lenders would make covered 
short-term loans with multiple payments under proposed Sec.  1041.7. 
The Bureau also seeks comment on whether the requirement under proposed 
Sec.  1041.7(b)(2) is appropriate and on whether any additional 
requirements are appropriate with respect to multi-payment loans made 
under proposed Sec.  1041.7. The Bureau also seeks comment on whether 
any alternative approaches would protect consumers from the harms of 
multi-payment, covered short-term loans with balloon payments. In 
addition, the Bureau seeks comment on whether proposed Sec.  1041.7 
should permit only single-payment covered short-term loans.
7(b)(3)
    Proposed Sec.  1041.7(b)(3) would prohibit a lender, as a condition 
of making a covered short-term loan under proposed Sec.  1041.7, from 
obtaining vehicle security, as defined in proposed Sec.  1041.3(d). A 
lender seeking to make a covered short-term loan with vehicle security 
would have to make an ability-to-repay determination under proposed 
Sec. Sec.  1041.5 and 1041.6. Proposed comment 7(b)(3)-1 clarifies this 
prohibition on a lender obtaining vehicle security on a Section 7 loan.
    The Bureau is proposing this requirement because the Bureau is 
concerned that some consumers obtaining a loan under proposed Sec.  
1041.7 would not be able to afford the payments required to pay down 
the principal over a sequence of three loans. Allowing lenders to 
obtain vehicle security in connection with such loans could 
substantially increase the harm to such consumers by putting their 
vehicle at risk. The proposed requirement would protect consumers from 
default harms, collateral harms from making unaffordable loan payments, 
and reborrowing harms on covered short-term vehicle title loans. First, 
the Bureau is particularly concerned about default that could result in 
the loss of the consumer's vehicle. The Bureau has found sequences of 
short-term vehicle title loans are more likely to end in default than 
sequences of payday loans,\616\ and that 20 percent of loan sequences 
of single-payment vehicle title loans result in repossession of the 
consumer's vehicle.\617\ A consumer's vehicle may be essential for the 
consumer to travel to and from work, school, and medical 
appointments.\618\ The vehicle is likely also one of the consumer's 
most valuable economic assets.\619\ Second, due to the potentially 
serious consequences of defaulting on vehicle title loans, the Bureau 
is concerned that consumers may take extraordinary measures to repay 
vehicle title loans and, as a result, fail to meet other major 
financial obligations or basic living expenses. Third, even with the 
other protections against reborrowing in proposed Sec.  1041.7, the

[[Page 47977]]

Bureau is concerned that, due to the serious consequences of defaulting 
on vehicle title loans, consumers may feel pressure to reborrow up to 
twice on unaffordable vehicle title loans.\620\
---------------------------------------------------------------------------

    \616\ CFPB Single-Payment Vehicle Title Lending, at 11; CFPB 
Report on Supplemental Findings, at 120.
    \617\ CFPB Single-Payment Vehicle Title Lending, at 23.
    \618\ See Pew Charitable Trusts, Auto Title Loans: Market 
Practices and Borrowers' Experiences at 14 (2015), available at 
http://www.pewtrusts.org/~/media/assets/2015/03/
autotitleloansreport.pdf (``Thirty-five percent of [vehicle title 
borrower] respondents report having no more than one working vehicle 
in their household[.]); Fritzdixon, et al., at 1038 (finding that 
nearly 15 percent of vehicle title borrowers did not have an 
alternative means of getting to work).
    \619\ Nathalie Martin & Ozymandias Adams, Grand Theft Auto 
Loans: Repossession and Demographic Realities in Title Lending, 77 
Mo. L. Rev. 41, 86 (2012). Interviews with 313 title loan borrowers 
found that 50 percent are renters. The Pew Charitable Trusts, Auto 
Title Loans: Market Practices and Borrowers' Experiences, at 28 
(2015), available at http://www.pewtrusts.org/~/media/Assets/2015/
03/AutoTitleLoansReport.pdf?la=en. An earlier study of Illinois 
title loan borrowers found that ``homeownership rates for title loan 
borrowers are far below the national average, with 80% of title loan 
borrowers reporting that they rent their homes.'' See Nathalie 
Martin & Ernesto Longa, High-Interest Loans and Class: Do Payday and 
Title Loans Really Serve the Middle Class?, 24 Loy. Consumer L. Rev. 
524, 550 (2012).
    \620\ A single-payment short-term vehicle title loan is less 
likely to be repaid after one loan than a payday loan. CFPB Single-
Payment Vehicle Title Lending, at 11; CFPB Report on Supplemental 
Findings, at 120.
---------------------------------------------------------------------------

    Furthermore, the Bureau believes proposed Sec.  1041.7(b)(3) is 
necessary to restrict lenders' incentives to make Section 7 loans with 
unaffordable payments. Because loan sequences would be limited to a 
maximum of three Section 7 loans under proposed Sec.  1041.7(c)(3) and 
subject to principal reduction under Sec.  1041.7(b)(1), the Bureau 
believes a lender that makes Section 7 loans would have a strong 
incentive to underwrite effectively, even without having to comply with 
the specific requirements in proposed Sec. Sec.  1041.5 and 1041.6. 
However, with vehicle title loans, in which the lender obtains security 
interest in an asset of significantly greater value than the principal 
amount on the loan,\621\ the Bureau is concerned that a lender would 
have much less incentive to evaluate the consumer's ability to repay. 
The lender could repossess the vehicle if the loan were not repaid in 
full, even after the first loan in the sequence.
---------------------------------------------------------------------------

    \621\ For short-term title loans, loan-to-value ratios have been 
estimated to be between 25 and 40 percent. See discussion in part 
II.B above.
---------------------------------------------------------------------------

    While Section 7 loans with vehicle security would be prohibited, 
the Bureau notes that there would be alternatives available to 
consumers and lenders. Lenders could make covered short-term loans with 
vehicle security that comply with the ability-to-repay requirements in 
proposed Sec. Sec.  1041.5 and 1041.6. In addition, many lenders could 
offer covered longer-term loans with vehicle security that comply with 
the ability-to-repay requirements in proposed Sec. Sec.  1041.9 and 
1041.10. Lenders may, in fact, be able to recoup the costs of an 
ability-to-repay determination more easily for a covered longer-term 
loan than for a covered short-term loan of comparable amount. 
Furthermore, in most States that permit short-term vehicle title loans, 
payday lending is also permitted.\622\ Accordingly, lenders could offer 
Section 7 loans if they decide such an alternative (including 
satisfying additional State licensing requirements where applicable) is 
advantageous.
---------------------------------------------------------------------------

    \622\ See part II.B.
---------------------------------------------------------------------------

    The Bureau included this requirement in the Small Business Review 
Panel Outline. During the SBREFA process, the Bureau received feedback 
from a SER that is a vehicle title lender questioning the need for this 
requirement and urging the Bureau to consider permitting vehicle title 
loans to be made under the alternative requirements for covered short-
term loans. The Bureau has considered this feedback but, as described 
above, the Bureau remains concerned that the harms from unaffordable 
payments on covered short-term loans with vehicle security may be 
especially severe for consumers. In light of these concerns, the Bureau 
believes it is appropriate to prohibit lenders, as a condition of 
making covered short-term loans under the conditional exemption in 
proposed Sec.  1041.7, from obtaining vehicle security.
    The Bureau seeks comment on the protective benefits of this 
proposed prohibition. The Bureau also seeks comment on whether there 
are alternative approaches that could allow vehicle title lending under 
the proposed conditional exemption for certain covered short-term loans 
and still provide strong protections against the harms that can result 
to consumers who lack the ability to repay their loans, including 
default and potential loss of the consumer's vehicle, collateral harms 
from making unaffordable loan payments, and reborrowing.
7(b)(4)
    Proposed Sec.  1041.7(b)(4) would provide that, as a requirement of 
making a covered short-term loan under proposed Sec.  1041.7, the loan 
must not be structured as an open-end loan. Proposed comment 7(b)(4)-1 
clarifies this prohibition on a lender structuring a Section 7 loan as 
an open-end loan.
    The Bureau is concerned that permitting open-end loans under 
proposed Sec.  1041.7 would present significant risks to consumers, as 
consumers could repeatedly draw down credit without the lender ever 
determining the consumer's ability to repay. In practice, consumers 
could reborrow serially on a single Section 7 loan structured as an 
open-end loan. These consumers would not receive the important 
protections in proposed Sec.  1041.7, including the ability to 
gradually reduce their debt burden over the course of a sequence of 
three Section 7 loans. The Bureau also believes that attempting to 
develop restrictions for open-end loans in proposed Sec.  1041.7 would 
add undue complexity without providing appreciable benefit for 
consumers.
    The Small Business Review Panel Outline did not include this 
requirement as part of the proposed alternative requirements for 
covered short-term loans. Based on further consideration, the Bureau 
believes this requirement is necessary for the reasons described above. 
The Bureau seeks comment on whether proposed Sec.  1041.7 should 
include this requirement and whether lenders, in the absence of this 
requirement, would make covered short-term loans under proposed Sec.  
1041.7 that are structured as open-end loans.
7(c) Borrowing History Requirements
    Proposed Sec.  1041.7(c) would require the lender to determine that 
the borrowing history requirements under proposed Sec.  1041.7(c) are 
satisfied before making a Section 7 loan.
    In conjunction with the other requirements set forth in proposed 
Sec.  1041.7, the borrowing history requirements under proposed Sec.  
1041.7(c) are intended to prevent consumers from falling into long-term 
cycles of reborrowing and diminish the likelihood that consumers would 
experience harms during shorter loan sequences.
7(c)(1)
    Proposed Sec.  1041.7(c)(1) would require the lender to examine the 
consumer's borrowing history to ensure that it does not make a covered 
short-term loan under proposed Sec.  1041.7 when certain types of 
covered loans are outstanding. Specifically, it would provide that, as 
a requirement of making a covered short-term loan under proposed Sec.  
1041.7, the lender must determine that the consumer does not have a 
covered loan outstanding made under proposed Sec.  1041.5, proposed 
Sec.  1041.7, or proposed Sec.  1041.9, not including a loan made under 
proposed Sec.  1041.7 that the same lender seeks to roll over.
    Proposed comment 7(c)(1)-1 clarifies the meaning of this 
restriction and provides a cross-reference to the definition of 
outstanding loan in proposed Sec.  1041.2(a)(15). Proposed comment 
7(c)(1)-2 explains that the restriction in proposed Sec.  1041.7(c)(1) 
does not apply to an outstanding loan made by the same lender or an 
affiliate under proposed Sec.  1041.7 that is being rolled over.
    The Bureau is proposing Sec.  1041.7(c)(1) because it is concerned 
that consumers who have a covered loan outstanding made under proposed 
Sec.  1041.5, proposed Sec.  1041.7, or proposed Sec.  1041.9 and seek 
a new, concurrent covered short-term loan may be struggling to repay 
the outstanding loan. These consumers may be seeking the new loan to 
retire the outstanding loan or to cover major financial obligations or 
basic living expenses that they cannot afford if they make one or

[[Page 47978]]

more payments on the outstanding loan.\623\ In the absence of an 
ability-to-repay determination under proposed Sec. Sec.  1041.5 and 
1041.6, however, the lender would not determine whether the new loan 
would cause the consumer to fall deeper into a financial hole and 
suffer additional reborrowing, default, or collateral harms from making 
unaffordable loan payments. Accordingly, the Bureau believes that 
making a loan without an ability-to-repay determination under proposed 
Sec.  1041.7 would be inappropriate given the borrower's circumstances.
---------------------------------------------------------------------------

    \623\ A consumer also could be seeking a concurrent loan because 
State laws limit the amount of principal that may be borrowed. Thus, 
for some borrowers the same needs that triggered the decision to 
take out the first loan may be triggering the decision to seek the 
concurrent loan.
---------------------------------------------------------------------------

    The Bureau has addressed comparable concerns about concurrent 
outstanding loans in the context of covered short-term loans made under 
proposed Sec. Sec.  1041.5 and 1041.6, in two ways. First, the lender 
would be required to obtain information about current debt obligations 
(a subset of major financial obligations) under proposed Sec.  
1041.5(c) and to account for it as part of its ability-to-repay 
determination for any new loan. Second, a new, concurrent loan would be 
considered the second loan in the loan sequence of consecutive covered 
short-term loans and thereby would trigger the presumption of 
unaffordability for a covered short-term loan under proposed Sec.  
1041.6(b)(1), unless the exception under proposed Sec.  1041.6(b)(2) 
applies. Covered short-term loans made under proposed Sec.  1041.7 
would not have these means of accounting for the outstanding debt. As a 
result, the Bureau believes the requirement under proposed Sec.  
1041.7(c)(1) would ensure that consumers, who already have a covered 
loan outstanding made under Sec.  1041.5, Sec.  1041.7, or Sec.  
1041.9, would not increase their total debt burden and suffer 
additional harms from unaffordable loan payments on a new loan under 
proposed Sec.  1041.7.
    One outside study examined a dataset with millions of payday loans 
and found that approximately 15 to 25 percent of these loans are taken 
out while another loan is outstanding.\624\ The Bureau believes that 
this finding indicates that concurrent borrowing occurs frequently 
enough to warrant concern and that, without this proposed requirement, 
consumers could routinely take out concurrent covered short-term loans 
not subject to the proposed ability-to-repay determination and suffer 
harms as a result.
---------------------------------------------------------------------------

    \624\ nonPrime101, Report 7-A: How Persistent Is the Borrower-
Lender Relationship in Payday Lending 17-23 (2015), available at 
https://www.nonprime101.com/data-findings/.
---------------------------------------------------------------------------

    For the proposed alternative set of requirements for covered short-
term loans, the Small Business Review Panel Outline required that the 
consumer have no covered loans outstanding.\625\ The Bureau received 
little feedback from the SERs or other industry stakeholders on this 
provision during the SBREFA process and general outreach. The Bureau 
notes that proposed Sec.  1041.7(c)(1) differs from the Small Business 
Review Panel Outline because it would not apply to outstanding covered 
longer-term loans made under proposed Sec.  1041.11 and Sec.  1041.12. 
Upon further consideration, the Bureau believes that it is unlikely 
that consumers would move from one of those loans to a short-term 
alternative loan under proposed Sec.  1041.7 in the first 
instance.\626\ In contrast, the Bureau believes that it is important to 
apply this proposed requirement to covered loans subjected to the 
ability to repay requirements in proposed Sec. Sec.  1041.5 and 1041.6 
and proposed Sec. Sec.  1041.9 and 1041.10 to ensure that lenders do 
not use combinations of different kinds of loans to try to evade the 
safeguards against loans with unaffordable payments in proposed 
Sec. Sec.  1041.6 and 1041.10.
---------------------------------------------------------------------------

    \625\ Small Business Review Panel Report, at 432.
    \626\ The loans include various protections tied to loan 
duration, cost or other loan terms, or portfolio performance, and 
would not be as limited in amount and duration as loans under Sec.  
1041.7. The Bureau believes that there would be little incentive for 
consumers or lenders to move across loan products in this way, and 
information on such loans would be less readily available in any 
event under proposed Sec. Sec.  1041.11 and 1041.12.
---------------------------------------------------------------------------

    The Bureau seeks comment on whether the requirement under proposed 
Sec.  1041.7(c)(1) is appropriate. The Bureau also seeks comment on 
whether the requirement under proposed Sec.  1041.7(c)(1) should apply 
to covered loans outstanding made under proposed Sec.  1041.11 or Sec.  
1041.12. The Bureau further seeks comment on whether there are 
alternative approaches to the proposed requirement that would still 
protect consumers against the potential harms from taking concurrent 
loans.
7(c)(2)
    Proposed Sec.  1041.7(c)(2) would require that, prior to making a 
covered short-term loan under Sec.  1041.7, the lender determine that 
the consumer has not had in the past 30 days an outstanding loan that 
was either a covered short-term loan (as defined in Sec.  1041.2(a)(6)) 
made under proposed Sec.  1041.5 or a covered longer-term balloon-
payment loan (as defined in Sec.  1041.2(a)(7)) made under proposed 
Sec.  1041.9. The requirement under proposed Sec.  1041.7(c)(2) would 
prevent a consumer from obtaining a covered short-term loan under 
proposed Sec.  1041.7 soon after repaying a covered short-term made 
under proposed Sec.  1041.5 or a covered longer-term balloon-payment 
loan made under proposed Sec.  1041.9. Proposed comment 7(c)(2)-1 
explains that this requirement would apply regardless of whether the 
prior loan was made by the same lender, an affiliate of the lender, or 
an unaffiliated lender. The proposed comment also provides an 
illustrative example.
    Much as with proposed Sec.  1041.7(c)(1) as discussed above, 
proposed Sec.  1041.7(c)(2) would protect consumers, who lack the 
ability to repay a current or recent covered short-term or balloon-
payment loan, from the harms of a covered short-term loan made without 
an ability-to-repay determination under proposed Sec. Sec.  1041.5 and 
1041.6. As explained in Market Concerns--Short-Term Loans, the Bureau 
believes that such reborrowing frequently reflects the adverse 
budgetary effects of the prior loan and the unaffordability of the new 
loan. Indeed, for that reason, the Bureau is proposing to create a 
presumption of unaffordability for a covered short-term loans subject 
to the ability-to-repay requirements in proposed Sec. Sec.  1041.5 and 
1041.6. This presumption would be undermined if consumers, who would be 
precluded from reborrowing by the presumption under proposed Sec.  
1041.6, could simply transition to covered short-term loans made under 
proposed Sec.  1041.7.
    Moreover, permitting a consumer to transition from a covered short-
term loan made under proposed Sec.  1041.5 or a covered longer-term 
balloon-payment loan made under proposed Sec.  1041.9 to a covered 
short-term loan made under proposed Sec.  1041.7 would be inconsistent 
with the basic purpose of proposed Sec.  1041.7. As previously noted, 
proposed Sec.  1041.7 creates an alternative to the ability-to-pay 
requirements under proposed Sec. Sec.  1041.5 and 1041.6 and features 
carefully structured consumer protections. If lenders were permitted to 
make a Section 7 loan shortly after making a covered short-term under 
proposed Sec.  1041.5 or a covered longer-term balloon-payment loan 
under proposed Sec.  1041.9, it would be very difficult to apply all of 
the requirements under proposed Sec.  1041.7 that are designed to 
protect consumers. As noted, proposed Sec.  1041.7(b)(1)(i) would 
require that the first loan in a loan sequence of Section 7 loans have 
a principal amount no greater than $500,

[[Page 47979]]

and proposed Sec.  1041.7(b)(1)(ii) and (iii) would impose principal 
reduction requirements for additional Section 7 loans that are part of 
the same loan sequence. If a consumer were permitted to transition from 
a covered short-term or balloon-payment loan made under proposed Sec.  
1041.5 to a covered short-term loan made under proposed Sec.  1041.7, 
the principal reduction requirements under proposed Sec.  1041.7(b)(1) 
would be undermined.
    The Bureau also believes providing separate paths for covered 
short-term loans that are made under the ability-to-repay framework in 
proposed Sec. Sec.  1041.5 and 1041.6 and under the framework in 
proposed Sec.  1041.7 would make the rule's application more consistent 
across provisions and also simpler for both consumers and lenders. 
These two proposed frameworks would work in tandem to ensure that 
lenders could not transition consumers back and forth between covered 
short-term loans made under proposed Sec.  1041.5 and under proposed 
Sec.  1041.7. Furthermore, with these proposed provisions in place, 
consumers and lenders would have clear expectations of the types of 
covered short-term loans that could be made if the consumer were to 
reborrow.
    The Bureau seeks comment on whether this requirement is 
appropriate. The Bureau also seeks comment on whether there are 
alternative approaches that would allow consumers to receive covered 
short-term loans made under both proposed Sec.  1041.5 and proposed 
Sec.  1041.7 in a loan sequence and still maintain the integrity of the 
consumer protections under the two proposed sections.
7(c)(3)
    Proposed Sec.  1041.7(c)(3) would provide that a lender cannot make 
a covered short-term loan under Sec.  1041.7 if the loan would result 
in the consumer having a loan sequence of more than three Section 7 
loans made by any lender. Proposed comment 7(c)(3)-1 clarifies that 
this requirement applies regardless of whether any or all of the loans 
in the loan sequence are made by the same lender, an affiliate, or 
unaffiliated lenders and explains that loans that are rollovers count 
toward the sequence limitation. Proposed comment 7(c)(3)-1 includes an 
example.
    The Bureau is proposing Sec.  1041.7(c)(3) for several reasons. 
First, the limitation on the length of loan sequences is aimed at 
preventing further harms from reborrowing. As discussed in the 
Supplemental Findings on Payday Loans, Deposit Advance Products, and 
Vehicle Title Loans, the Bureau found that 66 percent of loan sequences 
that reach a fourth loan end up having at least seven loans, and 47 
percent of loan sequences that reach a fourth loan end up having at 
least 10 loans.\627\ Second, the Bureau believes that a three-loan 
limit would be consistent with evidence presented in the Supplemental 
Findings on Payday Loans, Deposit Advance Products, and Vehicle Title 
Loans, noted above, that approximately 38 percent of new loan sequences 
end by the third loan without default.\628\ Third, a three-loan limit 
would work in tandem with the principal restrictions in proposed Sec.  
1041.7(b)(1) to allow consumers to repay a covered short-term loan in 
manageable one-third increments over a loan sequence. Fourth, a three-
loan limit would align with proposed Sec.  1041.6(f), which would 
prohibit a lender from making another short-term covered loan after the 
third loan in a sequence of covered short-term loans made under 
proposed Sec.  1041.5. Fifth, the Bureau believes that a three-loan 
limit would provide lenders with a strong incentive to evaluate the 
consumer's ability to repay before making Section 7 loans, albeit 
without complying with the specific ability-to-repay requirements in 
proposed Sec. Sec.  1041.5 and 1041.6.
---------------------------------------------------------------------------

    \627\ Results calculated using data described in Chapter 5 of 
the CFPB Report on Supplemental Findings.
    \628\ See CFPB Report on Supplemental Findings, at 116-17.
---------------------------------------------------------------------------

    The Small Business Review Panel Outline stated that the Bureau was 
considering a proposal to limit the length of a loan sequence of 
covered short-term loans made under the alternative requirements for 
covered short-term loans. The Bureau received feedback during the 
SBREFA process from small lenders that the sequence limitations would 
significantly reduce their revenue. During the SBREFA process and the 
Bureau's general outreach following the Bureau's release of the Small 
Business Review Panel Outline, many lenders and other industry 
stakeholders argued that the alternative requirements for covered 
short-term loans presented in the Small Business Review Panel Outline 
did not provide sufficient flexibility. As noted above, a group of SERs 
submitted a report projecting significantly lower revenue and profits 
for small lenders if they originated loans solely under the alternative 
approach. The Small Business Review Panel Report recommended that the 
Bureau request comment on whether permitting more than three loans 
under these requirements would enable the Bureau to satisfy its stated 
objectives for this rulemaking while reducing the revenue impact on 
small entities making covered short-term loans.\629\
---------------------------------------------------------------------------

    \629\ Small Business Review Panel Report, at 32.
---------------------------------------------------------------------------

    The Bureau seeks comment on whether the requirement under proposed 
Sec.  1041.7(c)(3) is appropriate and also whether three covered short-
term loans is the appropriate number for the limitation on the length 
of a loan sequence under proposed Sec.  1041.7(c)(3). The Bureau 
specifically seeks comment on whether, given the principal reduction 
requirement for the second and third loans made under proposed Sec.  
1041.7, a four-loan sequence limit, with a 25 percent step down for 
each loan would be more affordable for consumers than loans made under 
a three-loan limit with a 33 percent step down. Moreover, consistent 
with the Small Business Review Panel recommendation, the Bureau seeks 
comment on whether permitting a loan sequence of more than three 
Section 7 loans would enable the Bureau to satisfy its stated 
objectives for the proposed rulemaking while reducing the impact on 
small entities making covered short-term loans.
7(c)(4)
    Proposed Sec.  1041.7(c)(4) would require that a covered short-term 
loan made under proposed Sec.  1041.7 not result in the consumer having 
more than six covered short-term loans outstanding during any 
consecutive 12-month period (also referred to as the ``Section 7 loan 
limit'') or having covered short-term loans outstanding for an 
aggregate period of more than 90 days during any consecutive 12-month 
period (also referred to as the ``Section 7 indebtedness limit''). The 
lender would have to determine whether any covered short-term loans 
were outstanding during the consecutive 12-month period. If a consumer 
obtained a covered short-term loan prior to the consecutive 12-month 
period and was obligated on the loan during part of the consecutive 12-
month period, this loan and the time in which it was outstanding during 
the consecutive 12-month period would count toward the Section 7 loan 
and Section 7 indebtedness limits.
    Proposed comment 7(c)(4)-1 explains the meaning of consecutive 12-
month period as used in proposed Sec.  1041.7(c)(4). The proposed 
comment clarifies that a consecutive 12-month period begins on the date 
that is 12 months prior to the proposed contractual due date of the new 
Section 7 loan and ends on the proposed contractual due date. Proposed

[[Page 47980]]

comment 7(c)(4)-1 explains further that the lender would have to obtain 
information about the consumer's borrowing history on covered short-
term loans for the 12 months preceding the proposed contractual due 
date on that loan. Proposed comment 7(c)(4)-1 also provides an example.
    Under proposed Sec.  1041.7(c)(4), the lender would have to count 
the proposed new loan toward the Section 7 loan limit and count the 
anticipated contractual duration of the new loan toward the Section 7 
indebtedness limit. Because the new loan and its proposed contractual 
duration would count toward these limits, the lookback period would not 
start at the consummation date of the new loan. Instead, the lookback 
period would start at the proposed contractual due date of the final 
payment on the new loan and consider the full 12 months immediately 
preceding this date.
    As a general matter, the Bureau is concerned about consumers' 
frequent use of covered short-term loans made under proposed Sec.  
1041.7 for which lenders are not required to determine consumers' 
ability to repay. The frequent use of covered short-term loans that do 
not require an ability-to-repay determination may be a signal that 
consumers are struggling to repay such loans without reborrowing. For 
purposes of determining whether the making of a loan would satisfy the 
Section 7 loan and Section 7 indebtedness limits under proposed Sec.  
1041.7(c)(4), the lender would also have to count covered short-term 
loans made under both proposed Sec.  1041.5 and proposed Sec.  1041.7. 
Although loans made under proposed Sec.  1041.5 would require the 
lender to make a reasonable determination of a consumer's ability to 
repay, the consumer's decision to seek a Section 7 loan, after 
previously obtaining a covered short-term loan based on an ability-to-
repay determination, suggests that the consumer may now lack the 
ability to repay the loan and that an earlier ability-to-repay 
determination may not have fully captured this particular consumer's 
expenses or obligations. Under proposed Sec.  1041.7(c)(4), consumers 
could receive up to six Section 7 loans and accrue up to 90 days of 
indebtedness on Section 7 loans, assuming the consumer did not also 
have any covered short-term loans made under proposed Sec.  1041.5 
during the same time period. Because the duration of covered short-term 
loans are typically tied to how frequently a consumer receives income, 
the Bureau believes that the two overlapping proposed requirements are 
necessary to provide more complete protections for consumers.
    The Bureau seeks comment on whether the number of and period of 
indebtedness on covered short-term loans made under proposed Sec.  
1041.5 should count toward the Section 7 loan and Section 7 
indebtedness limits, respectively. The Bureau also seeks comment on 
whether there are alternative approaches that would address the 
Bureau's concerns about a high number of and long aggregate period of 
indebtedness on covered short-term loans made without the ability-to-
repay determination under proposed Sec. Sec.  1041.5 and 1041.6. The 
Bureau also seeks comment on whether proposed Sec.  1041.7(c)(4) should 
count loans with a term that partly fell in the 12-month period toward 
the Section 7 loan and Section 7 indebtedness limits or alternatively 
should count only covered short-term loans that were consummated during 
the consecutive 12-month period toward the Section 7 loan and Section 7 
indebtedness limits.
7(c)(4)(i)
    Proposed Sec.  1041.7(c)(4)(i) would require that a covered short-
term loan made under proposed Sec.  1041.7 not result in the consumer 
having more than six covered short-term loans outstanding during any 
consecutive 12-month period. This proposed requirement would impose a 
limit on the total number of Section 7 loans during a consecutive 12-
month period.
    Proposed comment 7(c)(4)(i)-1 explains certain aspects of proposed 
Sec.  1041.7(c)(4)(i) relating to the Section 7 loan limit. Proposed 
comment 7(c)(4)(i)-1 clarifies that, in addition to the new loan, all 
covered short-term loans made under either proposed Sec.  1041.5 or 
proposed Sec.  1041.7 that were outstanding during the consecutive 12-
month period count toward the Section 7 loan limit. Proposed comment 
7(c)(4)(i)-1 also clarifies that, under proposed Sec.  1041.7(c)(4)(i), 
a lender may make a loan that when aggregated with prior covered short-
term loans would satisfy the Section 7 loan limit even if proposed 
Sec.  1041.7(c)(4)(i) would prohibit the consumer from obtaining one or 
two subsequent loans in the sequence. Proposed comment 7(c)(4)(i)-2 
gives examples.
    The Bureau believes that a consumer who seeks to take out a new 
covered short-term loan after having taken out six covered short-term 
loans during a consecutive 12-month period may be exhibiting an 
inability to repay such loans. If a consumer is seeking a seventh 
covered short-term loan under proposed Sec.  1041.7 in a consecutive 
12-month period, this consumer may, in fact, be using covered short-
term loans to cover regular expenses and compensate for chronic income 
shortfalls, rather than to cover an emergency or other non-recurring 
need.\630\ Under these circumstances, the Bureau believes that the 
lender should make an ability-to-repay determination in accordance with 
proposed Sec. Sec.  1041.5 and 1041.6 before making additional covered 
short-term loans and ensure that the payments on any subsequent loan 
are affordable for the consumer. If the consumer were found to be 
ineligible for a covered short-term loan following the ability-to-repay 
determination, this would suggest that the Section 7 loan limit was 
having its intended effect and that the consumer would not be able to 
afford another Section 7 loan.
---------------------------------------------------------------------------

    \630\ Market Concerns--Short-Term Loans; Levy & Sledge, at 12.
---------------------------------------------------------------------------

    The specific limit of six Section 7 loans in a consecutive twelve-
month period in proposed Sec.  1041.7(c)(4)(i) is also informed by the 
decisions of Federal prudential regulators and two States that have 
directly or indirectly set limits on the total number of certain 
covered short-term loans a consumer can obtain during a prescribed time 
period. As described in part II.B above, the FDIC and the OCC in late 
2013 issued supervisory guidance on DAP (FDIC DAP Guidance and OCC DAP 
Guidance, respectively).\631\ The OCC DAP Guidance and FDIC DAP 
Guidance set the supervisory expectation that regulated banks require 
each deposit advance to be repaid in full before the extension of a 
subsequent advance, offer no more than one deposit advance loan per 
monthly statement cycle, and impose a cooling-off period of at least 
one monthly statement cycle after the repayment of a deposit 
advance.\632\ Taken collectively, these guidelines established the 
supervisory norm that institutions regulated by the FDIC or OCC should 
make no more than six deposit advances per year to a customer.
---------------------------------------------------------------------------

    \631\ OCC, Guidance on Supervisory Concerns and Expectations 
Regarding Deposit Advance Products, 78 FR 70624 (Nov. 26, 2013); 
FDIC, Guidance on Supervisory Concerns and Expectations Regarding 
Deposit Advance Products, 78 FR 70552 (Nov. 26, 2013).
    \632\ Id.
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    Two States have also placed a cap on the number of covered short-
term loans a consumer can receive in a year. In 2010, Washington State 
enacted an annual loan cap that restricts the number of loans a 
consumer may receive from all lenders to a maximum of eight in a 12-
month period.\633\

[[Page 47981]]

Delaware implemented a cap of five loans in any 12-month period in 
2013.\634\
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    \633\ Wash. Rev. Code Sec.  31.45.073(4). The Bureau examined 
the impacts of the Washington State statutory regime in Chapter 3, 
Part B of the CFPB Report on Supplemental Findings.
    \634\ Del. Code Ann. Tit. 5, Sec.  2235A(a)(1).
---------------------------------------------------------------------------

    The Bureau seeks comment on whether it is appropriate to establish 
a Section 7 loan limit. The Bureau also seeks comment on whether six 
covered short-term loans made under proposed Sec.  1041.7 is the 
appropriate Section 7 loan limit or whether a smaller or larger number 
should be considered by the Bureau. The Bureau also seeks comment on 
the impact of the Section 7 loan limit on small entities.
7(c)(4)(ii)
    Proposed Sec.  1041.7(c)(4)(ii) would require that a covered short-
term loan made under proposed Sec.  1041.7 not result in the consumer 
having covered short-term loans outstanding for an aggregate period of 
more than 90 days during any consecutive 12-month period. This proposed 
requirement would limit the consumer's aggregate period of indebtedness 
on such loans during a consecutive 12-month period.
    Proposed comment 7(c)(4)(ii)-1 clarifies certain aspects of 
proposed Sec.  1041.7(c)(4)(ii) relating to the Section 7 indebtedness 
limit. Proposed comment 7(c)(4)(ii)-1 explains that, in addition to the 
new loan, the time period in which all covered short-term loans made 
under either Sec.  1041.5 or Sec.  1041.7 were outstanding during the 
consecutive 12-month period count toward the Section 7 indebtedness 
limit. Proposed comment 7(c)(4)(ii)-1 also clarifies that, under 
proposed Sec.  1041.7(c)(4)(ii), a lender may make a loan with a 
proposed contractual duration, which when aggregated with the time 
outstanding of prior covered short-term loans, would satisfy the 
Section 7 indebtedness limit even if proposed Sec.  1041.7(c)(4)(ii) 
would prohibit the consumer from obtaining one or two subsequent loans 
in the sequence. Proposed comment 7(c)(4)(ii)-2 gives examples.
    The Bureau believes it is important to complement the proposed six-
loan limit with the proposed 90-day indebtedness limit in light of the 
fact that loan durations may vary under proposed Sec.  1041.7. For the 
typical two-week payday loan, the two thresholds would reach the same 
result, since a limit of six-loans under proposed Sec.  1041.7 means 
that the consumer can be in debt on such loans for up to approximately 
90 days per year or one quarter of the year. For 30- or 45-day loans, 
however, a six-loan limit would mean that the consumer could be in debt 
for 180 days or 270 days out of a 12-month period. This result would be 
inconsistent with protecting consumers from the harms associated with 
long cycles of indebtedness.
    Given the income profile and borrowing patterns of consumers who 
borrow monthly, the Bureau believes the proposed Section 7 indebtedness 
limit is an important protection for these consumers. Consumers who 
receive 30-day payday loans are more likely to live on fixed incomes, 
typically Social Security.\635\ Fifty-eight percent of monthly 
borrowers were identified as recipients of government benefits in the 
Bureau's 2014 Data Point.\636\ These borrowers are particularly 
vulnerable to default and collateral harms from making unaffordable 
loan payments. The Bureau has found that borrowers receiving public 
benefits are more highly concentrated toward the lower end of the 
income range. Nearly 90 percent of borrowers receiving public benefits 
reported annual incomes of less than $20,000, whereas less than 30 
percent of employed borrowers reported annual incomes of less than 
$20,000.\637\ Furthermore, because public benefits are typically fixed 
and do not vary from month to month,\638\ in contrast to wage income 
that is often tied to the number of hours worked in a pay period, the 
Bureau believes monthly borrowers are more likely than biweekly 
borrowers to use covered short-term loans to compensate for a chronic 
income shortfall rather than to cover an emergency or other non-
recurring need.
---------------------------------------------------------------------------

    \635\ Due dates on covered short-term loans generally align with 
how frequently a consumer receives income. Consumers typically 
receive public benefits, including Social security and unemployment, 
on a monthly basis. See CFPB Payday Loans and Deposit Advance 
Products White Paper, at 15, 19.
    \636\ CFPB Data Point: Payday Lending, at 14.
    \637\ The Bureau previously noted in April 2013 in the CFPB 
White Paper that a significant share of consumers (18 percent) 
reported a form of public assistance or other benefits as an income 
source (e.g., Social Security payments); these payments are usually 
of a fixed amount, typically occurring on a monthly basis; and that 
borrowers reporting public assistance or benefits as their income 
source are more highly concentrated towards the lower end of the 
income range for the payday borrowers in our sample. See CFPB Payday 
Loans and Deposit Advance Products White Paper, at 18-20.
    \638\ Id., at 19.
---------------------------------------------------------------------------

    The Bureau has found that borrowers on fixed incomes are especially 
likely to struggle with repayments and face the burden of unaffordable 
loan payments for an extended period of time. As noted in the 
Supplemental Findings on Payday Loans, Deposit Advance Products, and 
Vehicle Title Loans, for loans taken out by consumers who are paid 
monthly, more than 40 percent of all loans to these borrowers were in 
sequences that, once begun, persisted for the rest of the year for 
which data were available.\639\ The Bureau also found that 
approximately 20 percent of borrowers \640\ paid monthly averaged at 
least one loan per pay period.
---------------------------------------------------------------------------

    \639\ CFPB Report on Supplemental Findings, at 131.
    \640\ CFPB Report on Supplemental Findings, at 121.
---------------------------------------------------------------------------

    In light of these considerations, the Bureau believes that a 
consumer who has been in debt for more than 90 days on covered short-
term loans, made under either proposed Sec.  1041.5 or proposed Sec.  
1041.7, during a consecutive 12-month period may be exhibiting an 
inability to repay such loans. If a consumer is seeking a covered 
short-term loan under proposed Sec.  1041.7 that would result in a 
total period of indebtedness on covered short-term loans of greater 
than 90 days in a consecutive 12-month period, this consumer may, in 
fact, be using covered short-term loans to cover regular expenses and 
compensate for chronic income shortfalls, rather than to cover an 
emergency or other non-recurring need.\641\ Under these circumstances, 
the Bureau believes that the lender should make an ability-to-repay 
determination in accordance with proposed Sec. Sec.  1041.5 and 1041.6 
before making additional covered short-term loans and ensure that the 
payments on any subsequent loan are affordable for the consumer. If the 
consumer were found to be ineligible for a covered short-term loan 
following the ability-to-repay determination, this would suggest that 
the Section 7 indebtedness limit was having its intended effect and 
that the consumer would not be able to afford another Section 7 loan.
---------------------------------------------------------------------------

    \641\ Market Concerns--Short-Term Loans; Levy & Sledge, at 12.
---------------------------------------------------------------------------

    Proposed Sec.  1041.7(c)(4)(ii) is also consistent with the policy 
choice embodied in the FDIC's 2005 supervisory guidance on payday 
lending. The FDIC recommended limits on the total time of indebtedness 
during a consecutive 12-month period.\642\ Among other guidelines, the 
FDIC advised that:
---------------------------------------------------------------------------

    \642\ FDIC Financial Institution Letter FIL-14-2005, Guidelines 
for Payday Lending, (Mar. 1, 2005), available at https://www.fdic.gov/news/news/financial/2005/fil1405a.html.

    Depository institutions should ensure that payday loans are not 
provided to customers who had payday loans outstanding at any lender 
for a total of three months during the previous 12 months. When 
calculating the three-month period, institutions should consider the 
customers' total use of payday loans at all lenders. When a customer 
has

[[Page 47982]]

used payday loans more than three months in the past 12 months, 
institutions should offer the customer, or refer the customer to, an 
alternative longer-term credit product that more appropriately suits 
the customer's needs. Whether or not an institution is able to 
provide a customer alternative credit products, an extension of a 
payday loan is not appropriate under such circumstances.\643\
---------------------------------------------------------------------------

    \643\ FDIC Financial Institution Letter FIL-14-2005, Guidelines 
for Payday Lending, (Mar. 1, 2005), available at https://www.fdic.gov/news/news/financial/2005/fil1405a.html.

    The Bureau seeks comment on whether it is appropriate to establish 
a Section 7 indebtedness limit. The Bureau also seeks comment on 
whether 90 days of Section 7 indebtedness is the appropriate period for 
the Section 7 indebtedness limit or whether a shorter or longer period 
of time should be considered by the Bureau. Furthermore, consistent 
with the Small Business Review Panel recommendation, the Bureau seeks 
comment on whether a period of indebtedness longer than 90 days per 
consecutive 12-month period would permit the Bureau to fulfill its 
objectives for the rulemaking while reducing the revenue impact on 
small entities.\644\ The Bureau also seeks comment on the interplay 
between the proposed definition of outstanding loan and the requirement 
under proposed Sec.  1041.7(c)(4)(ii). In addition, the Bureau seeks 
comment on whether contractual indebtedness should be the standard by 
which a covered short-term loan's duration is measured for purposes of 
the Section 7 indebtedness limit in proposed Sec.  1041.7(c)(4)(ii).
---------------------------------------------------------------------------

    \644\ See Small Business Review Panel Report, at 32.
---------------------------------------------------------------------------

7(d) Determining Period Between Consecutive Covered Short-Term Loans 
Made Under the Conditional Exemption
    Under proposed Sec.  1041.7(d), if a lender or an affiliate makes a 
non-covered bridge loan during the time any covered short-term loan 
made by a lender or an affiliate under proposed Sec.  1041.7 is 
outstanding and for 30 days thereafter, the lender or an affiliate must 
modify its determination of loan sequence for the purpose of making a 
subsequent Section 7 loan. Specifically, the lender or an affiliate 
must not count the days during which the non-covered bridge loan is 
outstanding in determining whether a subsequent Section 7 loan made by 
the lender or an affiliate is part of the same loan sequence as the 
prior Section 7 loan.
    Proposed comment 7(d)-1 provides a cross-reference to proposed 
Sec.  1041.2(a)(13) for the definition of non-covered bridge loan. 
Proposed comment 7(d)-2 clarifies that proposed Sec.  1041.7(d) 
provides for certain rules for determining whether a loan is part of a 
loan sequence when a lender or an affiliate makes both covered short-
term loans under Sec.  1041.7 and a non-covered bridge loan in close 
succession. Proposed comment 7(d)-3 provides an illustrative example.
    The Bureau believes that proposed Sec.  1041.7(d) would maintain 
the integrity of a core protection in proposed Sec.  1041.7(b). If a 
lender could make a non-covered bridge loan to keep a consumer in debt 
and reset a consumer's loan sequence after 30 days, it could make a 
lengthy series of $500 covered short-term loans under proposed Sec.  
1041.7 and evade the principal stepdown requirements in proposed Sec.  
1041.7(b)(1). In the absence of this proposed restriction, a consumer 
could experience an extended period of indebtedness after taking out a 
combination of covered short-term loans under Sec.  1041.7 and non-
covered bridge loans and not have the ability to gradually pay off the 
debt obligation by means of the principal reduction requirement in 
proposed Sec.  1041.7(b)(1). Proposed Sec.  1041.7(d) parallels the 
restriction in proposed Sec.  1041.6(h) applicable to covered short-
term loans made under proposed Sec.  1041.5.
    The Bureau seeks comment on whether this proposed restriction is 
appropriate. The Bureau also seeks comment on whether lenders would 
anticipate making covered short-term loans under proposed Sec.  1041.7 
and non-covered bridge loans to consumers close in time to one another, 
if permitted to do so under a final rule.
7(e) Disclosures
    Proposed Sec.  1041.7(e) would require a lender to provide 
disclosures before making the first and third loan in a sequence of 
Section 7 loans. Proposed comment 7(e)-1 clarifies the proposed 
disclosure requirements.
    The disclosures are designed to provide consumers with key 
information about how the principal amounts and the number of loans in 
a loan sequence would be limited for covered short-term loans made 
under proposed Sec.  1041.7 before they take out their first and third 
loans in a sequence. The Bureau developed model forms for the proposed 
disclosures through consumer testing.\645\ The notices in proposed 
Sec.  1041.7(e)(2)(i) and Sec.  1041.7(e)(2)(ii) would have to be 
substantially similar to the model forms. Proposed Sec.  1041.7(e) 
would require a lender to provide the notices required under proposed 
Sec.  1041.7(e)(2)(i) and Sec.  1041.7(e)(2)(ii) before the 
consummation of a loan. Proposed comment 7(e)-1 explains the proposed 
disclosure requirements.
---------------------------------------------------------------------------

    \645\ See FMG Report, at 11-15, 40-41.
---------------------------------------------------------------------------

    The Bureau believes that the proposed disclosures would help inform 
consumers of the features of Section 7 loans in such a manner as to 
make the costs, benefits, and risks clear. The Bureau believes that the 
proposed disclosures would, consistent with Dodd-Frank section 1032(a), 
ensure that these costs, benefits, and risks are fully, accurately, and 
effectively disclosed to consumers. In the absence of the proposed 
disclosures, the Bureau is concerned that consumers are less likely to 
appreciate the risk of taking a loan with mandated principal reductions 
or understand the proposed restrictions on Section 7 loans that are 
designed to protect consumers from the harms of unaffordable loan 
payments.
    The Bureau believes that it is important for consumers to receive 
the proposed notices before they are contractually obligated on a 
Section 7 loan. By receiving the proposed notices before consummation, 
a consumer can make a more fully informed decision, with an awareness 
of the features of a Section 7 loan, including specifically the limits 
on taking additional Section 7 loans in the near future. The Bureau 
believes that some consumers, when informed of the restrictions on 
taking subsequent loans in a sequence of Section 7 loans, may opt not 
to take the loan. If the proposed notices only had to be provided after 
the loan has been consummated, however, consumers would be unable to 
use this information in deciding whether to obtain a Section 7 loan.
    The Bureau seeks comment on the appropriateness of the proposed 
disclosures and whether they would effectively aid consumer 
understanding of Section 7 loans. Furthermore, the Bureau seeks comment 
on the specific elements in the proposed disclosures. The Bureau also 
seeks comment on the costs and burdens on lenders to provide the 
proposed disclosures to consumers.
7(e)(1) General Form of Disclosures
    Proposed Sec.  1041.7(e)(1) would establish the form of disclosures 
that would be provided under proposed Sec.  1041.7. The format 
requirements generally parallel the format requirements for disclosures 
related to payment transfers under proposed Sec.  1041.15, as discussed 
below. Proposed Sec.  1041.7(e)(1)(i) would require that the 
disclosures be clear and conspicuous. Proposed Sec.  1041.7(e)(1)(ii) 
would require that the disclosures be in provided in writing or through

[[Page 47983]]

electronic delivery. Proposed Sec.  1041.7(e)(1)(iii) would require the 
disclosures to be provided in retainable form. Proposed Sec.  
1041.7(e)(1)(iv) would require the notices to be segregated from other 
items and to contain only the information in proposed Sec.  
1041.7(e)(2). Proposed Sec.  1041.7(e)(1)(v) would require electronic 
notices to have machine readable text. Proposed Sec.  1041.7(e)(1)(vi) 
would require the disclosures to be substantially similar to the model 
forms for the notices required under Sec.  1041.7(e)(2)(i) and (ii).
7(e)(1)(i) Clear and Conspicuous
    Proposed Sec.  1041.7(e)(1)(i) would provide that the disclosures 
required by Sec.  1041.7 must be clear and conspicuous. The disclosures 
may use commonly accepted abbreviations that would be readily 
understandable by the consumer. Proposed comment 7(e)(1)(i)-1 clarifies 
that disclosures are clear and conspicuous if they are readily 
understandable and their location and type size are readily noticeable 
to consumers. This clear and conspicuous standard is based on the 
standard used in other consumer financial services laws and their 
implementing regulations, including Regulation E Subpart B (Remittance 
Transfers).\646\ Requiring that the disclosures be provided in a clear 
and conspicuous manner would aid consumer understanding of the 
information in the disclosure about the risks and restrictions on 
obtaining a sequence of covered short-term loans under Sec.  1041.7, 
consistent with the Bureau's authority under section 1032(a) of the 
Dodd-Frank Act.
---------------------------------------------------------------------------

    \646\ Regulation E, 12 CFR 1005.31.
---------------------------------------------------------------------------

    The Bureau seeks comment on this clear and conspicuous standard and 
whether it is appropriate for the proposed disclosures.
7(e)(1)(ii) In Writing or Electronic Delivery
    Proposed Sec.  1041.7(e)(1)(ii) would require disclosures mandated 
by proposed Sec.  1041.7(e) to be provided in writing or electronic 
delivery. The disclosures must be provided in a form that can be viewed 
on paper or a screen. This requirement cannot be satisfied by being 
provided orally or through a recorded message. Proposed comment 
15(e)(1)(ii)-1 clarifies the meaning of this proposed requirement. 
Proposed comment 7(e)(1)(ii)-2 explains that the disclosures required 
by proposed Sec.  1041.7(e) may be provided without regard to the 
Electronic Signatures in Global and National Commerce Act (E-Sign Act) 
(15 U.S.C. 7001 et seq.).
    The Bureau is proposing to allow electronic delivery because 
electronic communications may be more convenient than paper 
communications for some lenders and consumers. In particular for 
Section 7 loans that are made online, requiring disclosures in paper 
form could introduce delay and additional costs into the process of 
making loans online, without providing appreciable improvements in 
consumer understanding.
    The Bureau seeks comment on the benefits and risks to consumers of 
providing these disclosures through electronic delivery. The Bureau 
also seeks comment on whether electronic delivery should only be 
permitted for loans that are made online. Furthermore, the Bureau seeks 
comment on whether electronic delivery should be subject to additional 
requirements, including specific provisions of the E-Sign Act. The 
Bureau seeks comment on whether lenders should be subject to consumer 
consent requirements, similar to those in proposed Sec.  1041.15(a)(4), 
when providing the disclosures electronically. The Bureau also seeks 
comment on whether it is feasible and appropriate to provide the 
disclosures by text message or mobile application. The Bureau also 
seeks comment on situations in which consumers would be provided with a 
paper notice. The Bureau specifically seeks comment on the burdens of 
providing these notices through paper and the utility of paper notices 
to consumers.
7(e)(1)(iii) Retainable
    Proposed Sec.  1041.7(e)(1)(iii) would require disclosures mandated 
by proposed Sec.  1041.7(e) to be provided in a retainable form. 
Proposed comment 7(e)(1)(iii)-1 explains that electronic disclosures 
are considered retainable if they are in a format that is capable of 
being printed, saved, or emailed by the consumer.
    The Bureau believes that retainable disclosures are important to 
aid consumer understanding of the features and restrictions on 
obtaining a Section 7 loan at the time the consumer seeks the loan and 
as the consumer potentially progresses through a loan sequence. 
Requiring that disclosures be provided in this retainable form is 
consistent with the Bureau's authority under section 1032 of the Dodd-
Frank Act to prescribe rules to ensure that the features of a product 
over the term of the product are fully, accurate and effectively 
disclosed in a manner that permits consumers to understand the costs, 
benefits, and risks associated with the product. With retainable 
disclosures, consumers can review their content following the 
consummation of a Section 7 loan and during the course of a sequence of 
multiple Section 7 loans.
    The Bureau seeks comment on whether to allow for an exception to 
the requirement that notices be retainable for text messages and 
messages within mobile applications and whether other requirements 
should be placed on electronic delivery methods, such as a requirement 
that the URL link stay active for a certain period of time or a short 
notice requirement similar to that required in proposed Sec.  
1041.15(c) and (e). The Bureau also seeks comment on whether the 
notices should warn consumers that they should save or print the full 
notice given that the URL link will not be maintained indefinitely.
7(e)(1)(iv) Segregation Requirements for Notices
    Proposed Sec.  1041.7(e)(1)(iv) would require written, non-
electronic notices provided under proposed Sec.  1041.7(e) to be 
segregated from all other written materials and to contain only the 
information required by proposed Sec.  1041.7(e), other than 
information necessary for product identification and branding. Proposed 
Sec.  1041.7(e)(1)(iv) would require that electronic notices not have 
any additional content displayed above or below the content required by 
proposed Sec.  1041.7(e), other than information necessary for product 
identification, branding, and navigation. Lenders would not be allowed 
to include additional substantive information in the notice. Proposed 
comment 7(e)(1)(iv)-1 explains how segregated additional content can be 
provided to a consumer.
    In order to increase the likelihood that consumers would notice and 
read the written and electronic disclosures required by proposed Sec.  
1041.7(e), the Bureau is proposing that the notices be provided in a 
stand-alone format that is segregated from other lender communications. 
This requirement would ensure that the disclosure contents are 
effectively disclosed to consumers, consistent with the Bureau's 
authority under section 1032 of the Dodd-Frank Act. The Bureau believes 
that the addition of other items or the attachment of other documents 
could dilute the informational value of the required content by 
distracting consumers or overwhelming them with extraneous information.
    The Bureau seeks comment on the proposed segregation requirements 
for notices, including whether they provide enough specificity. The 
Bureau also seeks comment on whether and how lenders currently 
segregate separate

[[Page 47984]]

disclosures required under Federal or State law.
7(e)(1)(v) Machine Readable Text in Notices Provided Through Electronic 
Delivery
    Proposed Sec.  1041.7(e)(1)(v) would require, if provided through 
electronic delivery, that the notices required by paragraphs (e)(2)(i) 
and (ii) must be in machine readable text that is accessible via both 
Web browsers and screen readers. Graphical representations of textual 
content cannot be accessed by assistive technology used by the blind 
and visually impaired. The Bureau believes that providing the 
electronically-delivered disclosures with machine readable text, rather 
than as a graphic image file, would help ensure that consumers with a 
variety of electronic devices and consumers that utilize screen 
readers, such as consumers with disabilities, can access the disclosure 
information.
    The Bureau seeks comment on this requirement, including its 
benefits to consumers, the burden it would impose on lenders, and on 
how lenders currently format content delivered through a Web page.
7(e)(1)(vi) Model Forms
    Proposed Sec.  1041.7(e)(3) would require the notices under 
proposed Sec.  1041.7(e)(2) to be substantially similar to the proposed 
Model Forms A-1 and A-2 in appendix A. Proposed comment 7(e)(1)(vi)-1 
explains the safe harbor provided by the model forms, providing that 
although the use of the model forms and clauses is not required, 
lenders using them would be deemed to be in compliance with the 
disclosure requirement with respect to such model forms.
    The Bureau seeks comment on the content and form of the proposed 
Model Forms A-1 and A-2 in appendix A.
7(e)(1)(vi)(A) First Loan Notice
    Proposed Sec.  1041.7(e)(2)(i) would require the notice under 
proposed Sec.  1041.7(e)(2)(i) to be substantially similar to the 
proposed Model Form A-1 in appendix A.
    Proposed Model Form A-1 was tested in two rounds.\647\ In Round 1, 
nearly all participants understood that this notice sought to inform 
them that subsequent Section 7 loans would have to be smaller than the 
first loan. For Round 2, the ``30 days'' language was rephrased and the 
``loan date'' column in the table and the two line items for consumer 
initials were removed. Round 2 had results similar to Round 1. 
Participants understood the table listing maximum loan amounts and 
recognized that the notice sought to inform them that subsequent 
Section 7 loans would have to be smaller. Proposed Model Form A-1 is 
the notice tested in Round 2.
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    \647\ See FMG Report, at 11-14, 40-41.
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7(e)(1)(vi)(B) Third Loan Notice
    Proposed Sec.  1041.7(e)(2)(ii) would require the notice under 
proposed Sec.  1041.7(e)(2)(ii) to be substantially similar to the 
proposed Model Form A-2 in appendix A.
    Proposed Model Form A-2 was tested in one round.\648\ The majority 
of participants understood that they would not be allowed to take a 
fourth Section 7 loan for 30 days after the third Section 7 loan was 
repaid. Proposed Model Form A-2 is largely identical to the notice 
tested in Round 1 but has a few important differences. The prohibition 
on subsequent loan statement now refers to ``a similar loan'' instead 
of a ``loan like this one'' and ``at least 30 days'' instead of just 
``30 days.'' It also no longer has the two line items for consumer 
initials.
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    \648\ See FMG Report, at 14-15.
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7(e)(1)(vii) Foreign Language Disclosures
    Proposed Sec.  1041.7(e)(1)(vii) would allow lenders to provide the 
disclosures required by proposed Sec.  1041.7(e) in a foreign language, 
provided that the disclosures must be made available in English upon 
the consumer's request.
    The Bureau believes that, if a lender offers or services covered 
loans to a group of consumers in a foreign language, the lender should, 
at least, be allowed to provide disclosures that would be required 
under proposed Sec.  1041.7(e) to those consumers in that language, so 
long as the lender also makes an English-language version available 
upon request from the consumer. This option would allow lenders to more 
effectively inform consumers who have limited or no proficiency in 
English of the risks of and restrictions on taking Section 7 loans.
    The Bureau seeks comment in general on this foreign language 
requirement, including whether lenders should be required to obtain 
written consumer consent before providing the disclosures in proposed 
Sec.  1041.7(e) in a language other than English and whether lenders 
should be required to provide the disclosure in English along with the 
foreign language disclosure. The Bureau also seeks comment on whether 
there are any circumstances in which lenders should be required to 
provide the disclosures in a foreign language and, if so, what 
circumstance should trigger such a requirement.
7(e)(2) Notice Requirements
    Proposed Sec.  1041.7(e)(2) would require a lender to provide 
notices to a consumer before making a first and third loan in a 
sequence of Section 7 loans. Proposed Sec.  1041.7(e)(2)(i) would 
require a lender before making the first loan in a sequence of Section 
7 loans to provide a notice that warns the consumer not to take the 
loan if the consumer will be unable to repay the loan by the 
contractual due date and informs the consumer of the Federal 
restrictions on the maximum number of and maximum loan amount on 
subsequent Section 7 loans in a sequence. Proposed Sec.  
1041.7(e)(2)(ii) would require a lender before making the third loan in 
a sequence of Section 7 loans to provide a notice that informs the 
consumer that the consumer will not be able to take another similar 
loan for at least 30 days. More generally, these proposed notices would 
help consumers understand the availability of Section 7 loans in the 
near future.
7(e)(2)(i) First Loan Notice
    Proposed Sec.  1041.7(e)(2)(i) would require a lender before making 
the first loan in a sequence of Section 7 loans to provide a notice 
that warns the consumer of the risk of an unaffordable Section 7 loan 
and informs the consumer of the Federal restrictions governing 
subsequent Section 7 loans. Specifically, the proposed notice would 
warn the consumer not to take the loan if the consumer is unsure 
whether the consumer can repay the loan amount, which would include the 
principal and the finance charge, by the contractual due date. In 
addition, the proposed notice would inform the consumer, in text and 
tabular form, of the Federally required restriction, as applicable, on 
the number of subsequent loans and their respective amounts in a 
sequence of Section 7 loans. The proposed notice would have to contain 
the identifying statement ``Notice of restrictions on future loans,'' 
using that phrase. The other language in the proposed notice would have 
to be substantially similar to the language provided in proposed Model 
Form A-1 in appendix A. Proposed comment 7(e)(2)(i)-1 explains the ``as 
applicable'' standard for information and statements in the proposed 
notice. It states that, under Sec.  1041.7(e)(2)(i), a lender would 
have to modify the notice when a consumer is not eligible for a 
sequence of three covered short-term loans under proposed Sec.  1041.7.

[[Page 47985]]

    The Bureau believes the proposed notice would ensure that certain 
features of Section 7 loan are fully, accurately, and effectively 
disclosed to consumers in a manner that permits them to understand 
certain costs, benefits, and risks of such loans. Given that the 
restrictions on obtaining covered short-term loans under proposed Sec.  
1041.7 would be new and conceptually unfamiliar to many consumers, the 
Bureau believes that disclosing them is critical to ensuring that 
consumers understand the restriction on the number of and principal 
amount on subsequent loans in a sequence of Section 7 loans. The 
Bureau's consumer testing of the notice under proposed Sec.  
1041.7(e)(2)(i) indicated that it aided consumer understanding of the 
proposed requirements on Section 7 loans.\649\ In contrast, the 
consumer testing of notices for covered short-term loans made under 
Sec.  1041.5 indicated that these notices did not improve consumer 
understanding of the ability-to-repay requirements under proposed 
Sec. Sec.  1041.5 and 1041.6.\650\ Since the notice under proposed 
Sec.  1041.7(e)(2)(i) would be provided in retainable form, the Bureau 
believes that the incremental informational value of providing the same 
or similar notice before the consummation of the second loan in a 
sequence of Section 7 loans would be limited.
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    \649\ In Round 1 of consumer testing of the notice under 
proposed Sec.  1041.7(e)(2)(i), ``[n]early all participants who saw 
this notice understood that it was attempting to convey that each 
successive loan they took out after the first in this series had to 
be smaller than the last, and that after taking out three loans they 
would not be able to take out another for 30 days.'' FMG Report, at 
11. In Round 2 of consumer testing of the notice under proposed 
Sec.  1041.7(e)(2)(i), ``participants . . . noticed and understood 
the schedule detailing maximum borrowable amounts, and the schedule 
appeared to influence their responses when asked about the form's 
purpose.'' Id., at 40.
    \650\ FMG Report, at 9-11, 38-39.
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    The Bureau seeks comment on the content of the notice under 
proposed Sec.  1041.7(e)(2)(i) and whet