Payday, Vehicle Title, and Certain High-Cost Installment Loans, 44382-44446 [2020-14935]
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Federal Register / Vol. 85, No. 141 / Wednesday, July 22, 2020 / Rules and Regulations
BUREAU OF CONSUMER FINANCIAL
PROTECTION
12 CFR Part 1041
[Docket No. CFPB–2019–0006]
RIN 3170–AA80
Payday, Vehicle Title, and Certain
High-Cost Installment Loans
Bureau of Consumer Financial
Protection.
ACTION: Final rule.
AGENCY:
The Bureau of Consumer
Financial Protection (Bureau) is issuing
this final rule to amend its regulations
governing payday, vehicle title, and
certain high-cost installment loans.
Specifically, the Bureau is revoking
provisions of those regulations that:
Provide that it is an unfair and abusive
practice for a lender to make a covered
short-term or longer-term balloonpayment loan, including payday and
vehicle title loans, without reasonably
determining that consumers have the
ability to repay those loans according to
their terms; prescribe mandatory
underwriting requirements for making
the ability-to-repay determination;
exempt certain loans from the
mandatory underwriting requirements;
and establish related definitions,
reporting, recordkeeping, and
compliance date requirements. The
Bureau is making these amendments to
the regulations based on its reevaluation of the legal and evidentiary
bases for these provisions.
DATES: This rule is effective October 20,
2020.
FOR FURTHER INFORMATION CONTACT:
Joseph Baressi, Lawrence Lee, or Adam
Mayle, Senior Counsels, Office of
Regulations, at 202–435–7700. If you
require this document in an alternative
electronic format, please contact CFPB_
Accessibility@cfpb.gov.
SUPPLEMENTARY INFORMATION:
SUMMARY:
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Summary of the Rule
On November 17, 2017, the Bureau
published a final rule (2017 Final Rule
or Rule 1) establishing consumer
protection regulations for payday loans,
vehicle title loans, and certain high-cost
installment loans, relying on authorities
under title X of the Dodd-Frank Wall
Street Reform and Consumer Protection
Act (Dodd-Frank Act or Act).2 The 2017
Final Rule addressed two discrete
topics. First, the Rule contained a set of
provisions with respect to the
1 82 FR 54472 (Nov. 17, 2017) (codified at 12 CFR
part 1041).
2 Public Law 111–203, 124 Stat. 1376 (2010).
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underwriting of covered short-term and
longer-term balloon-payment loans,
including payday and vehicle title
loans, and related recordkeeping and
reporting requirements.3 These
provisions are referred to herein as the
‘‘Mandatory Underwriting Provisions’’
of the 2017 Final Rule. Second, the Rule
contained a set of provisions, applicable
to the same set of loans and also to
certain high-cost installment loans,4
establishing certain requirements and
limitations with respect to attempts to
withdraw payments on the loans from
consumers’ checking or other accounts.5
These provisions are referred to herein
as the ‘‘Payment Provisions’’ of the 2017
Final Rule.
The Rule became effective on January
16, 2018, although most provisions (12
CFR 1041.2 through 1041.10, 1041.12,
and 1041.13) had a compliance date of
August 19, 2019.6 On January 16, 2018,
the Bureau issued a statement
announcing its intention to engage in
rulemaking to reconsider the 2017 Final
Rule.7 A legal challenge to the Rule was
filed on April 9, 2018, and is pending
in the United States District Court for
the Western District of Texas.8 On
October 26, 2018, the Bureau issued a
statement announcing it expected to
issue notices of proposed rulemaking to
reconsider certain provisions of the
2017 Final Rule and to address the
Rule’s compliance date.9
On February 14, 2019, the Bureau
published a notice of proposed
rulemaking (2019 NPRM) to revoke the
Mandatory Underwriting Provisions of
the 2017 Final Rule.10 The 2019 NPRM
3 12 CFR 1041.4 through 1041.6, 1041.10,
1041.11, and portions of § 1041.12.
4 The 2017 Final Rule refers to all three of these
categories of loans together as covered loans. 12
CFR 1041.3(b).
5 12 CFR 1041.7 through 1041.9, and portions of
§ 1041.12.
6 82 FR 54472, 54814.
7 See Bureau of Consumer Fin. Prot., Statement
on Payday Rule (Jan. 16, 2018), https://
www.consumerfinance.gov/about-us/newsroom/
cfpb-statement-payday-rule/.
8 Cmty. Fin. Servs. Ass’n of Am. v. Consumer Fin.
Prot. Bureau, No. 1:18–cv–295 (W.D. Tex. filed Apr.
9, 2018). On November 6, 2018, the court issued an
order staying the August 19, 2019 compliance date
of the Rule pending further order of the court. See
id., ECF No. 53. The litigation is currently stayed.
See id., ECF No. 66 (Dec. 6, 2019).
9 See Bureau of Consumer Fin. Prot., Public
Statement Regarding Payday Rule Reconsideration
and Delay of Compliance Date (Oct. 26, 2018),
https://www.consumerfinance.gov/about-us/
newsroom/public-statement-regarding-payday-rulereconsideration-and-delay-compliance-date/.
10 Payday, Vehicle Title, and Certain High-Cost
Installment Loans, 84 FR 4252 (proposed Feb. 14,
2019). On the same day, the Bureau published a
notice of proposed rulemaking to delay the
compliance date for the Mandatory Underwriting
Provisions of the 2017 Final Rule. See Payday,
Vehicle Title, and Certain High-Cost Installment
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did not propose to amend the ‘‘Payment
Provisions’’ of the 2017 Final Rule.
The Bureau is finalizing the
amendments to the regulations as
proposed in the 2019 NPRM.
Specifically, the Bureau is revoking: (1)
The ‘‘identification’’ provision, which
states that it is an unfair and abusive
practice for a lender to make covered
short-term loans or covered longer-term
balloon-payment loans without
reasonably determining that consumers
will have the ability to repay the loans
according to their terms; 11 (2) the
‘‘prevention’’ provision, which
establishes specific underwriting
requirements for these loans to prevent
the unfair and abusive practice; 12 (3)
the ‘‘principal step-down exemption’’
provision for certain covered short-term
loans; 13 (4) the ‘‘furnishing’’ provisions,
which require lenders making covered
short-term or longer-term balloonpayment loans to furnish certain
information regarding such loans to
registered information systems (RISes)
and create a process for registering such
information systems; 14 (5) those
portions of the recordkeeping provisions
related to the mandatory underwriting
requirements; 15 and (6) the portion of
the compliance date provisions related
to the mandatory underwriting
requirements.16 The Bureau also is
revoking the Official Interpretations
relating to these provisions. The Bureau
is making these changes to the
regulations based on a re-evaluation of
the legal and evidentiary bases for these
provisions.
The Bureau revokes the 2017 Final
Rule’s determination that it is an unfair
practice for a lender to make covered
short-term loans or covered longer-term
balloon-payment loans without
reasonably determining that consumers
will have the ability to repay the loans
according to their terms. For the reasons
discussed below, the Bureau withdraws
the Rule’s determination that consumers
cannot reasonably avoid any substantial
injury caused or likely to be caused by
the failure to consider a borrower’s
ability to repay.17 The Bureau also
determines that, even if the Bureau had
not revoked its reasonable avoidability
finding, the countervailing benefits to
Loans; Delay of Compliance Date, 84 FR 4298
(proposed Feb. 14, 2019). On June 17, 2019, the
Bureau published a final rule delaying the
compliance date for the Mandatory Underwriting
Provisions. See 84 FR 27907 (June 17, 2019).
11 12 CFR 1041.4.
12 12 CFR 1041.5.
13 12 CFR 1041.6.
14 12 CFR 1041.10 and 1041.11.
15 12 CFR 1041.12(b)(1) through (3).
16 12 CFR 1041.15(d).
17 See 12 U.S.C. 5531(c)(1)(A).
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consumers and competition in the
aggregate from the identified practice
would outweigh any relevant injury.18
Further, the Bureau revokes the 2017
Final Rule’s determination that the
identified practice is abusive. The
Bureau determines that a lender’s not
considering a borrower’s ability to repay
does not take unreasonable advantage of
particular consumer vulnerabilities.19
The Bureau also withdraws the Rule’s
determination that consumers do not
understand the materials risks, costs, or
conditions of covered loans,20 as well as
its determination that consumers do not
have the ability to protect their interests
in selecting or using covered loans.21
II. Background
The SUPPLEMENTARY INFORMATION
accompanying the 2017 Final Rule
contains a more comprehensive
description of the payday and vehicle
title markets 22 and of the consumers
who use these products.23
A. The Market for Short-Term and
Balloon-Payment Loans
Consumers living paycheck to
paycheck and with little to no savings
often use credit as a means of coping
with financial shortfalls.24 These
shortfalls may be due to mismatched
timing between income and expenses,
income volatility, unexpected expenses
or income shocks, or expenses that
simply exceed income.25 According to a
recent survey conducted by the Board of
Governors of the Federal Reserve
System (Board), one-quarter of adults
are either just getting by or finding it
difficult to get by; a similar percentage
skipped necessary medical care in 2018
due to being unable to afford the cost.
In addition, nearly 40 percent of adults
reported they would either be unable to
cover an emergency expense costing
$400 or would have to sell something or
borrow money to cover it.26 Whatever
18 See
12 U.S.C. 5531(c)(1)(B).
12 U.S.C. 5531(d)(2).
20 See 12 U.S.C. 5531(d)(2)(A).
21 See 12 U.S.C. 5531(d)(2)(B).
22 See 82 FR 54472, 54474–96.
23 Id. at 54555–60.
24 Id. at 54474.
25 Id. (citing Rob Levy & Joshua Sledge, A
Complex Portrait: An Examination of Small-Dollar
Credit Consumers (Ctr. for Fin. Servs. Innovation
2012), https://www.fdic.gov/news/conferences/
consumersymposium/2012/A%20Complex
%20Portrait.pdf).
26 Bd. of Governors of the Fed. Reserve Sys.,
Report on the Economic Well-Being of U.S.
Households in 2018, at 5, 23 (May 2019), https://
www.federalreserve.gov/publications/files/2018report-economic-well-being-us-households201905.pdf; and Bd. of Governors of the Fed.
Reserve Sys., Report on the Economic Well-Being of
U.S. Households in 2018, Appendix A: Survey
Questionnaire, https://www.federalreserve.gov/
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19 See
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the cause of these financial shortfalls,
consumers in these situations
sometimes seek what may broadly be
termed a ‘‘liquidity loan.’’
The Mandatory Underwriting
Provisions focus specifically on shortterm loans and a smaller market
segment of longer-term balloon-payment
loans. The largest categories of shortterm loans are ‘‘payday loans,’’ which
are generally short-term loans 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.27
1. Payday Loans
Eighteen States and the District of
Columbia prohibit payday lending or
impose interest rate caps that most
payday lenders find too low to enable
them to make such loans profitably.28
The remaining 32 States have either
created a carve-out from their general
usury caps for payday loans or do not
regulate loan interest rates.29 Several
publications/appendix-a-survey-questionnaire.htm.
The 2016 survey relied upon in the 2017 Final Rule
found that 44 percent of adults could not cover an
emergency expense costing $400 or would cover it
by selling something or borrowing money. See 82
FR 54472, 54474 & n.9 (citing Bd. of Governors of
the Fed. Reserve Sys., Report on the Economic WellBeing of U.S. Households in 2016, at 2, 8 (May
2017), https://www.federalreserve.gov/publications/
files/2016-report-economic-well-being-ushouseholds-201705.pdf).
27 82 FR 54472, 54475.
28 These jurisdictions are Arizona, Arkansas,
Colorado, Connecticut, Georgia, Maryland,
Massachusetts, Montana, New Hampshire, New
Jersey, New Mexico, New York, North Carolina,
Ohio, Pennsylvania, South Dakota, Vermont, West
Virginia, and Washington, DC Ariz. Rev. Stat.
section 6–632; Ark. Const. art. XIX, sec. 13; see
Colo. Legislative Council Staff, Initiative #126
Initial Fiscal Impact Statement, https://
www.sos.state.co.us/pubs/elections/Initiatives/
titleBoard/filings/2017-2018/126FiscalImpact.pdf;
see also Colo. Sec’y of State, Official Certified
Results—State Offices & Questions, https://
results.enr.clarityelections.com/CO/91808/Web02state.220747/#/c/C_2 (Proposition 111); Conn. Gen.
Stat. 36a–558(d); Ga. Code Ann. 16–17–8; Md. Code
Ann. Com. Law 12–306(a)(2)(i); 209 Mass. Regs.
Code tit. 209, 26.01; Mont. Code Ann. 31–1–722(2);
N.H. Rev. Stat. 399–A:13(XX); N.J. Stat. Ann.
2C:21–19; 2017 N.M. Laws ch. 110 (H.B. 347); N.Y.
Penal Law 190.40; N.C. Gen. Stat. 53–281; Ohio
Rev. Code Ann. 1321.35 to 1321.48; 7 Pa. Cons.
Stat. Ann. 6201 to 6219; S.D. Codified Laws 54–4–
44, as amended by Initiated Measure 21 2 (Nov. 8,
2016); Vt. Stat. Ann. tit. 9, 41a; W. Va. Code 32A–
3–1(e), 46A–4–107 to 46A–4–113; District of
Columbia Laws 17–42 (Act 17–115) 2 (Nov. 24,
2007).
29 See, e.g., 82 FR 54472, 54477 & n.25. The 2017
Final Rule cited New Mexico and Ohio as payday
authorizing States. At the time the rule was issued,
New Mexico had enacted a law which had not yet
taken effect, prohibiting short-term payday lending.
As of April 27, 2019, Ohio effectively prohibited
short-term payday and bans vehicle title lending.
New Mexico and Ohio are no longer counted as
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44383
States that previously authorized
payday lending have, over the past
several years, changed their laws to
restrict payday lending.30 The States
that do permit payday lending have
enacted a wide variety of regulations on
payday lending practices—including
limits on price, or loan term, all of
which reflect the judgments of the
various States.31 While a few States
have enacted general requirements that
payday lenders consider a borrower’s
ability to repay or set loan-to-income
percentages,32 no State has adopted
payday authorizing States. See Ohio House Bill 123,
An Act to Modify the Short-Term Loan Act, https://
www.legislature.ohio.gov/legislation/legislationsummary?id=GA132-HB-123; https://
www.com.ohio.gov/documents/fiin_HB123_
Guidance.pdf. Oklahoma for purposes of this
rulemaking is counted as a payday-authorizing
State, but SB 720 established August 1, 2020 as the
date after which payday loans are banned. Loans of
$1,500 or less must have a minimum loan term of
60 days, be repaid in fully amortizing payments of
substantially equal amounts, and carry maximum
fees of 17 percent per month plus database
verification fees, https://www.oklegislature.gov/
BillInfo.aspx?Bill=sb720&Session=1800. After
August 1, 2020, references herein to Oklahoma law
may not be applicable. In addition, in 2021,
Virginia will no longer be counted as a paydayauthorizing State when HB 789 takes effect. Among
other things, the bill sets a four month minimum
loan term for ‘‘short-term’’ loans, https://
lis.virginia.gov/cgi-bin/
legp604.exe?201+sum+HB789&201+sum+HB789.
30 See, e.g., 82 FR 54472, 54485–86. In addition
to New Mexico and Ohio, voters in Colorado
approved a ballot initiative on November 6, 2018,
to cap annual percentage rates (APRs) on payday
loans at 36 percent. This initiative took effect
February 1, 2019, shortly before the release of the
2019 NPRM. Colorado is counted here as a State
that prohibits short-term payday lending. See Colo.
Legislative Council Staff, Initiative #126 Initial
Fiscal Impact Statement, https://
www.sos.state.co.us/pubs/elections/Initiatives/
titleBoard/filings/2017-2018/126FiscalImpact.pdf;
see also Colo. Sec’y of State, Official Certified
Results—State Offices & Questions, https://
results.enr.clarityelections.com/CO/91808/Web02state.220747/#/c/C_2 (Proposition 111). Until the
ballot initiative, Colorado law required that payday
loans have a six-month minimum loan term. Colo.
Rev. Stat. 5–3.1–103. There was no prohibition on
lenders making a single-installment loan due in six
months, but all payday lenders reported that they
offered only installment loans. 4 Colo. Code Regs.
902–1, Rule 17(B) (2010); State of Colorado, Dep’t
of Law, 2016 Deferred Deposit/Payday Lenders
Annual Report, question 10, https://coag.gov/officesections/consumer-protection/consumer-creditunit/uniform-consumer-credit-code/generalinformation/. As described in note 29 above,
Oklahoma will, as of August 1, 2020, prohibit
payday lending. In addition, as of January 1, 2020,
California caps rates on installment loans of $2,500
to $10,000 at 36 percent plus the Federal Funds
Rate, https://dbo.ca.gov/2019/12/11/newrequirements-for-cfl-licensees/. California caps rates
on smaller installment loans up to $2,500 at 30
percent APR, depending on the loan amount, and
also caps payday loan fees as noted above. See Cal.
Fin. Code section 9:22303.
31 See 84 FR 4252, 4254.
32 See 82 FR 54472, 54480–81, 54491. Community
Financial Services of America, a trade association
representing payday and small-dollar lenders,
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mandatory underwriting requirements
for payday loans that are similar to
those in the 2017 Final Rule.
The primary channel through which
consumers obtain payday loans, as
measured by total dollar volume, is
through State-licensed storefront
locations, although the share of online
loan volume has grown while storefront
loan volume has continued to decline.
There were an estimated 13,700
storefronts in 2018, down from the
industry’s peak of over 24,000 stores in
2007.33 The decline was due to several
factors including industry
consolidation, changes in State laws,
increased consumer demand for
alternative products such as installment
loans, and a shift to greater online
lending.34
From 2009 to 2014, storefront payday
lending generated approximately $30
billion in new loans per year; by 2018
the volume had declined to $15
billion,35 although these numbers may
include products other than singlepayment loans. Combined storefront
and online payday loan volume was
$30.5 billion in 2017 and $29.2 billion
in 2018,36 down from a peak of about
$50 billion in 2007.37 The online
payday loan industry generates about 50
percent of total payday loan revenue.38
In 2018, storefront industry revenue
(fees paid on payday loans) was $2.1
billion.39 Combined storefront and
online payday revenue was estimated at
$4.8 billion in 2017 and $4.6 billion in
2018,40 down from a peak of over $9
billion in 2012.41 Reports from several
States and publicly traded companies
offering payday loans show a shift from
payday loans to small-dollar installment
loans and other credit products. For
example, California and Texas payday
loan volume decreased approximately
includes among its best practices that its members
should, before extending credit, ‘‘undertake a
reasonable, good-faith effort to determine a
customer’s creditworthiness and ability to repay the
loan.’’ See Cmty. Fin. Servs. of Am., Best Practices
for the Small-Dollar Loan Industry, https://
www.cfsaa.com/files/files/CFSA-BestPractices.pdf
(last visited Apr. 28, 2020).
33 See John Hecht, State of the Industry:
Innovating and Adapting Amongst a Complex
Backdrop (Mar. 2019) (Jefferies LLC, slide
presentation) (on file) (Hecht 2019). In the 2017
Final Rule, the Bureau cited the same analyst’s
estimate of 16,480 payday storefronts in 2015. See
82 FR 54472, 54480 & n.53.
34 Hecht 2019.
35 See id.
36 See id.
37 John Hecht, The State of Short-Term Credit
Amid Ambiguity, Evolution and Innovation (2016)
(Jefferies LLC, slide presentation) (on file) (Hecht
2016).
38 See 82 FR 54472, 54487; Hecht 2016.
39 See Hecht 2019.
40 See id.
41 Hecht 2016.
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35 percent from 2015 to 2018; there was
a corresponding increase in installment
loan volume (of amounts at or below
$2,500) of approximately 35 percent
over the same period.42 Two publicly
traded companies offering payday loans
reported a significant decrease in the
percent of revenue contributed by
single-payment or short-term credit
products and simultaneous substantial
increases in percent of revenue
contributed by other credit products.43
When the 2019 NPRM was issued,
there were at least 12 payday lenders
with approximately 200 or more
storefront locations,44 and, despite the
storefront decline, these lenders
continue to have significant market
share.45 The Bureau estimated in 2017
that over 2,400 storefront payday
lenders are small businesses as defined
by the Small Business Administration
(SBA); 46 the number of storefront
payday lenders classified as small
businesses has likely declined to some
extent, continuing the trend noted over
the last several years.47
Estimates of the number of consumers
who use payday loans annually range
from 2.2 million households 48 to 12
42 Calculations were based on total reported
volume of single payment transactions and
installment transactions for amounts less than
$2,500. See California Dep’t of Bus. Oversight,
California Department of Business Oversight
Annual Report and Industry Survey: Operation of
Payday Lenders Licensed Under the California
Deferred Deposit Transaction Law for 2015 through
2018, https://dbo.ca.gov/payday-lenderspublications/ and Texas Office of Consumer Credit
Comm’r, Credit Access Business Annual Data
Report for 2015 through 2018, https://
occc.texas.gov/publications/activity-reports.
43 At Enova International, a publicly traded
online lender, revenue from installment, line of
credit, and receivables purchase agreement (small
business) products rose from 2 percent to 89
percent from 2009 to 2019, while short-term loan
revenue fell from 98 percent to 11 percent.
Similarly, at CURO, revenue from installment and
open-end line-of-credit products rose from 19
percent to 78 percent from 2010 to 2019. See Enova
Int’l, Investor Presentation: November 2019, at 9
(Nov. 2019), https://ir.enova.com/download/
Enova+Investor+Presentation+%2811-6-2019%29++FINAL.pdf and CURO Group, November 2019:
Stephens Investment Conference, at 7 (Nov. 13,
2019), https://ir.curo.com/∼/media/Files/C/Curo-IR/
reports-and-presentations/stephens-conferencenovember-2019.pdf.
44 84 FR 4252, 4255.
45 See Hecht 2019.
46 82 FR 54472, 54479 & n.52.
47 See id. at 54480 & n.53.
48 See Fed. Deposit Ins. Corp., 2017 FDIC
National Survey of Unbanked and Underbanked
Households, at 41 (Oct. 2018), https://
www.fdic.gov/householdsurvey/2017/
2017report.pdf (FDIC 2017 Survey). This is a
reduction from the 2015 numbers of 2.5 million
households cited in the 2017 Final Rule; see 82 FR
54472, 54479 & n.42 (citing Fed. Deposit Ins. Corp.,
2015 FDIC National Survey of Unbanked and
Underbanked Households, at 2, 34 (Oct. 20, 2016),
https://www.fdic.gov/householdsurvey/2015/
2015report.pdf). The FDIC used the United States
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million individuals.49 Given the number
of storefronts and the average number of
customers per storefront plus the
presence of the large online market for
payday loans, the actual number of
borrowers appears closer to the higher
end of the estimates.50
A small percentage of the up to 12
million consumers who take out payday
loans each year complain to the Bureau
about them. In 2016, for example, the
Bureau handled approximately 4,400
complaints in which consumers
reported ‘‘payday loan’’ as the
complaint product.51 The Bureau
received approximately 2,900 payday
loan complaints in 2017, approximately
2,300 in 2018, and approximately 2,100
in 2019.52 Consumers have complained
most frequently about unexpected fees
Census Bureau’s definition of ‘‘household’’ in the
Current Population Survey. See FDIC 2017 Survey
at 73; https://www.census.gov/programs-surveys/
cps/technical-documentation/subjectdefinitions.html#household.
49 82 FR 54472, 54479 & n.44 (citing Pew
Charitable Trusts, Payday Lending in America: Who
Borrows, Where They Borrow, and Why, at 4 (July
2012), https://www.pewtrusts.org/∼/media/legacy/
uploadedfiles/pcs_assets/2012/
pewpaydaylendingreportpdf.pdf.).
50 Community Financial Services of America, a
trade association representing payday and smalldollar lenders, states that approximately 12 million
Americans use small-dollar loans each year. See
https://www.cfsaa.com/ (last visited Apr. 28, 2020).
The 2017 Final Rule pointed to one study
estimating, based on administrate State data from
three States, that the average payday store served
around 500 customers per year. 82 FR 54472, 54480
& n.59 (citing Pew Charitable Trusts, Payday
Lending in America: Policy Solutions, at 18 (Report
3, 2013), https://www.pewtrusts.org/-/media/legacy/
uploadedfiles/pcs_assets/2013/
pewpaydaypolicysolutionsoct2013pdf.pdf).
51 Bureau of Consumer Fin. Prot., Consumer
Response Annual Report, Jan. 1–Dec. 31, 2016, at
33 (Mar. 2017), https://www.consumerfinance.gov/
documents/3368/201703_cfpb_ConsumerResponse-Annual-Report-2016.pdf.
52 Bureau of Consumer Fin. Prot., Consumer
Response Annual Report, Jan. 1–Dec. 31, 2017, at
34 (Mar. 2018), https://www.consumerfinance.gov/
documents/6406/cfpb_consumer-response-annualreport_2017.pdf; Bureau of Consumer Fin. Prot.,
Consumer Response Annual Report, Jan. 1–Dec. 31,
2018, at 62 (Mar. 2019), https://
files.consumerfinance.gov/f/documents/cfpb_
consumer-response-annual-report_2018.pdf; Bureau
of Consumer Fin. Prot., Consumer Response Annual
Report, Jan. 1–Dec. 31, 2019, at 62 (Mar. 2020),
https://files.consumerfinance.gov/f/documents/
cfpb_consumer-response-annual-report_2019.pdf.
To provide a sense of the number of complaints for
payday loans relative to the number of complaints
for other product categories, in 2019, approximately
0.6 percent of all consumer complaints the Bureau
received were about payday loans, and 0.2 percent
were about vehicle title loans. Bureau of Consumer
Fin. Prot., Consumer Response Annual Report, Jan.
1–Dec. 31, 2019, at 9 (Mar. 2020), https://
files.consumerfinance.gov/f/documents/cfpb_
consumer-response-annual-report_2019.pdf. There
is some overlap across product categories, for
example, a consumer complaining about the
conduct of a debt collector seeking to recover on a
payday loan would be in the debt collection
product category rather than the payday loan
product category.
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or interest associated with payday loans
and in the last two years frequently
selected the category ‘‘struggling to pay
your loan.’’ 53
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2. Single-Payment Vehicle Title Loans
The second major category of loans
covered by the Mandatory Underwriting
Provisions is single-payment vehicle
title loans. As with payday loans, the
States have taken different regulatory
approaches with respect to singlepayment vehicle title loans. Sixteen
States permit single-payment vehicle
title lending at rates that vehicle title
lenders will offer under their business
models.54 Another six States permit
only title installment loans but those
loans are not affected by the Mandatory
Underwriting Provisions.55 Three States
(Arizona, Georgia, and New Hampshire)
permit single-payment vehicle title
loans but prohibit or substantially
restrict payday loans.56 Although a few
States have enacted general
requirements that single-payment
vehicle title lenders consider a
borrower’s ability to repay or set loanto-income percentages,57 no State has
adopted mandatory underwriting
requirements for single-payment vehicle
title loans that are similar to those in the
2017 Final Rule.
Information about the vehicle title
market is more limited than that
available for the storefront payday
industry.58 According to a 2015 report,
53 Bureau of Consumer Fin. Prot., Consumer
Response Annual Report, Jan. 1–Dec. 31, 2018, at
64 (Mar. 2019), https://files.consumerfinance.gov/f/
documents/cfpb_consumer-response-annualreport_2018.pdf; Bureau of Consumer Fin. Prot.,
Consumer Response Annual Report, Jan. 1–Dec. 31,
2019, at 64 (Mar. 2020), https://
files.consumerfinance.gov/f/documents/cfpb_
consumer-response-annual-report_2019.pdf.
54 Alabama, Mississippi, New Hampshire,
Oregon, and Tennessee authorize single-payment
title lending and Arizona, Delaware, Georgia, Idaho,
Louisiana, Minnesota, Missouri, Nevada, Texas,
Utah, and Wisconsin authorize both single-payment
or installment title lending. See Pew Charitable
Trusts, Auto Title Loans—Market Practices and
Borrowers’ Experiences (2015), https://
www.pewtrusts.org/∼/media/assets/2015/03/
autotitleloansreport.pdf (updated to reflect State
law changes since 2015) (Pew Auto Title Loans). As
noted in the 2017 Final Rule, New Mexico enacted
a law in 2017, effective January 1, 2018, that
prohibits single-payment vehicle title loans and
allows only installment title lending. See 82 FR
54472, 54490. As of April 27, 2019, Ohio prohibits
lenders from making loans of $5,000 or less secured
by a vehicle title or any other collateral. See https://
www.com.ohio.gov/documents/fiin_HB123_
Guidance.pdf; see also Ohio House Bill 123, An Act
to Modify the Short-Term Loan Act, https://
www.legislature.ohio.gov/legislation/legislationsummary?id=GA132-HB-123.
55 See 82 FR 54472, 54490. See also Pew Auto
Title Loans (updated to reflect State law changes
since 2015 by adding New Mexico).
56 Id.
57 See 82 FR 54472, 54491.
58 Id.
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there were approximately 8,000 title
loan storefront locations in the United
States, about half of which also offered
payday loans.59 Of the locations that
predominantly offered vehicle title
loans in 2017, three privately held firms
dominated the market and together
accounted for approximately 2,500
stores in over 20 States.60 In addition to
the large title lenders, in 2017 there
were about 800 vehicle title lenders that
were small businesses as defined by the
SBA.61
Estimates of the number of consumers
who use vehicle title loans annually
have ranged from 1.8 million
households to 2 million adults, although
these estimates do not necessarily
differentiate between users of singlepayment and installment vehicle title
loans.62 The demographic profiles of
vehicle title borrowers appear to be
comparable to the demographics of
payday borrowers, which is to say that
they tend to be lower and moderate
income.63
As with payday loans, a small
percentage of the estimated two million
consumers who take out vehicle title
loans each year file complaints with the
Bureau. In 2019, the Bureau received
approximately 530 complaints involving
vehicle title loans, down 7 percent from
2018.64 In 2019, consumers most
59 See id. at 54491 & n.197 (citing Pew Charitable
Trusts, Auto Title Loans—Market practices and
borrowers’ experiences, at 1 (2015), https://
www.pewtrusts.org/∼/media/assets/2015/03/
autotitleloansreport.pdf.
60 82 FR 54472, 54492; see also https://
www.midwesttitleloans.net/SiteMap, https://
www.northamericantitleloans.net/SiteMap (last
visited Apr. 28, 2020). Store counts for these three
firms may include States with stores that offer
installment vehicle title loans.
61 82 FR 54472, 54492 & n.200 (explaining that
State reports have been supplemented with
estimates from Center for Responsible Lending,
revenue information from public filings, and from
non-public sources). See Jean Ann Fox et al., Driven
to Disaster: Car-Title Lending and Its Impact on
Consumers, at 7 (Consumer Fed’n of Am. & Ctr. for
Responsible Lending (2013), https://
www.responsiblelending.org/other-consumer-loans/
car-title-loans/research-analysis/CRL-Car-TitleReport-FINAL.pdf.).
62 FDIC 2017 Survey at 41. The number of
households using vehicle title loans in the 2017
FDIC survey rose from the 1.7 million households
reported in the 2015 survey cited in the 2017 Final
Rule. The individual user estimate is from a 2015
report. See Pew Auto Title Loans at 33; 82 FR
54472, 54491 & n.195.
63 FDIC 2017 Survey (calculations made using
custom data tool).
64 Bureau of Consumer Fin. Prot., Consumer
Response Annual Report, Jan. 1–Dec. 31, 2019, at
67 (Mar. 2020), https://files.consumerfinance.gov/f/
documents/cfpb_consumer-response-annualreport_2019.pdf. The vehicle title category may
include complaints about both single payment and
installment vehicle title loans. In addition, there is
some overlap across product categories; a consumer
complaining about debt collection on a vehicle title
loan would be in the debt collection product
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44385
frequently complained about
unexpected fees or interest and
struggling to pay their vehicle title
loans.65 Vehicle title loan complaints
made up 0.2 percent of all consumer
complaints the Bureau received in
2019.66
3. Longer-Term Balloon-Payment Loans
The third category of loans covered by
the Mandatory Underwriting Provisions
is longer-term balloon-payment loans
which generally involve a series of
small, often interest-only, payments
followed by a single larger lump sum
payment.67 There does not appear to be
a large market for such loans. However,
in the preamble to the 2017 Final Rule,
the Bureau expressed the concern that
the market for these longer-term
balloon-payment loans, with structures
similar to payday loans that pose similar
risks to consumers, might grow if only
covered short-term loans were regulated
under the 2017 Final Rule.68 Because
the market was relatively small, the
Bureau supplemented its analysis of
these loans by using relevant
information on related types of covered
longer-term loans, such as hybrid
payday loans, payday installment loans,
and vehicle title installment loans.69
The profile of borrowers in the market
for longer-term balloon-payment loans
is similar to those seeking covered
short-term and vehicle title loans—they
also generally have low average
incomes, poor credit histories, and
recent credit-seeking activity.70
4. Short-Term Lending by Depository
Institutions
Since the issuance of the 2017 Final
Rule, prudential regulators have
released additional regulations and
guidance on small-dollar lending by
depository institutions. On October 5,
2017, the Office of the Comptroller of
the Currency (OCC) rescinded its
November 2013 ‘‘Guidance on
Supervisory Concerns and Expectations
Regarding Deposit Advance
Products.’’ 71 From its market
monitoring activities, the Bureau is
aware that at least one large bank has
category rather than the vehicle title loan product
category.
65 Id. at 69.
66 Id. at 9.
67 82 FR 54472, 54475. For examples of longerterm balloon-payment loans, see id. at 54486 &
n.143, 54490 & n.179.
68 Id. at 54472, 54527–28.
69 Id. at 54580.
70 Id. at 54581.
71 OCC News Release 2017–118, Acting
Comptroller of the Currency Rescinds Deposit
Advance Product Guidance (Oct. 5, 2017), https://
www.occ.treas.gov/news-issuances/news-releases/
2017/nr-occ-2017-118.html.
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reopened its deposit advance products
to new customers. On May 23, 2018, the
OCC issued a bulletin encouraging
banks ‘‘to offer responsible short-term,
small-dollar installment loans, typically
two to 12 months in duration with equal
amortizing payments, to help meet the
credit needs of consumers.’’ 72 From its
market monitoring activities, the Bureau
is aware that since the release of the
OCC’s bulletin, at least one large bank
is offering a short-term, small-dollar
installment lending product. On
November 14, 2018, the Federal Deposit
Insurance Corporation (FDIC) issued a
request for information on small-dollar
lending ‘‘to encourage FDIC-supervised
institutions to offer small-dollar credit
products that are responsive to
customers’ needs and that are
underwritten and structured prudently
and responsibly.’’ 73
In addition, on October 1, 2019 the
National Credit Union Administration
(NCUA) published a rule expanding its
original Payday Alternative Loan (PAL)
program with a new program referred to
as ‘‘PALs II’’ ‘‘to encourage responsible
lending [by Federal credit unions] that
allows consumers to address immediate
needs while working towards fuller
financial inclusion.’’ 74 The PALs II rule,
effective December 2, 2019, authorizes
Federal credit unions to offer smalldollar loans with larger loan amounts
and longer loan terms than were
available under the original PALs rule,
removes the membership tenure
requirement, and limits Federal credit
unions to one type of PALs loan at a
time. The other requirements of the
original PAL rule apply to PALs II.75
The 2017 Final Rule establishes a safe
harbor under the conditional exemption
for alternative loans for Federal credit
unions’ original PALs loans.76 The
conditional exemption is, by its terms,
limited to original PALs loans. If
Federal credit unions structure PALs II
to be substantially repaid within 45
days, PALs II could be covered loans
under the 2017 Final Rule. However,
Federal credit unions are unlikely to
72 OCC Bulletin 2018–14, Installment Lending:
Core Lending Principles for Short-Term, SmallDollar Installment Lending (May 23, 2018), https://
www.occ.gov/news-issuances/bulletins/2018/
bulletin-2018-14.html.
73 Fed. Deposit Ins. Corp., Financial Institution
Letters: Request for Information on Small-Dollar
Lending (Nov. 14, 2018), https://www.fdic.gov/
news/news/financial/2018/fil18071.html.
74 84 FR 51942 (Oct. 1, 2019); Nat’l Credit Union
Admin., Press Release, Payday Alternative Loan
Rule Will Create More Alternatives for Borrowers
(Sept. 2019), https://www.ncua.gov/newsroom/
press-release/2019/payday-alternative-loan-rulewill-create-more-alternatives-borrowers.
75 84 FR 51942, 51950–52.
76 See 12 CFR 1041.3(e)(4), 84 FR 51942, 54873–
74.
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structure PALs II loans to be repaid
within 45 days as PALs II are generally
designed for larger loan amounts of up
to $2,000 and must fully amortize over
the life of the loan.77 Consequently, it is
highly unlikely that PALs II meet the
definition of covered short-term loans
under the 2017 Final Rule or are subject
to its Mandatory Underwriting
Provisions. In addition, the Payment
Provisions of the 2017 Final Rule do not
apply to PALs II with loan terms longer
than 45 days due to the NCUA’s 28
percent interest rate limitation on PALs
II loans.78
The Bureau is of course aware of the
COVID–19 pandemic and its economic
effects. On March 26, 2020, in response
to the pandemic, the Bureau and four
other Federal regulators issued a joint
statement encouraging banks, savings
associations, and credit unions to offer
responsible small-dollar loans including
closed-end installment loans, open-end
lines of credit, and appropriately
structured single-payment loans.79 The
statement also recognized that in
ordinary circumstances small-dollar
loans may be beneficial to consumers to
address unexpected expenses or
temporary income shortfalls.80 The joint
statement’s analysis of responsible
small-dollar lending is distinct from the
analysis in this rulemaking and the
determinations herein with respect to
the 2017 Final Rule. The Bureau’s
analysis or determinations in this final
rule do not rely in any way on either the
occurrence of the pandemic or its
economic effects.
77 See 12 CFR 701.21(c)(7)(iv)(A)(1) and (5). PALs
II may also meet the 2017 Final Rule’s conditional
exemption for accommodation loans in 12 CFR
1041.3(f).
78 See 12 CFR 1041.2(a)(7) and 1041.3(b)(2). The
NCUA also authorizes an application fee of up to
$20 on both types of PALs. 12 CFR
701.21(c)(7)(iii)(A) and (c)(7)(iv)(A). Under the
Truth in Lending Act, an application fee charged to
all applicants, whether or not credit is extended, is
exempt from the finance charge and APR
calculation. 12 CFR 1026.4(c)(1). If in the future the
NCUA increases the permitted PALs II rate above
36 percent APR, potentially bringing PALs II within
the scope of the Payment Provisions, PALs II may
qualify for other exemptions. See 12 CFR 1041.3(f)
(conditional exemption for accommodation loans)
and 1041.8(a)(1)(ii) (conditional exclusion for
certain transfers by account-holding institutions).
79 Bd. of Governors of the Fed. Reserve Sys.,
Bureau of Consumer Fin. Prot., Fed. Deposit Ins.
Corp., Nat’l Credit Union Admin., Office of the
Comptroller of the Currency, Joint Statement
Encouraging Responsible Small-Dollar Lending in
Response to COVID–19 (Joint Statement), https://
files.consumerfinance.gov/f/documents/cfpb_
interagency-statement_small-dollar-lending-covid19_2020-03.pdf. The agencies also stated that the
loans should be consistent with safety and
soundness, treat consumers fairly, and comply with
applicable statutes and regulations, including
consumer protection laws.
80 Id.
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On May 20, 2020, the Board of
Governors of the Federal Reserve
System, the Federal Deposit Insurance
Corporation, the National Credit Union
Administration, and the Office of the
Comptroller of the Currency issued joint
small-dollar loan lending principles for
purposes of their oversight of banks,
savings associations, and credit unions
under their authorities. The analysis of
those agencies is distinct from the
Bureau’s analysis in this final rule
under its statutory authorities.81
On May 22, 2020, the Bureau issued
a No-Action Letter (NAL) template to
the Bank Policy Institute under its
innovation policies that insured
depository institutions may use to apply
for a NAL covering their small-dollar
credit products. The template is
intended to further competition in the
small-dollar lending space and facilitate
robust competition that fosters access to
credit.82
B. The Mandatory Underwriting
Provisions of the 2017 Final Rule
Section 1041.4 contains an
identification provision which provides
that it is an unfair and abusive practice
for a lender to make covered short-term
loans or covered longer-term balloonpayment loans without reasonably
determining that consumers have the
ability to repay the loans according to
their terms. The preamble to the 2017
Final Rule sets out the legal reasoning
and factual analysis in support of the
unfairness and abusiveness findings to
§ 1041.4.83
Section 1041.5 contains a detailed
and extensive set of underwriting
requirements adopted to prevent the
unfair and abusive practice.
Specifically, § 1041.5(c)(2) requires
lenders making covered short-term or
longer-term balloon-payment loans to
obtain a written statement from the
consumer with respect to the
consumer’s net income and major
financial obligations; obtain verification
evidence of the consumer’s income, if
reasonably available, and major
financial obligations; obtain a report
from a national consumer reporting
81 Bd. of Governors of the Fed. Reserve Sys., Fed.
Deposit Ins. Corp., Nat’l Credit Union Admin.,
Office of the Comptroller of the Currency, Federal
agencies share principles for offering Responsible
Small-Dollar Loans (May 2020), https://
www.federalreserve.gov/newsevents/pressreleases/
bcreg20200520a.htm.
82 Bureau of Consumer Fin. Prot., CFPB Takes
Action to Help Struggling Homeowners Seeking
Mitigation Efforts; Consumers Seeking Small-Dollar
Loans (May 2020), https://
www.consumerfinance.gov/about-us/newsroom/
cfpb-helps-struggling-homeowners-seekingmitigation-efforts-consumers-seeking-small-dollarloans/.
83 82 FR 54472, 54553–624.
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agency and a report from a registered
information system with respect to the
consumer; and review its own records
and the records of its affiliates for
evidence of the consumer’s required
payments under any debt obligations.
Using these inputs, the lender is
generally required pursuant to
§ 1041.5(b) and (c)(1) to make a
reasonable projection of the consumer’s
net income and payments for major
financial obligations over the ensuing 30
days; calculate either the consumer’s
debt-to-income ratio or the consumer’s
residual income; estimate the
consumer’s basic living expenses; and
determine based upon the debt-toincome or residual income calculations
whether the consumer will be able to
make the payments for his or her
payment obligations and the payments
under the covered loan and still meet
the consumer’s basic living expenses
during the term of the loan and for a
period of 30 days thereafter.84
This determination is required each
time a consumer returns to take out a
new loan, although pursuant to
§ 1041.5(c)(2)(ii)(D) the lender generally
need not obtain a new national credit
report if one was obtained within the
prior 90 days. If a consumer has
obtained three loans each within 30
days of the prior loan, pursuant to
§ 1041.5(d)(2) the lender cannot make
another covered short-term or longerterm balloon-payment loan for a period
of 30 days.
As also noted above, § 1041.6 contains
a principal step-down exemption that
allows lenders to make covered shortterm loans without an ability-to-repay
determination under § 1041.5. In order
to qualify for the principal step-down
exemption pursuant to § 1041.6(b)(1)(i),
the principal cannot exceed $500 for the
first in a sequence of covered short-term
loans, and pursuant to § 1041.6(b)(3) the
principal step-down exemption is not
available for vehicle title loans. A lender
may not make more than three loans in
succession under this principal stepdown exemption and the loans must
provide for a ‘‘principal step-down’’
over the sequence pursuant to
§ 1041.6(b)(1)(ii) and (iii) such that the
second loan in a sequence can be for
only two-thirds of the amount of the
initial loan and the third loan in a
sequence for one-third of the initial loan
amount.
Pursuant to § 1041.6(c)(1), a lender
cannot make a loan under the principal
step-down exemption to a consumer
who has had an outstanding covered
84 The Rule defines ‘‘basic living expenses’’ and
‘‘major financial obligations.’’ 12 CFR 1041.5(a)(1)
and (3).
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short-term or longer-term balloonpayment loan in the preceding 30 days.
Pursuant to § 1041.6(c)(3), the lender
also cannot make a loan that would
result in the consumer having more than
six covered short-term loans
outstanding during any consecutive 12month period or result in the consumer
being in debt on any covered short-term
loans for longer than 90 days in any
consecutive 12-month period. To verify
the consumer’s eligibility, before
making a conditionally exempt covered
short-term loan pursuant to § 1041.6(a),
the lender must review the consumer’s
borrowing history in its own records
and those of its affiliates and obtain a
report from a Bureau-registered
information system to determine a
potential loan’s compliance with
§ 1041.6(b) and (c).
Lenders making covered short-term
and longer-term balloon-payment
loans—including conditionally exempt
covered short-term loans—generally are
required to furnish certain information
on those loans to every registered
information system that has been
registered with the Bureau for 180 days
or more. Pursuant to § 1041.10(c)(1),
certain information must be furnished
no later than the date on which the loan
is consummated or as close in time as
feasible thereafter; pursuant to
§ 1041.10(c)(2), updates to such
information must be furnished within a
reasonable period after the event that
requires the update.
In adopting the Mandatory
Underwriting Provisions in 2017, the
Bureau considered and rejected a
number of alternatives, including
requiring disclosures, adopting a
payment-to-income ratio requirement,
adopting one of the various State law
approaches to regulating short-term
loans (such as rollover caps, less
detailed ability-to-repay frameworks,
complete bans on short-term lending
products), and other suggestions from
commenters. A comprehensive
description of the Bureau’s
consideration and treatment of these
alternatives is set forth in the 2017 Final
Rule.85
III. Outreach
In developing the 2019 NPRM, the
Bureau took into account the input it
received from stakeholders through its
efforts to monitor and support industry
implementation of the 2017 Final Rule,
as well as comments received in
response to other Bureau initiatives,
such as a series of requests for
information (RFIs) the Bureau published
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82 FR 54472, 54636–40.
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44387
in 2018.86 The Bureau also held a series
of briefing calls with various
government, industry, and consumer
group stakeholders on the 2019 NPRM.
Interagency Consultation. As
discussed in connection with section
1022(b)(2) of the Dodd-Frank Act below,
the Bureau’s outreach included
consultation with other Federal
consumer protection and prudential
regulators, and their feedback has
assisted the Bureau in preparing this
final rule.
Consultation with State and Local
Officials. The Bureau’s outreach has
included calls with State attorneys
general, State financial regulators, and
organizations representing the officials
charged with enforcing applicable
Federal, State, and local laws on smalldollar loans.
Tribal Consultation. On December 19,
2018, the Bureau held a consultation
with representatives from a number of
Indian tribes about what it might
address in its proposed rulemaking.
Federally recognized Indian tribes were
invited to participate in this
consultation. On March 13, 2020, the
Bureau held a consultation regarding
the finalization of the 2019 NPRM.
Federally recognized Indian tribes were
invited to participate in this
consultation.
Public Comments. The Bureau
received approximately 197,000
comments on the 2019 NPRM. All
comments have been posted to the
public docket for this rulemaking.87
These comments included several
hundred detailed comments from
consumer groups, trade associations,
non-depository lenders, banks, credit
unions, research and advocacy
organizations, members of Congress,
industry service providers, fintech
companies, Tribal leaders, faith leaders
and coalitions of faith leaders, and State
and local government officials and
agencies. The Bureau allowed into the
docket and considered comments
received after the comment period had
closed.
The Bureau did not tally precisely
comments supporting or opposing the
2019 NPRM. A minority of comments
were hard to categorize as simply in
favor of or in opposition to
reconsidering the 2017 Final Rule. As
with the 2017 Final Rule, it was
possible to achieve a rough
approximation that broke down the
86 See Bureau of Consumer Fin. Prot., Calls for
Evidence, https://www.consumerfinance.gov/policycompliance/notice-opportunities-comment/archiveclosed/call-for-evidence/ (lasted visited Mar. 12,
2020).
87 https://www.regulations.gov/docket?D=CFPB2019-0006.
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universe of comments in this manner.
More than 150,000 commenters wrote in
favor of payday lending generally or in
opposition to regulation generally.
Approximately 31,000 commenters
wrote in opposition to payday lending
generally or in opposition to regulation
generally.
Somewhat fewer comments either
explicitly supported or opposed
generally the proposed revocation of the
2017 Final Rule or could be fairly read
to support or oppose the specific rule
proposed in the 2019 NPRM. Of the
individual comments that specifically
addressed the 2019 NPRM, just over half
(approximately 29,000 comments) more
specifically supported the 2019 NPRM
and/or opposed the Mandatory
Underwriting Provisions of the 2017
Final Rule, while somewhat fewer
(approximately 25,000 comments) more
specifically opposed the 2019 NPRM
and/or supported the Mandatory
Underwriting Provisions of the 2017
Final Rule.
A rough estimate of pro and con
submissions by individuals may provide
insight as to public interest in a topic
and to individual consumer
experiences. However, under both the
Administrative Procedure Act (APA) 88
and the Dodd-Frank Act, the Bureau
must base its determinations in
rulemaking on the facts and the law in
the rulemaking record as a whole.
A comment submitted by a consumer
group observed that many of the
individual comments writing in favor of
the 2019 NPRM used identical or nearidentical language and stories, and even
repeated certain typographical errors.
The consumer group stated that such
patterns suggested that the comments
were not submitted by actual consumers
sharing their real experiences. The
comment did not provide support for
the suggested inference.
Ex parte communications. In addition
to comments submitted to the docket,
the Bureau also considered input from
17 ex parte meetings and telephone
conferences. These communications
were memorialized in the form of
summary memoranda and placed into
the docket for this rulemaking.89
Comments on the Payment Provisions.
In the 2019 NPRM, the Bureau did not
propose to reconsider the Payment
Provisions of the 2017 Final Rule. The
Payment Provisions are outside the
scope of this final rule. However, the
Bureau has received a rulemaking
petition to exempt debit card payments
from the Rule’s Payment Provisions.
88 5
U.S.C. 551 et seq., 701 et seq.
docket is available at https://
www.regulations.gov/docket?D=CFPB-2019-0006.
The Bureau also received requests
related to various aspects of the
Payment Provisions or the Rule as a
whole, including requests to exempt
certain types of lenders or loan products
from the Rule’s coverage and to delay
the compliance date for the Payment
Provisions. The Bureau has engaged
with several stakeholders on their
requests related to various aspects of the
Payment Provisions, including receiving
questions related to implementation as
well as requests to exempt certain types
of lenders or loan products from the
Rule’s coverage. The Bureau, concurrent
with the release of this final rule, has
issued compliance aids, including FAQs
and an updated Small Entity
Compliance Guide, to respond to certain
queries and to support ongoing
implementation efforts. In addition, the
Bureau has also issued a policy
statement to address concerns
pertaining to the coverage of certain
large loans. The Bureau will monitor
and assess the effects of the Payment
Provisions and determine whether
further action is needed in light of what
it learns. In addition, the Bureau intends
to use its market monitoring authority to
gather data on whether the requirement
in the 2017 Final Rule that lenders
provide consumers with ‘‘unusual
withdrawal’’ notices before the lenders
make certain withdrawal attempts are
made affects the number of unsuccessful
withdrawals made from consumers’
accounts.
IV. Legal Authority
The Bureau adopted the Mandatory
Underwriting Provisions in principal
reliance on the Bureau’s authority under
section 1031(b) of the Dodd-Frank Act.90
Section 1031(b) of the Dodd-Frank Act
provides that the Bureau ‘‘may prescribe
rules applicable to a covered person or
service provider identifying as unlawful
unfair, deceptive, or abusive acts or
practices 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 section 1031 may
include requirements for the purpose of
preventing such acts or practices.
Section 1031(c)(1) of the Dodd-Frank
Act provides that the Bureau shall have
no authority under section 1031 to
declare an act or practice in connection
with a transaction with a consumer for
a consumer financial product or service,
or the offering of a consumer financial
product or service, to be unlawful on
the grounds that such act or practice is
89 The
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U.S.C. 5531(b).
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unfair, unless the Bureau has a
reasonable basis to conclude that the act
or practice causes or is likely to cause
substantial injury to consumers which is
not reasonably avoidable by consumers,
and that such substantial injury is not
outweighed by countervailing benefits
to consumers or to competition.91 The
unfairness provisions of the Dodd-Frank
Act are similar to the unfairness
provisions under the Federal Trade
Commission Act (FTC Act), and the
meaning of the Bureau’s authority under
section 1031(b) is informed by the FTC
Act unfairness standard and Federal
Trade Commission (FTC or
Commission) and other Federal agency
rulemakings.92 When applying section
1031(c) of the Dodd-Frank Act, the
Bureau also considers the FTC’s
‘‘Commission Statement of Policy on
Scope of Consumer Unfairness
Jurisdiction’’ (FTC Unfairness Policy
Statement), the principles of which
Congress generally incorporated into
section 5 of the FTC Act.93
Under section 1031(d) of the DoddFrank Act, the Bureau ‘‘shall have no
authority . . . to declare an act or
practice abusive in connection with the
provision of a consumer financial
product or service’’ unless the act or
practice meets at least one of several
enumerated conditions.94 Section
1031(d)(2) of the Dodd-Frank Act
provides, in pertinent part, that an act
or practice is abusive when it takes
unreasonable advantage of: (1) A
consumer’s lack of understanding of the
91 12 U.S.C. 5531(c)(1). Additionally, 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. 12 U.S.C.
5531(c)(2).
92 82 FR 54472, 54520. See also 15 U.S.C. 41 et
seq. 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).
93 See 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 (Dec. 17, 1980),
reprinted in In re Int’l Harvester Co., 104 F.T.C. 949,
1070–88 (1984); see also S. Rep. No. 103–130, at
12–13 (1993) (legislative history to FTC Act
amendments indicating congressional intent to
codify the principles of the FTC Unfairness Policy
Statement).
94 12 U.S.C. 5531(d).
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material risks, costs, or conditions of the
product or service; or (2) a consumer’s
inability to protect the interests of the
consumer in selecting or using a
consumer financial product or service.
In addition to section 1031 of the
Dodd-Frank Act, the Bureau relied on
other legal authorities for certain aspects
of the Mandatory Underwriting
Provisions.95 These include: The
principal step-down exemption for
certain loans in § 1041.6; two provisions
(§§ 1041.10 and 1041.11) that facilitate
lenders’ ability to obtain certain
information about consumers’
borrowing history from information
systems that have registered with the
Bureau; and certain recordkeeping
requirements in § 1041.12.
In adopting each of these provisions,
the Bureau relied on one or more of the
following authorities. Section
1022(b)(3)(A) of the Dodd-Frank Act
authorizes the Bureau, in a rulemaking,
to conditionally or unconditionally
exempt any class of covered persons,
service providers, or consumer financial
products or services from any rule
issued under title X, which includes a
rule issued under section 1031, as the
Bureau determines is necessary or
appropriate to carry out the purposes
and objectives of title X. In doing so, the
Bureau must take into consideration the
factors set forth in section 1022(b)(3)(B)
of the Dodd-Frank Act.96 Section
1022(b)(3)(B) specifies three factors that
the Bureau shall, as appropriate, take
into consideration in issuing such an
exemption.97 The Bureau also relied, in
adopting certain provisions, on its
authority under section 1022(b)(1) of the
Dodd-Frank Act to prescribe rules as
may be necessary or appropriate to
enable the Bureau to administer and
carry out the purposes and objectives of
the Federal consumer financial laws.98
The term ‘‘Federal consumer financial
law’’ includes rules prescribed under
title X of the Dodd-Frank Act, including
those prescribed under section 1031.99
Additionally, the Bureau relied, for
certain provisions, on other authorities,
including those in sections 1021(c)(3),
95 See
82 FR 54472, 54522.
U.S.C. 5512(b)(3)(A).
97 12 U.S.C. 5512(b)(3)(B).
98 12 U.S.C. 5512(b)(1). The Bureau also interprets
section 1022(b)(1) of the Dodd-Frank Act as
authorizing it to revoke or amend a previously
issued rule if it determines such rule is not
necessary or appropriate to enable the Bureau to
administer and carry out the purposes and
objectives of the Federal consumer financial laws,
including a rule issued to identify and prevent
unfair, deceptive, or abusive acts or practices.
99 12 U.S.C. 5481(14).
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1022(c)(7), 1024(b)(7), and 1032 of the
Dodd-Frank Act.100
The Bureau’s decisions to use these
authorities were premised on its
decision to use its authority under
section 1031 of the Dodd-Frank Act. In
light of the Bureau’s decision to revoke
its use of section 1031 authority in the
Mandatory Underwriting Provisions, the
Bureau now concludes that it must also
revoke its uses of these other authorities
in the Mandatory Underwriting
Provisions. The specific provisions of
the 2017 Final Rule that the Bureau is
revoking are discussed further in the
section-by-section analysis in part VIII
below.
Part V.A reviews certain of the factual
predicates and legal conclusions
underlying this use of authority. Part
V.B sets forth the Bureau’s legal and
factual bases, under section 1031(c) of
the Dodd-Frank Act, for withdrawing its
previous finding that an injury
associated with the identified practice is
not reasonably avoidable. Part V.C
analyzes the reasons why the Bureau
has revalued the countervailing benefits
under the unfairness analysis and
determined that they were greater than
the Bureau found in the 2017 Final
Rule, and that the benefits to consumers
and competition in the aggregate from
the practice outweigh any such injury.
V. Amendments to 12 CFR Part 1041 To
Eliminate the Mandatory Underwriting
Provisions—Revoking the Identification
of an Unfair Practice
The Bureau has determined that the
grounds provided in the 2017 Final Rule
do not support its determination that
the identified practice is unfair, thereby
eliminating the basis for the Mandatory
Underwriting Provisions to address that
conduct.101
This part explains the Bureau’s
reasons for determining that the
identified practice in the 2017 Final
Rule is not unfair under section 1031 of
the Dodd-Frank Act. Combined with the
Bureau’s determinations concerning
abusive practices set out in part VI
below, the Mandatory Underwriting
Provisions are therefore not supported
by an appropriate legal or evidentiary
basis.102
A. Overview of the Factual Predicates
and Legal Conclusions Underlying the
Identification of an Unfair Practice in
§ 1041.4
100 See 82 FR 54472, 54522; see also 12 U.S.C.
5511(c)(3), 5512(c)(7), 5514(b)(7), 5522.
101 The rulemaking addresses the legal and
evidentiary bases for particular rule provisions
identified in this final rule. It does not prevent the
Bureau from exercising other tool choices, such as
appropriate exercise of supervision and
enforcement tools, consistent with the Dodd-Frank
Act and other applicable laws and regulations. It
also does not prevent the Bureau from exercising its
judgment in light of factual, legal, and policy factors
in particular circumstances as to whether an act or
practice causes or is likely to cause substantial
injury to consumers which is not reasonably
avoidable by consumers, and whether such
substantial injury is not outweighed by
countervailing benefits to consumers or to
competition.
102 The Bureau notes that, alongside covered
short-term loans, the 2017 Final Rule included
covered longer-term balloon-payment loans within
the scope of the identified unfair and abusive
practice. The Bureau stated that it was concerned
that the market for covered longer-term balloonpayment loans, which is currently quite small,
could expand dramatically if lenders were to
circumvent the Mandatory Underwriting Provisions
by making these loans without assessing borrowers’
ability to repay. 82 FR 54472, 54583–84. The
Bureau did not separately analyze the elements of
unfairness and abusiveness for covered longer-term
balloon-payment loans. See id. at 54583 n.626.
Because the Bureau’s identification in the 2017
Final Rule that the failure to determine ability to
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As noted above, section 1031(c)(1)(A)
of the Dodd-Frank Act states that the
Bureau has no authority to declare an
act or practice to be unfair unless the
Bureau has a reasonable basis to
conclude that the act or practice causes
or is likely to cause substantial injury
which is not reasonably avoidable by
consumers and that such substantial
injury is not outweighed by
countervailing benefits to consumers or
to competition.103
In the 2017 Final Rule, the Bureau
found that the practice of making
covered short-term or longer-term
balloon-payment loans to consumers
without reasonably determining if the
consumers have the ability to repay
them according to their terms causes or
is likely to cause substantial injury to
consumers. The Bureau reasoned that
where lenders were engaged in this
identified practice and the consumer in
fact lacks the ability to repay, the
consumer will face choices—default,
delinquency, and reborrowing, as well
as the negative collateral consequences
of being forced to forgo major financial
obligations or basic living expenses to
cover the unaffordable loan payment—
each of which the Bureau found in the
2017 Final Rule leads to injury for many
of these consumers and ‘‘the sum of that
injury is very substantial.’’ 104
repay was unfair for covered longer-term balloonpayment loans was predicated on its identification
that it was unfair to fail to determine ability to
repay for covered short-term loans, in the 2019
NPRM the Bureau proposed that if the
identification for covered short-term loans is
revoked then the identification for covered longerterm balloon-payment loans also should be revoked.
The Bureau received no comments on this proposed
treatment of covered longer-term balloon-payment
loans and so finalizes it as proposed.
103 12 U.S.C. 5531(c)(1).
104 82 FR 54472, 54590–94.
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The Bureau in the 2017 Final Rule
found that consumers could not
reasonably avoid this substantial injury.
The Bureau stated that, under section
1031(c)(1)(A) of the Dodd-Frank Act, an
injury is reasonably avoidable if
consumers ‘‘have reasons generally to
anticipate the likelihood and severity of
the injury and the practical means to
avoid it.’’ 105 The Bureau added: ‘‘[t]he
heart of the matter here is consumer
perception of risk, and whether
borrowers are in [a] position to gauge
the likelihood and severity of the risks
they incur by taking out covered shortterm loans in the absence of any
reasonable assessment of their ability to
repay those loans according to their
terms.’’ 106
In applying this standard, the 2017
Final Rule focused on borrowers’ ability
to predict their individual outcomes
prior to taking out loans. The Bureau
acknowledged that it ‘‘is possible that
many borrowers accurately anticipate
their debt duration.’’ 107 However, the
Bureau stated that its ‘‘primary concern
is for those longer-term borrowers who
find themselves in extended loan
sequences’’ and that for those borrowers
‘‘the picture is quite different, and their
ability to estimate accurately what will
happen to them when they take out a
payday loan is quite limited.’’ 108 That
led the Bureau to conclude that ‘‘many
consumers do not understand or
perceive the probability that certain
harms will occur’’ 109 and that therefore
it would not be reasonable to expect
consumers to take steps to avoid
injury.110 Note that, although the
Bureau made these statements about
consumers who take out payday loans
as part of an extended sequence, the
identified practice and the
corresponding Mandatory Underwriting
Provisions to address that practice apply
to all consumers who take out all
payday loans, including those that are
not part of an extended sequence.
The 2017 Final Rule based that
finding primarily on the Bureau’s
interpretation of limited data from a
study by Professor Mann of Columbia
Law School. The Mann study compared
consumers’ predictions when taking out
a payday loan about how long they
would be in debt with administrative
data from lenders showing the actual
duration consumers were in debt.111
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105 Id.
106 Id.
at 54594.
at 54597.
107 Id.
108 Id.
109 Id.
110 Id.
at 54594.
J. Mann, Assessing the Optimism of
Payday Loan Borrowers, 21 Supreme Court Econ.
Rev. 105 (2013) (discussed at 82 FR 54472, 54568–
111 Ronald
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The Bureau did not base its central
findings on the conclusions in Professor
Mann’s study. Rather, the Bureau
selected limited data compiled in the
course of that study, conducted its own
analysis of the data, and interpreted the
results as ‘‘provid[ing] the most relevant
data describing borrowers’ expected
durations of indebtedness with payday
loan products.’’ 112 The Bureau’s
interpretation of limited data from the
Mann study is discussed in part V.B.1
below.113
In further support of the finding in the
2017 Final Rule that some consumers
were not in a position to evaluate the
likelihood and severity of these risks
and therefore it would not be reasonable
to expect consumers to take steps to
avoid the injury, the Bureau in the 2017
Final Rule relied on other findings,
including those related to the marketing
and servicing practices of providers of
short-term loans,114 and on the Bureau’s
own expertise and experience in
supervisory matters and enforcement
actions concerning covered lenders in
the markets for covered short-term and
longer-term balloon-payment loans.115
These additional factors are discussed
in detail in part V.C.2 below.
B. Reasonable Avoidability
1. Reasonable Avoidability—Legal
Standard
The Bureau’s Proposal
The Bureau determined in the 2017
Final Rule that making covered shortterm or longer-term balloon-payment
loans without reasonably assessing a
borrower’s ability to repay the loan
according to its terms is an unfair act or
practice. In making this determination,
the Bureau concluded that this practice:
(1) Caused or was likely to cause
substantial injury to consumers; (2)
which is not reasonably avoidable by
consumers; and (3) that such injury was
not outweighed by countervailing
benefits to consumers or competition.116
70, 54592, 54597); see also 82 FR 54472, 54816–17,
54836–37 (section 1022(b)(2) analysis discussion of
the Mann study).
112 82 FR 54472, 54816.
113 The Bureau also referenced two academic
studies, one of which compared borrowers’ belief
about the average borrower with data about the
average outcome of borrowers and the other of
which compared borrowers’ predictions of their
own borrowing with average outcomes of borrowers
in another State. These studies found that
borrowers appear, on average, somewhat optimistic
about the length of their indebtedness. See id. at
54568, 54836. However, the Bureau noted the
weaknesses of these studies, id. at 54568, and, as
discussed, relied primarily on the Bureau’s
interpretation of limited data from the Mann study.
114 See, e.g., id. at 54616.
115 Id. at 54505–07.
116 Id. at 54588.
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In the 2017 Final Rule, the Bureau
interpreted section 1031(c)(1)(A) of the
Dodd-Frank Act to mean that for an
injury to be reasonably avoidable
consumers must ‘‘have reason generally
to anticipate the likelihood and severity
of the injury and the practical means to
avoid it.’’ 117 The Bureau interpreted
this standard as requiring consumers to
have a specific understanding of the
magnitude and severity of their personal
risks such that they could accurately
predict how long they would be in debt
after taking out a covered short-term or
longer-term balloon-payment loan.118
The Bureau stated in the 2017 Final
Rule that such borrowers ‘‘typically
understand that they are incurring a
debt which must be repaid within a
prescribed period of time and that, if
they are unable to do so, they will either
have to make other arrangements or
suffer adverse consequences.’’ 119 The
Bureau also stated that its interpretation
of limited data from the Mann study
indicated that most payday borrowers
expected some repeated sequences of
loans.120 Nonetheless, the Bureau stated
that ‘‘[t]he heart of the matter here is
consumer perception of risk, and
whether borrowers are in [a] position to
gauge the likelihood and severity of the
risks they incur by taking out covered
short-term loans in the absence of any
reasonable assessment of their ability to
repay those loans according to their
terms.’’ 121 Because it found that
consumers do not understand or
perceive the probability that certain
harms will occur, including the
substantial injury that can flow from
default, reborrowing, and the negative
collateral consequences of making
unaffordable payments, the Bureau
found that consumers could not
reasonably avoid the harm.122
The Bureau in the 2019 NPRM
expressed concern about the standard
that it applied in the 2017 Final Rule for
reasonable avoidability under section
1031(c)(1)(A) of the Dodd-Frank Act.
The 2019 NPRM stated that, in assessing
whether consumers could reasonably
avoid harm, the Bureau in the 2017
Final Rule concluded that they could
not without a specific understanding of
their individualized risk, as determined
by their ability to accurately predict
how long they would be in debt after
taking out a covered short-term or
longer-term balloon-payment loan.123 In
117 Id.
at 54594.
at 54594–96.
119 Id. at 54615.
120 Id. at 54569.
121 Id. at 54597.
122 Id. at 54594; see also id. at 54597.
123 Id. at 54597–98.
118 Id.
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reconsidering this interpretation of
reasonable avoidability, the Bureau
preliminarily determined that
consumers need not have a specific
understanding of their individualized
likelihood and magnitude of harm such
that they could accurately predict how
long they would be in debt after taking
out a covered short-term or longer-term
balloon-payment loan for the injury to
be reasonably avoidable. The Bureau
reasoned that requiring consumers to
know their individualized likelihood
and magnitude of risk of harm for that
harm to be reasonably avoidable would
overstate consumer injury and
effectively shift the burden to lenders to
make such determinations. This burden
shifting would deter lenders from
offering products or product features,
which would suppress rather than
facilitate consumer choice.
The 2019 NPRM stated that the
particular problem with the 2017 Final
Rule is illustrated by how the Bureau
responded to several comments that
urged the Bureau to mandate consumer
disclosures instead of imposing an
ability-to-repay requirement. In rejecting
that suggestion, the Bureau stated that
‘‘generalized or abstract information’’
about the attendant risks would ‘‘not
inform the consumer of the risks of the
particular loan in light of the
consumer’s particular financial
situation.’’ 124 Upon further
consideration, in the 2019 NPRM the
Bureau preliminarily determined that
there was a better reasonable
avoidability standard than the one set
out in the 2017 Final Rule. The 2019
NPRM explained that FTC Act
precedent informs the Bureau’s
understanding of the unfairness
standard under section 1031(c)(1)(A) of
the Dodd-Frank Act. In analyzing
unfairness under the FTC Act, the FTC
and courts have held that ‘‘an injury is
reasonably avoidable if consumers have
reason to anticipate the impending harm
and the means to avoid it,’’ 125 meaning
that ‘‘people know the physical steps to
take in order to prevent’’ injury,126 but
also ‘‘understand the necessity of
actually taking those steps.’’ 127 The
2019 NPRM noted that the Bureau in the
2017 Final Rule had not identified
relevant precedent suggesting that
consumers must understand their own
specific individualized likelihood and
magnitude of harm to reasonably avoid
injury.
124 Id.
at 54637 (emphasis added).
Davis v. HSBC Bank Nev., 691 F.3d 1152,
1168 (9th Cir. 2012).
126 See Int’l Harvester, 104 F.T.C. at 1066.
127 Id.
125 See
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The Bureau also stated in the 2019
NPRM that its approach to reasonable
avoidability was consistent with trade
regulation rules promulgated by the FTC
over several decades to address unfair or
deceptive practices that occur on
industry-wide bases.128 To prevent such
conduct, the Bureau stated that the FTC
has routinely established disclosure
requirements that mandate that
businesses provide to consumers
general information about material
terms, conditions, or risks related to
products or services.129 However,
according to the 2019 NPRM, no FTC
trade regulation rule based on
unfairness has required businesses to
provide individualized forecasts or
disclosures of each customer’s or
prospective customer’s own specific
likelihood and magnitude of potential
harm.130
The Bureau stated in the 2019 NPRM
its preliminary conclusion that injury is
reasonably avoidable if payday
borrowers have an understanding of the
likelihood and magnitude of risks of
harm associated with payday loans
sufficient for them to anticipate those
harms and understand the necessity of
taking reasonable steps to prevent
resulting injury. Specifically, this means
consumers need only understand that a
significant portion of payday borrowers
experience difficulty repaying and that
if such borrowers do not make other
arrangements they may either end up in
extended loan sequences, default, or
struggle to pay other bills after repaying
their payday loan. The Bureau
preliminarily determined in the 2019
NPRM that this approach, consistent
with the FTC’s longstanding approach
on informed consumer decision-making
in its interpretation of the unfairness
standard, is the better interpretation of
section 1031(c)(1)(A) as a legal and
128 Section 18 of the FTC Act provides that the
FTC is authorized to prescribe ‘‘rules which define
with specificity acts or practices which are unfair
or deceptive acts or practices in or affecting
commerce’’ within the meaning of section 5 of the
FTC Act. 15 U.S.C. 57a. The FTC’s trade regulation
rules are codified at 16 CFR part 400.
129 See, e.g., Use of Prenotification Negative
Option Plans Rule, 16 CFR 425.1(a)(1) (promotional
material must clearly and conspicuously disclose
material terms); Funeral Industry Practices Rule, 16
CFR 453.2(b) (requiring itemized price disclosures
of funeral goods and services and other nonconsumer specific disclosures); Credit Practices
Rule, 16 CFR 444.3 (prohibiting certain practices
and requiring disclosures about cosigner liability).
130 For example, the Credit Practices Rule
requires that a covered creditor to provide a ‘‘Notice
to Cosigner’’ disclosure prior to a cosigner
becoming obligated on a loan. This notice advises
in a concise and general manner consumers who
cosign obligations about their potential liability.
This notice is not individually tailored and does not
require a covered creditor to disclose information
about the severity or likelihood of risks related to
cosigner liability. See 16 CFR 444.3.
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44391
policy matter. In the Bureau’s
preliminary judgment, this approach
appropriately emphasized prohibiting
practices that prevent or hinder
informed consumer decision-making in
the marketplace.131
Applying an interpretation in the
2019 NPRM that was more consistent
with FTC precedent, the Bureau
preliminarily concluded that, assuming
for purposes of argument that the
identified practice causes or is likely to
cause substantial injury, consumers
could reasonably avoid that injury. As
noted above, in the 2017 Final Rule, the
Bureau found that payday loan
borrowers ‘‘typically understand 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.’’ 132 The 2019 NPRM
stated that consumers who have
reborrowed in the past would seem
particularly likely to have an
understanding that such reborrowing is
relatively common even if they cannot
predict specifically how long they will
need to borrow. Further, the 2019
NPRM noted a Bureau analysis of a
study of State-mandated payday loan
disclosures—which inform consumers
about repayment and reborrowing
rates—in which the majority of
consumers in the study continued to
take out payday loans despite the
disclosures.133 The 2019 NPRM stated
that a plausible explanation for the
limited effect of disclosures on
consumer behavior in this study is that
payday loan users were already aware
that such loans can result in extended
loan sequences.
The 2019 NPRM stated that the
Bureau in the 2017 Final Rule did not
offer evidence that would support the
conclusion that consumers cannot
reasonably avoid substantial injury from
131 As the FTC stated in the FTC Unfairness
Policy Statement: ‘‘[W]e expect the marketplace to
be self-correcting, and we rely on consumer
choice—the ability of individual consumers to
make their own private purchasing decisions
without regulatory intervention—to govern the
market. We anticipate that consumers will survey
the available alternatives, choose those that are
most desirable, and avoid those that are inadequate
or unsatisfactory.’’ FTC Unfairness Policy
Statement, Int’l Harvester, 104 F.T.C. at 1074. See
also Orkin Exterminating Co. v. FTC, 849 F.2d 1354,
1365 (11th Cir. 1988) (‘‘The Commission’s focus on
a consumer’s ability to reasonably avoid injury
‘stems from the Commission’s general reliance on
free and informed consumer choice as the best
regulator of the market.’’’) (quoting Am. Fin. Servs.
Ass’n v. FTC, 767 F.2d 957, 976 (D.C. Cir. 1985)
(AFSA)).
132 82 FR 54472, 54615.
133 Id. at 54577–78; see Tex. Office of Consumer
Credit Comm’r, Credit Access Businesses, https://
occc.texas.gov/industry/cab.
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taking out payday loans applying a
standard that focuses on understanding
that is sufficient to alert consumers of
the need to take steps to protect
themselves from the harm from taking
out such loans. The Bureau also found
in the 2017 Final Rule that consumers
who would not be offered a payday loan
under either § 1041.5 or § 1041.6 would
have alternatives to payday loans.134
Accordingly, the Bureau preliminarily
determined that there is not a sufficient
evidentiary basis on which to find that
consumers cannot reasonably avoid
substantial injury caused or likely to be
caused by lenders making covered
short-term and longer-term balloonpayment loans without assessing
borrowers’ ability to repay.135
The Bureau sought comments on
reasonable avoidability, including the
Bureau’s revised interpretation of
reasonable avoidability under section
1031(c)(1) of the Dodd-Frank Act. The
Bureau requested comment about the
types or sources of information with
respect to consumer understanding
about covered short-term and longerterm balloon-payment loans that would
be pertinent to a determination of
whether consumers can reasonably
avoid the substantial injury caused or
likely to be caused by the identified
practice.
Comments Received—Reasonable
Avoidability Standard
Industry commenters and a group of
12 State attorneys general stated that the
2019 NPRM’s proposed application of
reasonable avoidability in unfairness
was consistent with established
principles of consumer protection law.
A group of 12 State attorneys general
stated that the Dodd-Frank Act requires
the Bureau to look to the FTC Act when
interpreting its unfair, deceptive, or
abusive act or practice (UDAAP)
authorities. A commenter asserted that
understanding has been long
understood to mean a general awareness
of possible outcomes, not an
understanding of one’s individual
likelihood of being exposed to risks.
Commenters stated that requiring
covered lenders to assess whether
consumers can avoid harm by repaying
a loan would shift the risk calculus from
consumers to lenders and deprive
consumers of choice.
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134 82
FR 54472, 54840–41.
the 2019 NPRM proposed to find
that ‘‘robust and reliable’’ evidence was necessary
in order to support a determination that consumers
cannot reasonably avoid injury, in light of the
dramatic impacts of the Rule on the market; this
approach to requiring ‘‘robust and reliable’’
evidence is discussed in part V.B.2 of this
preamble.
135 Relatedly,
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Several commenters opined on the
legal standards the Bureau should use
when assessing reasonable avoidability
more broadly. Citing Katharine Gibbs
School (Inc.) v. FTC, a commenter stated
that FTC precedent does not support the
use of unfairness authority to prescribe
core economic terms, such as imposing
an ability-to-repay requirement.136
Industry commenters and 12 State
attorneys general commented that the
proper focus of reasonable avoidability
is on free and informed consumer
choice. According to the commenters,
unless a lender’s conduct interferes with
free choice, such as through deception
or coercion, harm from a financial
product is reasonably avoidable. In
other words, according to the
commenters, if any of the reasons that
consumers could not avoid harm caused
by a lender was not itself also caused by
the lender, the act or practice is not
unfair.
Consumer groups and a group of 25
State attorneys general stated that the
2019 NPRM’s proposed standard was
unreasonably restrictive and misapplied
lessons from FTC precedent. Some
commenters stated that FTC precedent
indicates that consumers must
understand their individualized
likelihood and magnitude of harm—a
general understanding of risk is
insufficient. Citing International
Harvester, a group of 25 State attorneys
general stated that for consumers to
understand the necessity of taking steps
to avoid harm, they must understand
the ‘‘full consequences’’ that might
follow from their decision to use
covered loans.137
Other commenters stated that the
2019 NPRM mischaracterized the 2017
Final Rule’s standard for reasonable
avoidability.138 According to these
commenters, the 2017 Final Rule did
not state that consumers had to have a
specific understanding of their
individualized risks for a harm to be
reasonably avoidable. Rather, a general
awareness of the specific risks of injury
was sufficient. Thus, according to these
commenters, the 2019 NPRM’s standard
for reasonable avoidability is essentially
identical to the 2017 Final Rule’s
standard.
At least one commenter stated that the
2019 NPRM’s application of reasonable
F.2d 658 (2d Cir. 1979).
Harvester, 104 F.T.C. at 1066.
138 The 2019 NPRM stated that ‘‘[i]n assessing
whether consumers could reasonably avoid harm,
the Bureau in the 2017 Final Rule concluded that
they could not without a specific understanding of
their individualized risk, as determined by their
ability to accurately predict how long they would
be in debt after taking out a covered short-term or
longer-term balloon-payment loan.’’ 84 FR 4252,
4269.
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136 612
137 Int’l
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avoidability is inconsistent with the
Bureau’s proposed standard. The 2019
NPRM stated that for harm to be
reasonably avoidable, ‘‘consumers need
only to understand that a significant
portion of payday borrowers experience
difficulty repaying and that if such
borrowers do not make other
arrangements they either end up in long
loan sequences, default, or struggle to
pay other bills after repaying their
payday loan.’’ A commenter argued that
this statement appears to omit the
‘‘likelihood and magnitude of risks of
harm’’ language in the standard and
ignores whether consumers have the
means to avoid the harm.
Some commenters stated that in
crafting the 2019 NPRM’s proposed
standard, the Bureau misread portions
of International Harvester. One
commenter stated that the specific
disclosure that the 2019 NPRM cited as
making harm reasonably avoidable was
criticized by the Commission for failing
to spell out the exact nature of the
hazard at a level of detail that would
effectively motivate compliance.139
Comments Received—Consumer
Understanding of the Risk of Harm
In applying the proposed standard
and assessing whether injury is
reasonably avoidable, industry
commenters and a group of 12 State
attorneys general stated that consumers
have sufficient information to
understand the likelihood and
magnitude of covered loan risk.
Commenters asserted that consumers
rationally choose to use covered loan
products and a lack of understanding
does not drive covered loan use.
In support of the proposition that
consumers have requisite understanding
about covered loan risk of harm, a nonprofit research and advocacy
organization commenter stated that the
2017 Final Rule recognized that
consumers generally understand how
covered loans function and that nonpayment has consequences.140 Twelve
State attorneys general agreed with the
2019 NPRM’s interpretation of a Bureau
analysis of a study of State-mandated
payday loan disclosures to conclude
that the disclosures’ limited impact on
reborrowing suggests that consumers are
already aware that such loans can result
in extended loan sequences.141 Another
139 Int’l
Harvester, 104 F.T.C. at 1054.
FR 54472, 54615 (‘‘[B]orrowers who take
out a payday, title, or other covered short term loan
typically understand that they are incurring a debt
which must be repaid within a prescribed period
of time and that if they are unable to do so, they
will either have to make other arrangements or
suffer adverse consequences.’’).
141 84 FR 4252, 4271.
140 82
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commenter identified two studies—the
Mann study and the Miller study 142—
that the commenter stated demonstrate
that consumers make informed choices
when using covered loans. Commenters
also pointed to the purportedly low
frequency of consumer complaints
about covered loans to the Bureau, FTC,
and State regulatory agencies as
evidence that consumers understand
covered loan products and appreciate
their access and use.
In contrast, consumer group
commenters and 25 State attorneys
general disagreed with the 2019 NPRM’s
preliminary determination that the 2017
Final Rule wrongly found that
consumers do not understand the
likelihood and magnitude of risk of
harm. A commenter stated that the 2017
Final Rule specifically found that
consumers do not understand the risks
and costs of unaffordable loans made
without assessing ability to repay,
including how long they would be in
debt or the consequences of extended
reborrowing.143 Commenters stated that
the 2019 NPRM did not provide a
reasoned explanation to disregard that
finding. Further, these commenters
stated that the 2019 NPRM offered no
evidence that payday loan users
understand the various harms that flow
from extended reborrowing, that a
significant portion of payday borrowers
experience difficulty repaying and that
if such borrowers do not make other
arrangements they either end up in long
loan sequences, or that such users even
have a general awareness about the risks
of covered loans.
These commenters also objected to
the Bureau’s preliminary determination
in the 2019 NPRM that the record
supports the finding that consumers
affirmatively understand the likelihood
and magnitude of risk of harm related to
covered loans. Several commenters
stated that the Bureau’s interpretation of
a study of State-mandated payday loan
disclosures was not plausible and was
speculative. An academic commenter
stated that this interpretation is
contradicted by a study that the Bureau
142 See Ronald J. Mann, Assessing the Optimism
of Payday Loan Borrowers, 21 Supreme Court Econ.
Rev. 105 (2013) (60 percent of borrowers can
accurately predict how long they would take to
repay their loan); Thomas W. Miller, Jr., Differences
in Consumer Credit Choices Made by Banked and
Unbanked Mississippians, 11 J.L. Econ. & Pol’y 367
(2015) (60 percent of unbanked borrowers
understand the loans terms that they had taken out).
143 In 2017, the Bureau found ‘‘evidence showing
that a significant proportion of consumers do not
understand the kinds of harms that flow from
unaffordable loans, including those imposed by
default, delinquency, re-borrowing, and the
collateral consequences of making unaffordable
payments to attempt to avoid these other injuries.’’
82 FR 54472, 54617.
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had not previously considered that
found a significant proportion of payday
loan users understand neither loan
terms nor costs.144 This commenter
asserted that a more plausible
interpretation of the study is that the
State-mandated disclosures are simply
ineffective. A commenter also objected
to the 2019 NPRM’s suggestion that
consumers can infer certain risks
associated with covered loans, either
because of their limited options or the
fact payday loans are advertised as
products designed to assist those in
financial distress. This commenter
stated that this suggestion ignores
informational asymmetry between
consumers and lenders regarding the
performance of credit products. Further,
this commenter stated that any mere
inference that short-term loans are risky
does not reveal information about the
likelihood and magnitude of that risk. A
commenter also questioned the 2019
NPRM’s proposed presumption that
borrowers’ prior experience with
covered loans imparts sufficient
understanding about risk, noting that
the Mann study found that heavy users
‘‘are least likely’’ to predict how long
they will be in loan sequences.
In arguing that harm is not reasonably
avoidable, commenters noted that the
2019 NPRM did not address seller
behavior that can hinder understanding
and consumer choice. Such conduct
cited by these commenters includes
deceptive advertising and marketing,
providing misleading or incomplete
information, failing to comply with
State small-dollar lending laws, such as
disclosures rules and rollover limits,
preventing borrowers from selfamortizing, and coercing or steering
borrowers into unaffordable
reborrowing.
Several commenters stated that lack of
understanding need not always be
present to establish that harm is not
reasonably avoidable and that the
pervasiveness and widespread
substantial injury is itself significant
evidence of unavoidable harm. At least
one commenter suggested that the fact
that consumers experience payday
lending problems and continue using
them is evidence that the harm is not
reasonably avoidable.
144 Nathalie Martin, 1,000% Interest—Good While
Supplies Last: A Study of Payday Loan Practices
and Solutions, 52 Ariz. L. Rev. 563 (2010) (Martin
study), https://www.regulations.gov/
contentStreamer?documentId=CFPB-2019-000627713&attachmentNumber=3&contentType=pdf
(interviews with approximately 130 payday loan
users in Albuquerque found that 60 percent of
consumers who had just taken out loans could not
accurately estimate their APR and 52 percent could
not accurately describe the dollar costs of their
loans).
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Several commenters also discussed
how behavioral factors—such as
financial distress and optimism bias—
impair understanding and skew
consumer perception of risk. A
commenter noted that storefront loan
borrowers frequently have unrealistic
expectations about their ability to repay
loans because they focus on short-term,
emergency needs over potentially
devastating future long-term losses.
Another commenter stated that
consumers cannot reasonably
understand the dramatically higher
levels of risk involved with covered
loans compared to conventional credit,
given the open-ended costs associated
with long loan sequences.
Comments Received—Means To Avoid
Harm
With respect to whether consumers
have the means to avoid harm,
consumer group commenters and 25
State attorneys general stated that
consumers have alternatives to payday
loans. Alternatives identified by these
and other commenters include credit
cards, non-recourse pawn loans, payday
loan alternatives (e.g., wage access
products), fintech offerings, borrowing
from friends, family, and community
organizations, and cutting back on
expenses.145 Commenters cited the
millions of consumers living in States
where payday lending is banned or
restricted as evidence that consumers
have alternatives to covered loans. In
the absence of payday loans, consumer
group commenters and 25 State
attorneys general stated that consumers
do not turn to illegal loans—a point
with which some industry commenters
disagreed. At least one commenter
stated that access to more reliable and
transparent credit options—like lowcost personal loans, payday loan
alternatives, and safer products from
mainstream financial institutions—exist
for most consumers and are consistently
expanding. Another commenter stated
that banks and credit unions are wellpositioned to responsibly issue smalldollar loans if they are provided with
proper guidelines.
Notwithstanding a general consensus
reflected in the comments that payday
loan alternatives exist, some
commenters stated that consumers lack
145 See, e.g., Nat’l Consumer Law Ctr., After
Payday Loans: How do Consumers Fare When
States Restrict High-Cost Loans? (Oct. 2018),
https://www.nclc.org/images/pdf/high_cost_small_
loans/payday_loans/ib_how-consumers-farerestrict-high-cost-loans-oct2018.pdf; Southern
Bancorp Community Partners, Into the Light: A
Survey of Arkansas Borrowers Seven Years after
State Supreme Court Bans Usurious Payday
Lending Rates (Apr. 2016), https://
southernpartners.org/pp/PP_V43_2016.pdf.
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the means to avoid harm. Some
consumer groups stated that the 2017
Final Rule had found limited
alternatives and borrowers’ perceptions
of their alternatives. At least one
commenter stated that borrowers using
covered loans have limited options and
limited time in which to assess them
and that most do not have access to
other formal sources of credit and
informal sources of credit have high
search costs. Other commenters stated
that even when alternatives do exist,
consumers do not pursue lower-cost
credit because of the ubiquity and
convenience of payday lenders.
A consumer group and an academic
commenter commented that the fact that
a consumer can avoid harm by not using
covered loans is not sufficient. Citing
AFSA v. FTC, commenters stated that
consumers can generally decline a
product or service, and ‘‘if the mere
existence of that right’’ were the end of
the inquiry, then no practice would be
subject to unfairness regulation.146 As
articulated by another commenter, the
‘‘just say no’’ option does not constitute
reasonable avoidability.
Numerous commenters, including
consumer groups, community financial
service institutions, and faith groups,
stated that consumers cannot avoid
injury once they have taken out a
covered loan and are unable to repay.
According to a consumer group and an
academic commenter, once a borrower
takes out an initial unaffordable loan,
the only options are to choose between
the harms associated with default,
reborrowing, or forgoing other major
financial obligations or basic living
expenses.
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Final Rule
After reviewing the comments, the
Bureau is finalizing its interpretation of
the standard for reasonable avoidability
under section 1031(c)(1)(A) of the DoddFrank Act as proposed, with some
clarification. Under this standard, the
facts and the law in the record do not
support the 2017 Final Rule’s
conclusion that the assumed substantial
injury from making covered short-term
or longer-term balloon-payment loans
without reasonably assessing a
borrower’s ability to repay the loan
according to its terms was not
reasonably avoidable.
146 See AFSA, 767 F.2d at 976–77 (holding that
prohibited contract provisions were unavoidable in
part because of industry-wide boilerplate that
prevented consumers ‘‘from making meaningful
efforts to search, compare, and bargain’’).
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Final Rule—Reasonable Avoidability
Standard
Pursuant to section 1031(c)(1)(A) of
the Dodd-Frank Act, the Bureau
determines that injury from making
covered short-term or longer-term
balloon-payment loans without
reasonably assessing a borrower’s ability
to repay the loan according to its terms
is reasonably avoidable if payday
borrowers have an understanding of the
likelihood and magnitude of risks of
harm associated with payday loans
sufficient for them to anticipate those
harms and understand the necessity of
taking reasonable steps to prevent
resulting injury. Specifically, this means
consumers need only understand that a
significant portion of payday borrowers
experience difficulty repaying and that
if such borrowers do not make other
reasonable arrangements they may
either end up in extended loan
sequences, default, or struggle to pay
other bills after repaying their payday
loan.
The interpretation of reasonable
avoidability the Bureau is finalizing
closely tracks FTC precedent.147 The
Bureau determines that FTC precedent
is not inconsistent with the use of
unfairness authority to prescribe what
some commenters termed ‘‘core
economic terms.’’ For instance, in
Katharine Gibbs, the court did not strike
down the FTC’s tuition refund
requirements based on the innate
character of the remedy. Instead, the
court faulted the FTC for attempting to
create ‘‘structural incentives for
discriminate enrollment’’ to address
problematic sales and enrollment
practices without finding that refund
practices at issue were deceptive or
unfair.148 As the court noted, ‘‘the
Commission contented itself with
treating violations of its ‘requirements
prescribed for the purpose of
preventing’ unfair practices as
themselves the unfair practices.’’ 149
Thus, the tuition refund requirement’s
147 See Int’l Harvester, 104 F.T.C. at 1066 (for an
injury to be reasonably avoidable consumers must
not only ‘‘know the physical steps to take in order
to prevent it’’ but also ‘‘understand the necessity of
actually taking those steps.’’); Davis, 691 F.3d at
1168 (‘‘[A]n injury is reasonably avoidable if
consumers have reason to anticipate the impending
harm and the means to avoid it.’’) (quoting Orkin,
849 F.2d at 1365–66).
148 Katharine Gibbs School, 612 F.2d at 662–63
(‘‘Instead of defining with specificity the
advertising, sales, and enrollment practices it
deemed unfair and deceptive and setting forth
requirements for preventing them, the Commission
decided to make it financially unattractive for
schools covered by the Rule to accept a student
who, for any reason whatever, was unlikely to
finish the course in which he or she had
enrolled.’’).
149 Id. at 662.
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flaw was not that it prescribed core
economic terms. Further, the Bureau is
aware of other examples of unfairness
authority being used to establish
substantive requirements in consumer
financial transactions.150 These
examples include a Federal banking
agency imposing requirements requiring
that financial institutions make abilityto-repay determinations before making
subprime mortgage loans.151
The Bureau also determines that,
contrary to the suggestion of some
comments, following the approach in
International Harvester does not require
that consumers understand their
individualized risk in order for injury to
be reasonably avoidable. As noted in
that case, reasonable avoidability
depends on whether risks are
‘‘adequately disclosed.’’ 152 The
Commission did not base its reasonable
avoidability determination on whether
consumers knew the probability that
they would personally experience fuel
geysering.153 Instead, the Commission
found the harm not reasonably
avoidable because consumers ‘‘did not
realize that a fuel geyser was possible’’
and might engage in a dangerous
practice (i.e., loosening the fuel cap on
farm equipment) ‘‘without
consciousness of any particular
risk.’’ 154 Thus, the Bureau’s current
application of reasonable avoidability is
consistent with International Harvester
as it requires consumers to be aware of
the particular risks associated with
payday lending (such as extended loan
sequences, default, etc.) sufficient to
150 See Credit Card Rule, 74 FR 5498 (Jan. 29,
2009) (Board, OTS, and NCUA concluded that it is
an unfair act or practice to treat a payment on a
consumer credit card account as late unless the
consumer has been provided a reasonable amount
of time to make that payment); Credit Practices
Rule, 49 FR 7740 (Mar. 1, 1984) (prohibiting certain
remedies that creditors frequently included in
credit contracts for use when consumers defaulted
on the loans were unfair, including confessions of
judgments, irrevocable wage assignments, security
interests in household goods, waivers of exemption,
pyramiding of late charges, and cosigner liability).
151 Higher-Priced Mortgage Loan Rule, 73 FR
44522 (July 30, 2008) (Board considered the FTC
Act’s unfairness standard when finding that
extending credit without regard to borrowers’
ability to repay was an unfair practice). See also
Credit Practices Rule, 49 FR 7740 (Mar. 1, 1984)
(prohibiting certain remedies that creditors
frequently included in credit contracts for use when
consumers defaulted on the loans were unfair,
including confessions of judgments, irrevocable
wage assignments, security interests in household
goods, waivers of exemption, pyramiding of late
charges, and cosigner liability).
152 Int’l Harvester, 104 F.T.C. at 1066.
153 Id.
154 Id. (‘‘Farmers may have known that loosening
the fuel cap was generally a poor practice, but they
did not know from the limited disclosures made,
nor could they be expected to know from prior
experience, the full consequences that might follow
from it.’’).
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take steps to avoid or mitigate harm
from those risks.
Moreover, aside from their criticisms
of the Bureau’s reading in the 2019
NPRM of certain FTC precedents (which
the Bureau does not accept),
commenters have not provided a
compelling reason why the Bureau
should interpret the reasonable
avoidability element of section
1031(c)(1)(A) of the Dodd-Frank Act to
require payday borrowers to have a
specific understanding of their personal
risks—such that they can accurately
predict how long they will be in debt
after taking out a covered short-term or
longer-term balloon-payment loan. As
the 2019 NPRM explained, the 2017
Final Rule’s approach would mean that
consumers cannot reasonably avoid
injury even if they understand that a
significant portion of payday borrowers
experience difficulty repaying and that
if such borrowers do not take reasonable
steps they may either end up in
extended loan sequences, default, or
struggle to pay other bills after repaying
their payday loan. The ‘‘focus on a
consumer’s ability to reasonably avoid
injury ‘stems from the Commission’s
general reliance on free and informed
consumer choice as the best regulator of
the market.’ ’’ 155 The Bureau is not
persuaded that, if consumers have that
level of understanding, they should be
viewed as unable to take reasonable
steps to avoid that harm. Accordingly,
the Bureau does not believe that it
should rely upon a legal standard that
would treat such consumers as not
knowing that they should consider
taking steps to reasonably avoid injury.
The Bureau also concludes, contrary
to the suggestion of some commenters,
that the 2019 NPRM did not
mischaracterize the 2017 Final Rule’s
approach to reasonable avoidability.
The Bureau acknowledges that the 2017
Final Rule at times used language that
was similar to the 2019 NPRM when
summarizing the reasonable avoidability
standard at a high level of generality.156
However, as explained in the 2019
NPRM, the 2017 Final Rule actually
applied a different legal standard as it
relates to payday borrowers. The 2017
155 84 FR 4252, 4271 n.242 (quoting Orkin
Exterminating Co., 849 F.2d at 1365 (quoting AFSA,
767 F.2d at 976)).
156 Compare 82 FR 54472, 54596 (‘‘[U]nless
consumers have reason generally to anticipate the
likelihood and severity of the injury, and the
practical means to avoid it, the injury is not
reasonably avoidable.’’), with 84 FR 4252, 4270
(‘‘[I]njury is reasonably avoidable if payday
borrowers have an understanding of the likelihood
and magnitude of risks of harm associated with
payday loans sufficient for them to anticipate those
harms and understand the necessity of taking
reasonable steps to prevent resulting injury.’’).
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Final Rule principally relied on the
Bureau’s interpretation of limited data
from the Mann study regarding
borrowers’ abilities to predict personal
likelihood of reborrowing in assessing
whether consumers adequately
understood the likelihood and severity
of harms. The 2017 Final Rule
determined that borrowers lacked
requisite understanding because some
borrowers were unable to predict their
individual likelihood of reborrowing.157
In other words, the 2017 Final Rule
used the Bureau’s interpretation of
limited data from the Mann study about
individual likelihood of reborrowing as
a proxy for understanding that is
sufficient to alert consumers of the need
to take steps to protect themselves from
potential payday loan harm. Thus,
notwithstanding the 2017 Final Rule’s
use of some language similar to that
used in the 2019 NPRM when generally
summarizing the reasonable avoidability
standard, in substance the 2017 Final
Rule interpreted the standard to require
all consumers to have a specific
understanding of individualized risk.
Moreover, contrary to the suggestions
of some commenters, the 2019 NPRM
did not omit the standard’s requirement
that consumers must appreciate the
‘‘likelihood and magnitude’’ of risk. The
2019 NPRM stated that the Bureau
preliminarily concluded that injury is
reasonably avoidable if payday
borrowers have an understanding of the
likelihood and magnitude of risks of
harm associated with payday loans
sufficient for them to anticipate those
harms and understand the necessity of
taking reasonable steps to prevent
resulting injury.158 The 2019 NPRM
elaborated that this requires that
consumers understand that a significant
portion of payday borrowers experience
difficulty repaying and that if such
borrowers do not make other
arrangements they either end up in
extended loan sequences, default, or
struggle to pay other bills after repaying
their payday loan.159 The Bureau notes
that if consumers understand that a
significant portion of payday borrowers
experience adverse outcomes, they
grasp the likelihood of risk. If
consumers understand the potential
outcomes arising from difficulty
repaying, they appreciate the magnitude
of those risks.
However, the Bureau agrees with
comments that consumers must not only
have a sufficient awareness of the risk
of significant injury, but they also must
have reasonable steps they can take to
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82 FR 54472, 54597–98.
FR 4252, 4270.
159 Id. (emphasis added).
158 84
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44395
avoid that injury. The 2019 NPRM
recognized that the means to avoid
injury is a necessary component of the
reasonable avoidability standard.160 The
Bureau discusses its application to
covered loans below.
The Bureau does not regard as
significant the considerations of the
efficacy of disclosures discussed in
International Harvester.161 What is
significant is that International
Harvester stands for the proposition that
harm is reasonably avoidable if
consumers have requisite understanding
of risks related to a product. The
Bureau’s revised application of the
reasonable avoidability standard is more
consistent with International Harvester
as it incorporates criteria that would
indicate whether consumers have a
requisite understanding.
Accordingly, the Bureau concludes
that the 2017 Final Rule applied a
problematic standard for reasonable
avoidability under section 1031(c)(1)(A)
of the Dodd-Frank Act and adopts the
better interpretation of reasonable
avoidability set forth in the 2019 NPRM.
Final Rule—Consumer Understanding
of Risk of Harm
Applying the revised standard for
reasonable avoidability pursuant to
section 1031(c)(1)(A) of the Dodd-Frank
Act, the Bureau concludes that there is
not a sufficient evidentiary basis for the
Bureau to conclude that consumers
cannot reasonably avoid substantial
injury from lenders making covered
short-term and longer-term balloonpayment loans without assessing
borrowers’ ability to repay the loan
according to its terms.
As discussed in part V.B.2 below of
this preamble, the 2019 NPRM proposed
and the Bureau finalizes a
determination that evidence is only
sufficient for purposes of finding that
injury is not reasonably avoidable if that
evidence is robust and reliable, in light
of the dramatic impacts of the Rule on
the payday market. Thus, the relevant
question here is whether there is robust
and reliable evidence for that finding,
under the Bureau’s revised standard for
reasonable avoidability.162
160 See
id. at 4269 (citing Davis, 691 F.3d at 1168).
104 F.T.C. at 1054. International Harvester
is not entirely clear on whether the disclosure in
question was efficacious. See id. at 1006 n.165 (the
alternative disclosure ‘‘would have been the most
effective [ ] warning up to that time, had it been
adequately disseminated . . . . It did communicate
the fact that a hazard existed and the principal steps
an operator should take to avoid it.’’).
162 The Bureau does not make any comment as to
the appropriate evidentiary standard that would
apply to unfairness citations or claims brought
through the enforcement or the supervisory process.
161 See
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The Bureau concludes that the 2019
NPRM provided a reasoned explanation
for reconsidering the 2017 Final Rule’s
finding on reasonable avoidability.
Specifically, the 2017 Final Rule’s
determination that a significant
population of consumers do not
understand the risks of substantial
injury from covered loans is not
adequately supported. The Bureau’s
determination was primarily
extrapolated from its own interpretation
of limited data from the Mann study. In
support of its finding of lack of
understanding, the 2017 Final Rule
emphasized that ‘‘consumers who
experience long sequences of loans
often do not expect those long
sequences to occur when they make
their initial borrowing decision.’’ 163 In
its reasonable avoidability analysis, the
2017 Final Rule did not significantly
rely on other evidence of consumer
understanding with respect to covered
loans. The 2017 Final Rule’s broad
pronouncement about consumer
understanding is based on evidence that
goes to the different question of whether
consumers can predict their individual
likelihood of reborrowing, rather than to
the question of whether consumers
understand the magnitude and
likelihood of risk of harm associated
with covered loans sufficient for them to
anticipate that harm and understand the
necessity of taking reasonable steps to
prevent resulting injury. Thus, the
evidence that the 2017 Final Rule
presented on consumer understanding
does not satisfy the reasonable
avoidability analysis pursuant to the
Bureau’s better interpretation of section
1031(c)(1)(A).
The Bureau concludes that other
studies, such as the Martin study,164
which found that most consumers
cannot identify the precise APR or
dollar cost of their payday loans, only
suggest a lack of understanding as to
specific features of payday loans. These
studies do not ask the direct and
relevant question of whether consumers
understand the magnitude and
likelihood of risk of harm associated
with covered loans sufficient for them to
anticipate that harm and understand the
need to take steps to avoid injury.
Other lender behavior or structural or
behavioral factors that can impact
consumer understanding do not bear on
the reasonable avoidability of the
identified practice. Citing, among other
things, Bureau enforcement and
163 82
FR 54472, 54617.
Martin, 1,000% Interest—Good While
Supplies Last: A Study of Payday Loan Practices
and Solutions, 52 Ariz. L. Rev. 563 (2010). This
study is discussed further below.
164 Nathalie
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supervisory activities, numerous
commenters identified covered lender
behavior that may cause consumer harm
or hinder consumer choice. The
behavior that allegedly produces these
effects included steering borrowers into
unaffordable reborrowing, preventing
borrowers from self-amortizing,
engaging in deceptive advertising or
marketing, and failing to comply with
State laws. The Bureau notes that,
depending on the facts and
circumstances, some of this behavior
could violate Federal consumer
financial law. The Bureau has cited
covered lenders for similar acts or
practices in the past.165 But there can be
unlawful or harmful practices by some
market participants in all markets, and
that does not establish that other
practices—specifically here lenders’
failure to assess the ability to repay—in
those markets is unlawful. The Bureau
concludes that the existence of other
practices in the markets for covered
loans that could be harmful to
consumers or violate other laws does
not establish that the harm from a
lender’s decision to lend without
assessing a borrower’s ability to repay is
itself not reasonably avoidable.
Further, the Bureau declines to infer
from the conclusion that making payday
loans without assessing the ability to
repay causes or is likely to cause
substantial injury (a conclusion from the
2017 Final Rule the Bureau assumed to
be correct for purposes of the unfairness
analysis in the 2019 NPRM) the further
conclusion that consumers cannot
reasonably avoid that injury. While the
same facts in a rulemaking record may
support conclusions as to each of the
three elements of unfairness, to identify
a practice as unfair the Bureau must
separately analyze and find adequate
support for each of these three elements.
As discussed above, the Bureau based
its conclusion on the evidence in the
record that was the most direct and
most probative on the question of
reasonable avoidability. Having done so,
the Bureau declines to rely on indirect
and less probative evidence, including
that drawn from inferences as some
commenters have suggested.
e.g., Consumer Fin. Prot. Bureau v.
Navient Corp., No. 3:17–cv–00101–RDM (M.D.
Penn. Jan. 18, 2017), https://
www.consumerfinance.gov/documents/2297/
201701_cfpb_Navient-Pioneer-Credit-Recoverycomplaint.pdf. The Bureau has also filed lawsuits
against payday lenders for deceptive advertising.
See, e.g., Press Release, Bureau of Consumer Fin.
Prot., CFPB Takes Action Against Moneytree for
Deceptive Advertising and Collection Practices
(Dec. 16, 2016), https://www.consumerfinance.gov/
about-us/newsroom/cfpb-takes-action-againstmoneytree-deceptiveadvertising-and-collectionpractices/.
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The Bureau also declines to follow
recommendations that it give further
consideration to behavioral factors. The
2017 Final Rule considered whether
behavioral economics factors make it
difficult for consumers to understand
the implications of taking out a covered
loan.166 However, these considerations
did not form an independent basis for
the 2017 Final Rule and, as set out in
the 2019 NPRM, the Bureau need not
address them.
With respect to the 2019 NPRM’s
preliminary determination that goes
beyond withdrawing the 2017 Final
Rule’s reasonable avoidability
determination and posited that
consumers affirmatively have the
requisite understanding of the
likelihood and magnitude sufficient for
any harm to be reasonably avoidable,
the Bureau has decided it is not
necessary to finalize this determination.
As discussed above, the Bureau has
concluded that robust and reliable
evidence in the rulemaking record does
not support the 2017 Final Rule’s
determination that payday borrowers
cannot reasonably avoid substantial
injury from lenders not assessing their
ability to repay their loans.
Accordingly, the Bureau concludes
that the Mandatory Underwriting
Provisions at 12 CFR part 1041 must be
revoked in light of the Bureau’s
determination to revoke the 2017 Final
Rule’s finding that consumers lack
sufficient understanding of the
likelihood and magnitude or risks of
covered loans such that they cannot
reasonably avoid substantial injury from
lenders making covered short-term and
longer-term balloon-payment loans
without assessing borrowers’ ability to
repay.
Final Rule—Means To Avoid Harm
As explained above, the revised
reasonable avoidability standard
adopted by the Bureau in this final rule
requires that covered loan borrowers
have an understanding of the likelihood
and magnitude of risks of harm
associated with payday loans sufficient
for them to anticipate those harms and
understand the necessity of taking
166 The Bureau in the 2017 Final Rule cited
research stating that certain consumer behaviors
may make it difficult for them to predict accurately
the future implications of taking out a covered
short-term or longer-term balloon-payment loan. As
the Bureau made clear, however, this research
helped to explain the Bureau’s findings from the
Mann study but was not in itself an independent
basis to conclude that consumers do not predict
whether they will remain in reborrowing sequences.
82 FR 54472, 54571 (explaining that ‘‘[r]egardless
of the underlying explanation, the empirical
evidence indicates that many borrowers who find
themselves ending up in extended loan sequences
did not expect that outcome’’).
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reasonable steps to prevent resulting
injury. The requirement that consumers
‘‘understand the necessity of taking
reasonable steps to prevent injury’’
presupposes that reasonable steps exist
and are available to the consumer, i.e.,
there are practical means to avoid harm.
The Bureau concludes that the evidence
in the record does not support the
conclusion in the 2017 Final Rule that,
even assuming consumers were
adequately aware of the risk of
substantial injury from the failure of
lenders to assess their ability to repay,
consumers could not take reasonable
steps to prevent or mitigate that injury.
The Bureau reaches this conclusion in
part based on the fact that consumers
continue to have access to short-term
credit in States where covered loans are
prohibited or severely restricted as well
as on the expanding availability of
alternatives to payday and other covered
loans in the marketplace.
The 2017 Final Rule found that ‘‘once
borrowers find themselves obligated on
a loan they cannot afford to repay,’’ the
resulting injury is ‘‘generally not
reasonably avoidable at any point
thereafter,’’ because after that point the
relevant long-term borrowers lack the
means to avoid injury.167 The Bureau
has not sought to reconsider that
determination in this rulemaking.
However, the 2017 Final Rule did not
assert that that determination was by
itself sufficient to support its finding
that injury was not reasonably avoidable
overall. It is well-established that
consumers can reasonably avoid injury
through either ‘‘anticipatory avoidance’’
or ‘‘subsequent mitigation,’’ so a finding
that consumers lack the means to avoid
injury at a later time is not generally
sufficient if they could do so at an
earlier time.168 And the 2017 Final Rule
did not rest its reasonable avoidability
analysis on a finding that consumers
lack the means to avoid injury before
they have taken out any covered loans.
Instead, the 2017 Final Rule explained
that the ‘‘heart of the matter here is
consumer perception of risk,’’ and
whether borrowers are in a position
before taking out covered loans ‘‘to
gauge the likelihood and severity of the
risks they incur.’’ 169 It is that critical
issue from the 2017 Final Rule that the
2019 NPRM reconsidered.
The Bureau does not find persuasive
these arguments in these comments that
before consumers have taken out any
payday loans they lacked the ability to
167 82
FR 54472, 54598 (emphasis added).
168 Orkin Exterminating Co., 849 F.2d at 1365
(quoting Orkin Exterminating Co., 108 F.T.C. at
366).
169 82 FR 54472, 54597.
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take reasonable steps to avoid injury
from the lenders’ failure to assess their
ability to repay.
Consumers generally have viable
alternatives to payday loans, which is
evidenced by the fact that millions of
consumers live in States where covered
loans are prohibited or severely
restricted and these consumers obtain
access to other alternative forms of
credit.170 Evidence submitted by
commenters that payday loan
alternatives are consistently expanding
are persuasive and confirmed by the
Bureau’s market monitoring. These
alternatives include credit offered by
fintechs, credit unions, and other
mainstream financial institutions.171
Consistent with their incentive to make
a profit, creditors who offer products
that compete with payday loans engage
in marketing and advertising to make
consumers aware of the availability of
their products.
Consumers do not lack the practical
ability to take advantage of these
alternatives. Arguments based on
behavioral factors that attempt to
explain why borrowers may not seek out
readily available covered loan
alternatives are hypothetical and do not
compellingly rebut available real-world
evidence to the contrary. Further, that
consumers may choose payday and
other covered loans over other credit
options because payday loans are
ubiquitous and convenient is not
evidence of a lack of alternatives. It is
consistent with some consumers
preferring payday or other covered loans
based on speed and convenience of the
borrowing process, easy loan approval,
the ability to take out a loan without a
170 See discussion at part II.A.1. For example,
Colorado is one State where payday loans are
restricted. Following its reform, the number of
payday lenders in Colorado substantially
contracted, but the lending volume remained stable
and the cost of loans dropped. See Pew Charitable
Trusts, Trial, Error, and Success in Colorado’s
Payday Lending Reforms (Dec. 2014), https://
www.pewtrusts.org/∼/media/assets/2014/12/pew_
co_payday_law_comparison_dec2014.pdf.
171 See, e.g., Fin. Health Network, Financially
Underserved Market Size Study 2019, at 6 (2019),
https://finhealthnetwork.org/research/2019financially-underserved-market-size-study/ (noting
the transition in small-dollar credit markets away
from payday and title loans toward installment
loans); CURO Group, Presentation at Jefferies
Consumer Finance Summit, at 9 (Dec. 2018),
https://ir.curo.com/events-and-presentations (19
percent of a prominent payday lender’s revenue
came from multi-payment loans in 2010, but by the
third quarter of 2018, that figure had quadrupled to
77 percent); Pew Charitable Trusts, From Payday to
Small Installment Loans: Risks, Opportunities, and
Policy Proposals for Successful Markets (Aug.
2016), https://www.pewtrusts.org/en/research-andanalysis/issue-briefs/2016/08/from-payday-tosmall-installment-loans (noting that non-bank
small-dollar lenders already offered installment
loans in 26 of 39 States where they operated).
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44397
traditional credit check, or other
considerations as some commenters
suggested.
And contrary to some comments, the
Bureau’s approach would not make any
harm reasonably avoidable simply
because a consumer can decline a
product or service. The small-dollar
loan market is not comparable to the
circumstances addressed in AFSA,
where the court found that industrywide use of boilerplate provisions
prevented consumers from making
meaningful efforts to identify
alternatives that did not feature those
provisions.172 Consumers in the market
for covered loans do not face a take-itor-leave-it choice; they can potentially
access formal credit options with varied
terms and conditions and other informal
credit options, such as borrowing from
family and friends.173
Regarding comments that consumers
cannot avoid injury after they take out
a loan, are trapped in an extended
sequence, and are unable to repay, the
Bureau acknowledges, as it did in the
2017 Final Rule, that some borrowers in
extended sequences suffer financial
harm. But the identified unfair practice
pertains to lender conduct when
borrowers are making an initial decision
to take out a new loan. The fact that
some subgroup of borrowers may have
limited options at a later point in a
repayment cycle does not negate the fact
that all consumers had alternatives to
covered loans before taking out an
initial loan, which is the relevant
inquiry where the identified practice
and related rule provisions apply to all
covered loans to all consumers.
Conclusion
Accordingly, as discussed above, the
Bureau is withdrawing the conclusion
in the 2017 Final Rule that any
substantial injury from lenders making
covered short-term and longer-term
balloon-payment loans without
assessing borrowers’ ability to repay the
loan according to its terms is not
reasonably avoidable.
2. Reconsidering the Evidence for the
Factual Analysis of Reasonable
Avoidability in Light of the Impacts of
the Mandatory Underwriting Provisions
The Bureau has decided to adopt a
different, better interpretation of the
level of understanding that payday
borrowers need in order to reasonably
avoid injury, as discussed in part V.B.1.
172 AFSA,
767 F.2d at 977.
Pew Charitable Trusts, Payday Lending in
America: Who Borrows, Where They Borrow, and
Why, at 16–28, https://www.pewtrusts.org/∼/media/
legacy/uploadedfiles/pcs_assets/2012/
pewpaydaylendingreportpdf.pdf.
173 See
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But independent of that interpretive
question, the Bureau has concluded that
it should withdraw the 2017 Final
Rule’s determination regarding
reasonable avoidability because it was
supported by insufficiently robust and
reliable evidence. The Bureau believes
that more robust and reliable evidence
for this key determination should be
required, in light of the impacts of the
Mandatory Underwriting Provisions
would have on the market.
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a. Background on the Impacts of the
Mandatory Underwriting Provisions
Before reconsidering the evidence
supporting the 2017 Final Rule’s
determinations below in parts V.B.2.c
and V.B.2.d, the Bureau discusses the
dramatic impacts of the Mandatory
Underwriting Provisions that give rise to
the Bureau’s application of the robust
and reliable evidence standard. The
Bureau stated and explained in the 2019
NPRM its preliminary belief that the
Mandatory Underwriting Provisions
would have ‘‘dramatic impacts’’ on the
market.174 As the 2019 NPRM
explained, the section 1022(b)(2)
analysis for the 2017 Final Rule
observed that the primary impacts of the
Rule on covered persons derived mainly
from the restrictions on who could
obtain payday and single-payment
vehicle title loans and the number of
such loans that could be obtained. To
simulate the impacts of the Mandatory
Underwriting Provisions, the section
1022(b)(2) analysis for the 2017 Final
Rule assumed, on the basis of a number
of studies by the Bureau and outside
researchers concerning payday
borrowers, that only 33 percent of
current payday and vehicle title
borrowers would be able to satisfy the
Rule’s ability-to-repay requirements
when initially applying for a loan and
that for each succeeding loan in a
sequence only one-third of borrowers
would satisfy the mandatory
underwriting requirement (i.e., 11
percent of current borrowers for a
second loan and 3.5 percent for a third
loan).175 Applying these assumptions to
data with respect to current patterns of
borrowing and reborrowing, the section
1022(b)(2) analysis estimated that,
absent the principal step-down
exemption in § 1041.6, the Mandatory
Underwriting Provisions of the Rule
would reduce payday loan volume and
lender revenue by approximately 92 to
93 percent relative to lending volumes
in 2017 and vehicle title volume and
lender revenue by between 89 and 93
174 84
175 82
FR 4252, 4264.
FR 54472, 54826–34.
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percent.176 Factoring in the expected
effects of the novel principal step-down
exemption, and assuming that payday
lenders would endeavor to take full
advantage of that novel exemption
before seeking to qualify consumers for
a loan under the mandatory
underwriting requirements of § 1041.5,
the analysis estimated that the
Mandatory Underwriting Provisions
would result in a decrease in the
number of payday loans of 55 to 62
percent and, because of the step-down
feature of the principal step-down
exemption, a decrease in payday lender
revenue of between 71 and 76
percent.177
The section 1022(b)(2) analysis that
accompanied the 2017 Final Rule stated
that these revenue impacts would have
a substantial effect on the market. The
analysis projected that unless lenders
were able to replace their reduction in
revenue with other products, there
would be a contraction in the number of
storefronts of similar magnitude to the
contraction in revenue, i.e., a
contraction of between 71 and 76
percent for storefront payday lenders
and of between 89 and 93 percent for
vehicle title lenders.178
The section 1022(b)(2) analysis for the
2017 Final Rule identified a number of
impacts that the Mandatory
Underwriting Provisions would have on
consumers’ ability to access credit.
Specifically, the analysis estimated that
approximately 6 percent of existing
payday borrowers would be unable to
initiate a new loan because they would
have exhausted the loans permitted
under the principal step-down
exemption and would not be able to
satisfy the ability-to-repay
requirement.179 The section 1022(b)(2)
analysis that accompanied the 2017
Final Rule identified, but did not
quantify, certain other potential impacts
of the Mandatory Underwriting
Provisions on consumers’ access to
at 54826, 54834.
at 54826. Given that short-term vehicle title
loans are not eligible for the principal step-down
exemption, the analysis estimated that the
Mandatory Underwriting Provisions would result in
a decrease in the number of short-term vehicle title
loans of between 89 and 93 percent, with an
equivalent reduction in loan volume and revenue.
Id. at 54834.
178 Id. at 54835.
179 Id. at 54840. Vehicle title borrowers would be
more likely to be unable to obtain an initial loan
because the principal step-down exemption does
not extend to such loans. Id. The analysis noted that
while those borrowers could pursue a payday loan,
there are three States that permit some form of
vehicle title loans (either single-payment or
installment) but not payday loans and that 15
percent of vehicle title borrowers do not have a
checking account and thus may not be eligible for
a payday loan. Id.
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177 Id.
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credit. Consumers seeking to borrow
more than $500 after the 2017 Final
Rule’s compliance date may find their
ability to do so limited because of the
cap on the initial loan amount under the
principal step-down exemption and
because of the impact of the Rule on
vehicle title loans, which tend to be for
larger amounts.180 Additionally,
because of the principal step-down
feature of the exemption, consumers
obtaining loans under that exemption
would be forced to repay their loans
more quickly than they are required to
do today. The analysis stated that 40
percent of the reduction in payday
revenue estimated to result from the
Mandatory Underwriting Provisions
would be the result of the cap on loan
sizes under the principal step-down
exemption and the remainder would be
the result of the restriction on the
number of loans available to consumers
under that exemption coupled with the
mandatory underwriting requirement
for any additional loans.181 Finally, the
analysis concluded, based on research
concerning the implementation of
various State regulations, that although
the reduction in the number of
storefronts would not substantially
affect consumers’ geographic access to
payday locations in most areas, a small
share of potential borrowers would lose
easy access to stores.182
The section 1022(b)(2) analysis that
accompanied the 2017 Final Rule went
on to observe that consumers who are
unable to obtain a new loan because
they cannot satisfy the Rule’s mandatory
underwriting requirement or cannot
qualify for a loan under the principal
step-down exemption will have reduced
access to credit. They may be forced at
least in the short term to forgo certain
purchases, incur high costs from
delayed payment of existing obligations,
incur high costs and other negative
impacts by defaulting on bills, or they
may choose to borrow from sources that
are more expensive or otherwise less
desirable.183 Some borrowers may
overdraft their checking accounts;
depending on the amount borrowed, an
overdraft on a checking account may be
more expensive than taking out a
payday or single-payment vehicle title
loan.184 Similarly, ‘‘borrowing’’ by
180 Id.
at 54841.
181 Id.
182 Id. at 54842 & n.1224. Research conducted by
the Bureau had found that in one State where
regulatory restrictions resulted in a substantial
contraction of payday stores, the median distance
between stores in counties outside of metropolitan
areas increased from 0.2 miles to 13.9 miles.
Supplemental Findings at 87.
183 See 82 FR 54472, 54841.
184 Id.
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paying a bill late may lead to late fees
or other negative consequences like the
loss of utility service.185
b. The Bureau’s Decision To Require
Robust and Reliable Evidence of the
Reasonable Avoidability Element in
Light of the Potential Dramatic Impacts
of the Mandatory Underwriting
Provisions at 12 CFR Part 1041
The Bureau’s Proposal
As explained above, were compliance
with the Mandatory Underwriting
Provisions of the 2017 Final Rule to
become mandatory,186 the provisions
would have the effect of eliminating
most covered short-term and longerterm balloon-payment loans. In the 2019
NPRM, the Bureau stated its preliminary
view that if a rule could have such
dramatic impacts on consumer choice
and access to credit, then it would be
reasonable under the Dodd-Frank Act
and prudent to have robust and reliable
evidence to support the key finding that
consumers cannot reasonably avoid
injury (for purposes of the unfairness
standard in Dodd-Frank Act section
1031(c)).187 Similarly, the 2019 NPRM
set forth the Bureau’s preliminary view
that it would be reasonable under the
Dodd-Frank Act and prudent to have
robust and reliable evidence to support
key findings of consumers’ lack of
understanding (for purposes of the
abusiveness standard in Dodd-Frank Act
section 1031(d)(2)(A)) and inability to
protect their own interests (for purposes
of the abusiveness standard in section
1031(d)(2)(B)).188
Comments Received
In comments on the 2019 NPRM,
consumer groups and others stated that
the 2017 Final Rule will not have a
dramatic impact on consumers’ access
to credit, because loan providers will
respond to the rule by shifting from
providing short-term loans to providing
longer-term installment loans, which are
not covered by the 2017 Final Rule’s
Mandatory Underwriting Provisions.189
Industry commenters and others
stated that a shift from short-term loans
to longer-term installment loans would
itself be a dramatic impact on how
credit is provided, consumer choice,
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185 Id.
186 As noted above, the Bureau published in June
2019 a final rule delaying the compliance date for
the Mandatory Underwriting Provisions to
November 19, 2020. See 84 FR 27907.
187 84 FR 4252, 4264.
188 Id.
189 Notably, these comments from consumer
groups support the Bureau’s point in part V.B.1
above that consumers in these markets have
alternatives to payday loans and as a result have the
means to avoid any harm from the loans.
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and consumer access to credit, sufficient
to justify the Bureau’s policy decision to
adopt the robust and reliable standard.
These commenters also noted that
payday loans have traditionally been
regulated by State law, and the 2017
Final Rule therefore raises federalism
issues. These commenters stated that
these federalism issues constitute
another reason to require robust and
reliable evidence in support of the 2017
Final Rule.
Consumer group commenters and
others stated that the 2017 Final Rule is
a final rule adopted by the Bureau and,
as such, is now the baseline for
determining the impact of Bureau
rulemakings on a going-forward basis.
And, they stated, revoking the 2017
Final Rule is itself a full rulemaking
action that has the same magnitude of
impact as the 2017 Final Rule, except in
the opposite direction. They reason that
the Bureau cannot finalize the 2019
NPRM unless the evidence on which the
Bureau now relies satisfies the ‘‘robust
and reliable’’ standard the Bureau cited
in the 2019 NPRM for re-evaluating the
evidence supporting the 2017 Final
Rule. Further, these commenters stated,
the 2019 NPRM did not provide
evidence sufficient to support
revocation of the Mandatory
Underwriting Provisions pursuant to the
rulemaking requirements of the APA,
and that action would, if finalized, be
arbitrary and capricious under the APA.
Consumer groups and others also
stated that a Bureau determination to
require robust and reliable evidence for
rules that have a dramatic impact on
consumer choice and access to credit
will make it harder for the Bureau to
adopt consequential rules addressing
consumer harm in the future.
Final Rule
After reviewing the comments
received, the Bureau finds that its
preliminary determination that the
Mandatory Underwriting Provisions of
12 CFR part 1041 would eliminate most
covered short-term and longer-term
balloon-payment loans was correct. The
Bureau also concludes that eliminating
such loans would have a dramatic
impact on consumer choice and access
to credit. Accordingly, the Bureau
determines that the 2017 Final Rule
would have a dramatic impact on
consumer choice and access to credit
that consumers prefer.
In light of this dramatic impact, the
Bureau determines that it is reasonable
and prudent to have robust and reliable
evidence to support the key finding that
consumers cannot reasonably avoid
injury (for purposes of the unfairness
standard in Dodd-Frank Act section
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44399
1031(c)). Similarly, the Bureau
determines that it is reasonable and
prudent to have robust and reliable
evidence to support key findings of
about consumers’ lack of understanding
(for purposes of the abusiveness
standard in Dodd-Frank Act section
1031(d)(2)(A)) and inability to protect
their own interests (for purposes of the
abusiveness standard in section
1031(d)(2)(B)). Those abusiveness
determinations are further addressed in
part VI below.
In making these determinations, the
Bureau has not relied upon the
federalism concerns about the 2017
Final Rule raised by some commenters.
(Of course, the effect of the Bureau’s
decision to revoke the Mandatory
Underwriting Provisions for the reasons
set forth herein is to leave existing State
approaches in place, some of which
reflect a preference to allow their
citizens’ access to payday loans.)
The Bureau does not agree with some
commenters’ characterization of the
Bureau’s policy choice in requiring
robust and reliable evidence as being
arbitrary and capricious. The Bureau
makes this policy choice in the context
of Dodd-Frank Act section
1031(c)(1)(A), which provides that the
Bureau cannot identify an unfair
practice unless there is substantial
injury that is ‘‘not reasonably avoidable
by consumers.’’ As the 2019 NPRM
notes, this element is premised on the
fact that ‘‘[n]ormally we expect the
marketplace to be self-correcting, and
we rely on consumer choice—the ability
of individual consumers to make their
own private purchasing decisions
without regulatory intervention—to
govern the market.’’ 190 As a policy
matter, the Bureau believes that this
principle of respecting consumer choice
is especially important where, as here,
regulatory action by the Bureau could
result in dramatic impacts on consumer
choice and access to the credit that
consumers prefer. Thus, in exercising
the Bureau’s discretion to determine
whether there is sufficient evidence that
consumers cannot reasonably avoid
injury here, the Bureau believes that
such evidence should be robust and
reliable. (And, although abusiveness is a
much newer standard than unfairness,
the Bureau believes that similar
reasoning applies in this rulemaking to
abusiveness’ ‘‘lack of understanding’’
and ‘‘inability to protect’’ elements.
Those abusiveness elements are
similarly threshold determinations of
consumer vulnerability that must be
made before regulatory intervention is
190 See FTC Unfairness Policy Statement, Int’l
Harvester, 104 F.T.C. at 1074.
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appropriate. The Bureau discusses those
abusiveness elements in part VI.C
below.) In doing so, the Bureau need not
and has not attempted to provide an
abstract definition of the terms ‘‘robust’’
or ‘‘reliable’’ beyond their commonly
understood meanings. The measure of
whether evidence is robust and reliable
is whether, as a practical matter, the
evidence gives the Bureau a level of
confidence in the Bureau’s conclusion
that is commensurate with the dramatic
impacts on consumer choice and access
to credit that are at stake here.
The Bureau disagrees with the
argument by some commenters that
requiring robust and reliable evidence
in this context will make it harder for
it to adopt consequential rules
addressing consumer harm in the future.
In this final rule, the Bureau has made
a determination to require robust and
reliable evidence to satisfy the ‘‘not
reasonably avoidable,’’ ‘‘lack of
understanding,’’ and ‘‘inability to
protect’’ elements in the context of
regulatory provisions that would have a
dramatic impact on consumer choice
and access to credit. The policy
considerations underpinning this
rulemaking might, or might not, be
relevant to evaluation of the evidence in
future Bureau rules. The Bureau has
made this determination consistent with
the requirements of the Administrative
Procedure Act and the evidentiary
record and is explaining its basis for
that determination after a full noticeand-comment process.
The comments suggesting that the
Bureau needs to have robust and
reliable evidence to prove that
consumers can reasonably avoid injury
in order to finalize this rule
misunderstand the Bureau’s approach.
The Bureau is reconsidering the
evidentiary basis for its prior
determination that consumers cannot
reasonably avoid injury, not seeking to
establish that consumers can reasonably
avoid injury. Further, this approach is
entirely consistent with the statutory
scheme. Under that scheme, consumers’
choices in the marketplace are
respected, absent a determination that
they cannot reasonably avoid injury.
And the Bureau’s policy of requiring
robust and reliable evidence is based on
caution about potentially interfering
with consumers’ decision-making in the
payday market on a massive scale.
Nor are commenters correct that the
Bureau is violating the APA by not
offering sufficient new evidence in
support of this final rule. The Bureau is
reconsidering the conclusions regarding
unfairness (and abusiveness) that it
previously drew from the evidentiary
record, and the Bureau is explaining the
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basis for that reconsideration after a full
notice-and-comment process, consistent
with the APA. Under section 1031 of the
Dodd-Frank Act, consumers’ choices in
the marketplace are respected, absent a
threshold determination that they
cannot reasonably avoid injury (or lack
understanding or are unable to protect
their own interests).
c. The Mann Study and the Findings
Based On It
The Bureau’s Proposal
In the 2019 NPRM, the Bureau
preliminarily found that the 2017 Final
Rule’s interpretation of limited data
from the Mann study was not
sufficiently robust and reliable, in light
of the 2017 Final Rule’s dramatic
impacts in restricting consumer access
to payday loans, to be the linchpin for
the 2017 Final Rule’s conclusion that
consumers could not reasonably avoid
harm. Specifically, this limited data
does not support the determination that
many payday loan consumers lack a
specific understanding of their personal
risks and cannot accurately predict how
long they will be in debt after taking out
covered short-term or longer-term
balloon-payment loans.191
The 2019 NPRM preliminarily found
that the Bureau’s interpretation of
limited data from the Mann study was
not sufficiently reliable because the
Mann study involved a single payday
lender in just five States and was
administered at a limited number of
locations.192 The 2019 NPRM stated that
a study focusing on a single lender or
limited number of lenders may not be
representative of the variety of payday
lenders across the United States. In
addition, it stated, these five States also
are not necessarily representative of
payday lending nationally.193 Because
consumer understanding and
expectations may be informed by the
191 The 2017 Final Rule’s finding that consumers
do not have a specific understanding of their
personal risks of reborrowing was a necessary
predicate to its determination that consumers
cannot reasonably avoid the substantial injury that
the 2017 Final Rule asserted that consumers incur
from payday loans (per the unfairness standard set
forth in Dodd-Frank Act section 1031(c)(1)(A)). The
finding was also a necessary predicate to the 2017
Final Rule’s determination that consumers do not
understand the material risks, costs, or conditions
of such loans (per the abusiveness standard set forth
in Dodd-Frank Act section 1031(d)(2)(A)).
192 See Mann study at 116.
193 The Mann study noted that rollover loans are
technically prohibited in all five of the States in
which payday borrowers were surveyed. Id. at 114.
Further, same-day rollover transactions are not
possible in Florida, which has a 24-hour coolingoff period, and are limited in Louisiana, which
permitted rollovers only upon partial payment of
the principal. Id. Over half of the survey
participants were in Florida and Louisiana alone.
Id. at 117 & tbl. 1.
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information consumers are provided—
and because that information can vary
from lender to lender and State to
State 194—the 2019 NPRM preliminarily
concluded that the Bureau’s
interpretation of limited data from the
Mann study is not a sufficiently robust
and reliable basis to make general
findings about all lenders making
payday loans to all borrowers in all
States.
Comments Received
Industry commenters and others
stated that the single lender and the five
States represented in the limited data
from the Mann study are not
representative of payday lending
nationally and that the Bureau’s
interpretation of that data is not
sufficiently robust and reliable to serve
as the basis for findings about all
lenders and all borrowers in all States.
These commenters (including Professor
Mann himself) also stated that the 2019
NPRM correctly interpreted the Mann
study as indicating that most payday
loan consumers have a reasonable
understanding of their loans. They also
stated that, because longer-term
reborrowers are typically more
financially distressed consumers, it is
plausible that they are more constrained
in their credit options and less able to
accurately predict when or if they can
repay a loan. Thus, even if longer-term
borrowers generally have the same level
of understanding of the costs and risks
of payday loans as shorter-term
borrowers, their predictions of their
loan-sequence length will reflect a
greater amount of error than will those
of shorter-term borrowers.195
Consumer group commenters and
others stated that the Mann study is
194 82 FR 54472, 54486 (identifying detailed
disclosures required of payday lenders under Texas
law), and id. at 54577 (noting that some
jurisdictions require lenders to provide specific
disclosures in order to alert borrowers of potential
risks).
195 Additionally, at least one commenter stated
that the Mann study participants with long loan
sequences were only 12 percent of sampled
borrowers, or 62 people, and that that number was
not an adequate sample to support the 2017 Final
Rule’s position that consumers lack understanding
of payday loans. However, the share of borrowers
who gave an answer to how long they expected to
borrow is not relevant, because all consumers who
ended up in sequences more than 200 days long
failed to make a numeric prediction at the
beginning of their debt cycle. Further, these
commenters were incorrect as factual matter.
Specifically, the actual number of borrowers in
question was 12 percent of the 1,300 borrowers
sampled, or about 156 borrowers (plus the
consumers in sequences more than 200 days long,
none of whom provided responses). The commenter
improperly multiplied that 12 percent of 1,300 (or
156) by 40 percent, which was the 40 percent of
borrowers who said they expected to continue
borrowing after their current loan’s initial due date.
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sufficiently robust and reliable to
support the conclusion that consumers
cannot reasonably avoid harm from the
identified practice, for the following
reasons. First, lenders tend to be
uniform in relevant ways: Loan
structure, marketing, encouragement of
rollovers, and concentration of revenue
from those borrowers who engage in
extended loan sequences. Also, these
commenters stated, the Mann study
itself notes that the payday loan
products of the one lender the study
involved are typical of large storefront
lenders. Thus, they said, the fact that
the Mann study involved a single lender
is not necessarily problematic. Second,
the five States included in the study
comprise over a quarter of the nation’s
payday loan market. The five States
account for over $1 billion in payday
fees annually or roughly 27 percent of
total fees collected by payday lenders
each year. Further, the population of
these five States represents 32 percent of
the population of the States that
authorize payday lending. Third, the
Mann study itself discusses the five
States’ rollover bans and crafts its
survey question to control for the fact
that the States prohibited rollovers.
Fourth, rollover bans are common in
payday loan States and the bans do not
change consumer behavior; 196 it is
therefore unlikely that they would affect
the accuracy of consumers’ predictions.
And fifth, consumer group commenters
stated that the Bureau could have tested
the representativeness of the data from
the Mann study by reviewing data in its
possession. Specifically, these
commenters said, the Bureau has loanlevel data from multiple lenders and
should have analyzed whether or not
sequence lengths or renewal rates vary
significantly across lenders before
asserting that consumer outcomes at one
lender’s outlets are not representative.
These commenters noted that the
Bureau’s March 2014 payday lending
data point analyzed borrower outcomes
across States with different restrictions
on rollovers and found virtually no
difference in renewal rates between
States that had no restrictions and those
that either prohibited rollovers or
required waiting periods between loans.
196 The commenters stated that approximately 16
States ban rollovers (approximately half of the
States that permit short-term payday lending) while
approximately another 10 States limit rollovers or
have similar restrictions. They further stated that
rollover bans and short cooling-off periods between
loans demonstrably have little impact on
reborrowing rates. And, rollover bans are
particularly irrelevant in the five States in the Mann
study, because none of those States has a
meaningful cooling-off period, meaning that their
ban on rollovers has particularly little effect
limiting long loan sequences.
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These findings, the commenters stated,
indicate that greater geographic
coverage beyond the five States in
question would not have led to different
findings than using the data from the
Mann study.
With respect to the substantive
question at issue—whether the Bureau’s
interpretation of data from the Mann
study indicates that payday loan
consumers do not have a specific
understanding of their personal risks
and cannot accurately predict how long
they will be in debt—consumer group
commenters acknowledged that the
Mann study found that consumers of
payday loans are generally able to
predict in advance the length of the
payday loan sequence that they are
entering into, a finding they stated is
largely driven by the fact that many
study participants accurately predicted
that they would not remain in debt for
longer than one or two loans. Consumer
groups stated, however, that the 2017
Final Rule’s analysis relied on a portion
of the Mann study data that, they stated,
indicates that consumers with long
payday loan sequences did not
accurately predict those sequences in
advance. That is, consumer groups
argued that it was proper for the
Bureau’s interpretation of data from the
Mann study to focus on a portion of the
data as evidence that consumers with
long loan sequences do not have a
specific understanding of the risks
posed to them by payday loans.
Finally, consumer group commenters
stated that the other evidence cited by
the 2019 NPRM as casting doubt on the
Bureau’s interpretation of data from the
Mann study was itself dubious or not
applicable to payday borrowers. These
commenters also sought to rebut the
other evidence cited by the 2019 NPRM.
Even if this other evidence were valid,
these commenters asserted that it does
not undermine the 2017 Final Rule’s
findings based on the Bureau’s
interpretation of data from the Mann
study.
Final Rule
The Bureau has determined that the
interpretation of the limited data from
the Mann study in the 2017 Final Rule
is not sufficiently robust and reliable to
serve as the primary factual support for
the Bureau’s determination in that Rule
that many payday loan consumers do
not have a specific understanding of
their personal risks and cannot
accurately predict how long they will be
in debt when they take out covered
short-term or longer-term balloonpayment loans. In light of the dramatic
impacts the Mandatory Underwriting
Provisions would have in restricting
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consumer access to payday loans, the
Bureau has determined that a more solid
foundation is needed.
As a preliminary matter, the Bureau
does not dispute, and did not dispute in
the 2019 NPRM, that the 2017 Final
Rule relied on limited data from the
Mann study that pertained to the
predictions of consumers who engage in
long sequences of payday loans, and
that the Bureau’s interpretation of that
data suggests that some of those
consumers may not accurately predict
their outcomes. At the same time, the
Bureau also believes that the Mann
study’s data overall indicates that
payday borrowers in general—i.e.,
including consumers who engage in
short sequences of payday loans—are
able to predict the length of their loan
sequences with reasonable accuracy.
Again, as discussed above, the
identified practice and the
corresponding Mandatory Underwriting
Provisions apply to payday borrowers in
general, not just payday borrowers who
engage in long sequences of payday
loans.
It may be true, as industry
commenters argued, that borrowers who
engage in long sequences of payday
loans generally have the same level of
understanding of the costs and risks of
payday loans as shorter-term borrowers,
but that these borrowers’ predictions of
their loan-sequence length nonetheless
are less accurate than those of shorterterm borrowers. This would be because,
in essence, the level of difficulty of
predicting loan-sequence length is
higher for borrowers who turn out to be
longer-sequence borrowers than it is for
borrowers who turn out to be shortersequence borrowers. Nonetheless,
accepting the 2017 Final Rule’s
approach to the legal standard for
reasonable avoidability for present
purposes (although the Bureau
reconsiders that issue in part V.B.1), the
relevant issue here is whether these
consumers lack a specific understanding
of their personal risks. That they may
have the same general understanding of
the loans’ costs and risks as shorter-term
payday loan borrowers would not affect
the 2017 Final Rule’s interpretation of
limited data from the Mann study to
find that longer-term reborrowers were
not accurately predicting their
outcomes, which may suggest they lack
specific understanding of their personal
risks from payday loans.197
197 The issue of whether the 2017 Final Rule’s
used the best legal standard is discussed in part
V.B.1. As stated there, the Bureau has determined
that the best legal standard is whether consumers
lack an understanding of the magnitude and
likelihood of risk that is sufficient to alert them of
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The Bureau has determined that the
Mann study, based on a single lender
operating in only five States, is not
sufficiently robust and reliable to serve
as the basis for making findings of
unfair practices that are applicable
nationwide to all lenders making
payday loans to borrowers in all States.
Moreover, the Bureau’s interpretation of
the data from the Mann study was based
on 156 respondents plus the 19 percent
of the 1,326 surveyed borrowers who
did not respond to the relevant
question, which was 254 respondents,
for a total of 410 respondents. These
figures represent a miniscule portion of
the up to approximately 12 million
consumers in the United States who
take out a payday loan in a given
year.198 Consumer groups’ assertions
about the single lender being a typical
lender and about the five States being
significant payday lending States do not
indicate that the limited data from the
Mann study the Bureau used is
nationally representative. Instead, the
comments merely suggest it is possible
that the Bureau’s interpretation of
limited data from the Mann study is not
unrepresentative. In light of the
dramatic impacts of the 2017 Final Rule,
the Bureau has concluded that its
determination of lack of understanding
as a predicate to finding that harm is not
reasonably avoidable should be based
on data and analysis thereof that is
nationally representative.199
Consumer group commenters argued
that data the Bureau analyzed and
reported on in its March 2014 data point
should enable the Bureau to ascertain
whether consumer outcomes at the one
lender’s outlets are representative.
However, these consumer outcomes are
not relevant to the issue of whether the
limited data at issue are sufficiently
nationally representative concerning
consumers’ understanding of the
magnitude and likelihood of risks
associated with their loans (as opposed
the need to take steps to protect themselves from
the harm from taking out such loans. The 2017
Final Rule did not use that better standard—it
required only finding a lack of specific ability to
predict their individual likelihood of risk of lengthy
reborrowing, rather than finding that consumers
lack a sufficient understanding to alert them of the
need to take steps to protect themselves from the
harm from taking out such loans. The use of the
other legal standard is an independent basis for the
Bureau’s present determination to revoke the 2017
Final Rule; i.e., it is separate from the basis for
revocation that is discussed here.
198 See Pew Charitable Trusts May 2016
Factsheet, Payday Loan Facts and the CFPB’s
Impact, https://www.pewtrusts.org/-/media/assets/
2016/06/payday_loan_facts_and_the_cfpbs_
impact.pdf.
199 As stated in part VI.C.1.b.(2) below, the
Bureau has reached the same conclusion regarding
its evidentiary basis for determining lack of
understanding in the abusiveness context.
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to predicting their ultimate outcomes
with those loans, such as length of
reborrowing). And, for the reasons
stated above, the Bureau has determined
that its prior interpretation of limited
data from the Mann study was based on
data that is not sufficiently nationally
representative. As the 2019 NPRM
explained, consumers using loans from
other lenders or in other places might
not have the same understanding as
those in the Mann study. Because
consumer understandings and
expectations may be informed by the
information consumers are provided—
and because that information can vary
from lender to lender and State to
State—the Bureau has concluded that
the 2017 Final Rule’s interpretation of
limited data from the Mann study is not
a sufficiently robust and reliable basis to
make nationwide findings about
consumer understanding at all lenders
making payday loans to all borrowers in
all States.
Finally, regarding consumer group
commenters’ criticisms of the other
evidence the 2019 NPRM cited as
casting doubt on the 2017 Final Rule’s
Mann data analysis, the 2019 NPRM
cited this evidence merely to
corroborate the Bureau’s concerns about
its interpretation of limited data from
the Mann study. However, the Bureau
would reach the same conclusion about
its prior use of the limited data from the
Mann study without that evidence. The
Bureau’s determination regarding the
lack of robustness and reliability of how
the 2017 Final Rule used the Mann
study is not dependent upon the other
evidence cited by the 2019 NPRM.
d. Other Evidence on the Consumer
Understanding of Risk
The Bureau’s Proposal
The 2017 Final Rule pointed to
certain other evidence—i.e., evidence
other than the Bureau’s interpretation of
limited data from the Mann study—that
it said showed that consumers were not
able to accurately predict the specific
likelihood of their individual risk of
entering a long reborrowing sequence
from taking out a covered short-term or
longer-term balloon-payment loan. In
part V.B.2 of the 2019 NPRM, the
Bureau preliminarily found that this
other evidence did not suffice to
compensate for the insufficient
robustness and reliability of the
Bureau’s prior use of the Mann study in
the 2017 Final Rule.
Comments Received
Industry commenters and others
stated that the studies, other than the
Mann study, cited by the 2017 Final
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Rule did not address the issue of
whether consumers were able to predict
their specific risk from payday loans.
They further noted that even if some
studies were in part suggestive that
consumers do not have a complete
understanding of their loans, other
aspects of the studies indicated that
consumers do have a reasonable
understanding of the risks associated
with their loans.
In addition, these commenters noted
that the rate of consumer complaints
about payday loans is low relative to
other consumer financial products,
which indicates that consumers’
experience with payday loans is not
unexpected. Further, of the payday loan
complaints that are submitted, many are
about unregulated offshore lenders and
illegal operators, and others do not
actually relate to payday lenders but are
in fact about debt collection or other
issues. Finally, these commenters noted,
the Bureau has acknowledged that
consumer complaints related to payday
loans have been declining for the past
several years.
Consumer group commenters and
others stated that there was a substantial
amount of what they considered to be
robust and reliable evidence, other than
the Mann study, that the 2017 Final
Rule pointed to as showing that payday
loan consumers do not have a specific
understanding of their personal risks
from payday loans sufficient to allow
them to take reasonable steps to prevent
or mitigate the injury from those risks.
And, these commenters said, the 2019
NPRM did not address or consider this
evidence. Specifically, consumer group
commenters asserted, the evidence in
the 2017 Final Rule record, which the
2019 NPRM did not address, and which
robustly shows consumer lack of
understanding, includes the following:
(1) Data showing that substantial
numbers of payday loan consumers
reborrow repeatedly prior to defaulting
on their loans.200 Consumer group
commenters said that this pattern
indicates that consumers do not
understand their specific risk of
defaulting, because, if they had such
understanding, they would default
earlier in the loan sequences. That is,
the consumers could have avoided
rollover fees from which they received
no benefit if they had defaulted earlier
in the loan sequences.
200 See 82 FR 54472, 54620. See also id. at 54572,
where the 2017 Final Rule cited to a June 2016
CFPB Report on Supplemental Findings, https://
www.consumerfinance.gov/data-research/researchreports/supplemental-findings-payday-paydayinstallment-and-vehicle-title-loans-and-depositadvance-products/.
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(2) Data showing consumer harm from
payday loans and that a large percentage
of payday loans are made to consumers
who take out the loans repeatedly.
Consumer group commenters argued
that consumers’ recurring use of loans
that harm them shows that the
consumers cannot reasonably avoid the
harm from the loans.201
(3) One hundred and fifty studies
mentioned by the 2017 Final Rule, of
which, commenters said, the 2019
NPRM reconsidered only the Mann
study and the Pew study.
(4) Additionally, consumer group
commenters pointed to other
miscellaneous evidentiary sources
discussed in the 2017 Final Rule.
Specifically, they pointed to: Lenders
marketing of payday loans as bridges for
short-term cash shortfalls, whereas the
loans actually function as longer-term,
high-cost sources of credit; lenders
encouraging consumers to reborrow the
full amount of the loan—i.e., to rollover
the loan at the end of its term—rather
than offering a repayment plan; lenders
not evaluating consumers’ ability to
repay their loans, notwithstanding what
commenters describe as consumer
expectations that lenders would not
permit consumers to take out loans they
cannot afford; evidence from the
Bureau’s supervision, enforcement, and
market monitoring activities; consumer
complaints submitted to the Bureau’s
consumer complaints function; the
Bureau’s stakeholder outreach during
the course of its rulemaking that led to
the 2017 Final Rule; the 1.4 million
public comments submitted in response
to the Bureau’s 2016 NPRM; the effects
of financial distress on consumers’
decision-making; and the Bureau’s
expertise generally.
(5) Finally, consumer group
commenters pointed to the Martin study
as particularly indicative of consumer
lack of understanding.202 The Martin
study reflects the results of interviews
with 109 borrowers at New Mexico
storefront payday locations. The study
found that nearly 60 percent of
borrowers who had just exited a payday
storefront location after completing their
transactions did not know the APR of
their loans, while another 16 percent
made estimates of their APRs that were
incorrect by a substantial margin.
201 Consumer group commenters made this
comment in a July 2019 ex parte meeting with
Bureau staff. The ex parte memo prepared by
Bureau staff setting forth the comments made
during the meeting is available at https://
www.regulations.gov/document?D=CFPB-20190006-52033.
202 The Martin study was attached to two
comments submitted in response to the Bureau’s
2016 NPRM, but was not cited by the 2017 Final
Rule.
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Further, nearly a fifth of respondents
could not describe the dollar cost of
their loans, while nearly 40 percent
inaccurately described the dollar cost.
Additionally, nearly 80 percent of
borrowers in the study did not shop
around for loan terms, and choice of
lender was driven more by the
convenience of a storefront location
than by any other factor; almost no
respondents cited the economic terms of
the loans as being a factor in their
choice of lender.
Additional Evidence Available
Subsequent to Publication of the 2019
NPRM
Since publication of the NPRM in
February 2019, information about two
relevant studies has become available.
The first study is a working paper
concerning a study of payday lending in
Iceland, published in September 2019
(Carvalho study).203 The study authors
use two sources of data to distinguish
poor financial conditions from
‘‘imperfect decision-making’’ for
consumers. The authors find that 53
percent of the payday loan dollars lent
go to consumers in the lowest 20
percent of decision-making ability,
which is estimated according to a scale
developed by the authors. The study’s
findings hold in regressions if the
authors control for experimental
assessments regarding impatience,
present bias, risk aversion, financial
resources and available demographics.
Further, the authors state that low
decision-making ability can accurately
be characterized as driving payday
borrowing mistakes. Finally, the authors
suggest that their analysis could likely
provide information relevant to U.S.
borrowers, offering as support how
various characteristics align between
their sample and a representative
sample of those in the United States.
While the authors do not have controls
for liquidity for U.S. consumers, after
controlling for other characteristics (risk
preferences, income, and
demographics), their study predicts the
same increase in payday loan usage for
a given change in decision-making
ability.
The second study is a working paper
publicly released in March 2020 of a
study that surveyed borrowers at a
lender in Indiana to evaluate their
borrowing expectations and attitudes
toward restrictions on payday lending
203 Leandro Carvalho et al., Misfortune and
Mistake: Financial Conditions and Decision-making
Ability of High-Cost Loan Borrowers, NBER
Working Paper No. 26328 (Sept. 2019), https://
www.nber.org/papers/w26328.
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44403
(Allcott study).204 After exiting a payday
storefront, 2,122 borrowers were asked
survey questions about their expected
probability of borrowing another loan
within the next eight weeks and, after
the application of several pre-registered
sample restrictions, 1,205 of these
borrowers were used in the analysis. On
average, the study participants
predicted they had a 70 percent chance
of reborrowing, not far from the actual
74 percent reborrowing rate for the
sample. On the other hand, borrowers
who used payday loans less frequently
in the six months prior to the survey
were much more likely to underestimate
their likelihood of reborrowing.
Most surveyed borrowers said they
would ‘‘very much’’ like to give
themselves extra motivation to avoid
payday loan debt and a supermajority
(about 90 percent) would at least
somewhat like to give themselves extra
motivation. Consistent with this
response, borrowers were also willing to
pay a large premium for an incentive to
avoid reborrowing. Finally, the authors
use the survey responses as inputs to a
model to estimate borrower awareness
of present bias and consumer welfare
responses to potential policy
interventions. They find borrowers in
their sample do put more weight on
near-term payoffs, but that borrowers
are also aware of this.205 The authors
use simulations to predict the effect of
different restrictions on payday lending,
finding that consumer welfare decreases
under full payday loan bans or under
caps on loan sizes, but consumer
welfare slightly increases in many
scenarios under a three-loan rollover
restriction.
Final Rule
The Bureau has considered all of the
applicable evidence, including all of the
evidence raised by commenters. For the
following reasons, the Bureau
determines that the evidence does not
provide a sufficiently robust and
reliable basis to conclude that
consumers who use covered short-term
or longer-term balloon-payment loans
do not have an adequate understanding
of their risk of substantial injury from
taking out payday loans where lenders
have not determined they have the
ability to repay them.
204 Hunt Allcott et al., Are High Interest Loans
Predatory? Theory and Evidence from Payday
Lending, working paper (Mar. 2020), https://
www.dropbox.com/s/ibavoq0pvr8p9ww/
Payday.pdf?dl=0.
205 In an appendix, the study authors allow that
a different interpretation of the motivation-related
survey parameter is possible. If this alternative
interpretation is more accurate, it dramatically
increases the weight consumers place on near term
payoffs and decreases their awareness of it.
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Evidence of Repeated Borrowing Prior
to Default
Other Studies Mentioned by the 2017
Final Rule
The Bureau turns first to the evidence
showing that substantial numbers of
payday loan consumers reborrow
repeatedly prior to defaulting on their
loans. This evidence arguably indicates
that, with hindsight, the actions that the
consumers took turned out not to have
been optimal. That is, the consumers
could have made themselves better off
(than they ended up being) by
defaulting earlier in their loan
sequences. Nonetheless, the Bureau
does not believe that whenever a
consumer makes a choice that turns out
to have been suboptimal it follows that
the consumer lacked understanding of
the risk at the time the choice was
made. Consumers often make decisions
in conditions of uncertainty—
uncertainty of which the consumers are
aware—and those decisions sometimes
turn out to be suboptimal. It does not
follow that the consumers at the time of
their decisions lacked adequate
understanding of their risk of
substantial injury from the relevant
practice. Moreover, the Bureau has
determined that more direct evidence of
lack of understanding is necessary in
order for the evidence to be robust and
reliable.
In addition, the Bureau has
determined that the other studies—e.g.,
the ‘‘150 studies’’ pointed to by
consumer group commenters—
mentioned by the 2017 Final Rule are
not relevant to the specific issue at hand
here. The number of studies is not the
point when it comes to the merits of an
issue (just like the number of comments
on a given issue is not the point).
Instead, the Bureau relies on the
relevance, rigor, and consistency of
findings across studies. The large set of
studies discussed in the 2017 Final Rule
concerned the experiences of lowincome consumers, State reports on
payday and vehicle title lending, and
responses to changes in State
regulations for small dollar lending, all
of which provide useful context and
evidence on how the market functions
and how consumers engage with these
products. But these studies do not
constitute evidence, let alone robust and
reliable evidence, regarding the point at
issue here: Whether consumers lack
adequate understanding of their risk of
substantial injury from taking out
payday loans where lenders have not
determined they have the ability to
repay them.
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Evidence of Harmed Consumers
Initiating Payday Loan Sequences
Recurringly
Regarding the evidence that consumer
group commenters asserted shows
consumer harm from payday loans and
that many initial loans go to consumers
who enter into loan sequences
repeatedly, the Bureau concludes that
that evidence does not in any way
suggest that consumers lack adequate
understanding of their risk of
substantial injury from taking out
payday loans if lenders have not
determined that they have the ability to
repay them. The evidence does not
suggest that consumers have inadequate
information about, or lack
understanding of, or do not have
alternatives to, payday loans. Indeed,
the Bureau believes the evidence
indicates that the consumers, making
their own choices, have decided that
payday loans are the best option among
the alternatives available to them. That
is, this evidence does not suggest that
consumers lack understanding of any of
the options available to them or of the
option they have chosen, which is a
payday loan.
Other Miscellaneous Sources of
Evidence Cited by Commenters
The other miscellaneous evidence
pointed to by consumer group
commenters—i.e., the evidence
summarized under (4) above—does not
robustly and reliably indicate that
consumers lack specific understanding
of their personal risks from payday
loans. Some of these sources of
information were cited by the 2017
Final Rule for various purposes, but
they were not the basis for the 2017
Final Rule’s determination that
consumers lack the required level of
understanding. This is because these
sources are even less probative of this
issue than the limited data from the
Mann study that the Bureau focused on
in the 2017 Final Rule and has now
determined to be insufficient to support
the conclusion in the 2017 Final Rule.
As the 2017 Final Rule noted:
‘‘Measuring consumers’ expectations
about re-borrowing is inherently
challenging.’’ 206 Contrary to some
commenters’ suggestions, the Bureau
did not have, and does not have, easy
access to robust and reliable information
on this subject. The miscellaneous
sources cited by commenters provide no
specific, direct insights into consumers’
206 82
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level of understanding. Commenters
instead invite the Bureau to draw
indirect inferences from some lenders’
behavior; from the Bureau’s past
activities related to the payday market;
from outreach and public comments
associated with the Bureau’s
rulemaking; from consumers’ financial
situations; and from the Bureau’s
general expertise. But commenters have
not pointed to specific, direct evidence
about consumers’ understanding that is
shown to be scientifically rigorous and
representative and therefore robust and
reliable.207
The Martin Study
The Bureau did not rely on the Martin
study in the 2017 Final Rule and does
not rely upon it in this rulemaking. The
Bureau does not believe that
commenters’ arguments regarding the
Martin study suggest that consumers
lack the requisite understanding of their
risks from payday loans, for the
following reasons.
The Martin study showed that 60
percent of payday loan borrowers did
not know the APR of their loans and 52
percent could not provide a reasonable
dollar cost of their loans. Even if the
Bureau were to grant that this study
suggests that some consumers might not
know the exact price of their payday
loans in APR or dollar terms, the Bureau
believes that such lack of knowledge
does not indicate that consumers lack
adequate understanding of their risk of
substantial injury from taking out a
payday loan where lenders have not
determined that they have the ability to
repay them. A consumer can be familiar
with payday loans, understand that they
are a relatively expensive source of
credit,208 and understand the risks and
costs of reborrowing and default, even if
the consumer does not know the APR or
dollar cost of a payday loan. For
example, the consumer might have prior
experience using payday loans or might
have family, friends, or neighbors who
207 For this reason, these sources are also not
sufficiently robust and reliable to supply evidence
under the revised standard for reasonable
avoidability that the Bureau adopts in part V.B.2.
208 Evidence overall is mixed as to whether
consumers understand the price of their loans in
dollar-cost terms (e.g., $15 for $100 for 2 weeks),
even if they might not remember or understand the
loans’ APR. For example, a 2009 study by Gregory
Elliehausen (Elliehausen study) states that most
payday loan consumers say they are aware of the
finance charge of their payday loans and report
plausible finance charges for their loans. Gregory
Elliehausen, An Analysis of Consumers’ Use of
Payday Loans, at 36–37 (Geo. Wash. Sch. of Bus.,
Monograph No. 41, 2009), https://
www.researchgate.net/profile/Gregory_Elliehausen/
publication/237554300_AN_ANALYSIS_OF_
CONSUMERS’_USE_OF_PAYDAY_LOANS/links/
00b7d5362429f9db10000000/AN-ANALYSIS-OFCONSUMERS-USE-OF-PAYDAY-LOANS.pdf.
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have used payday loans and other forms
of credit and from whom the consumer
might have developed a reasonable
sense of the desirability and risks, and
relative expensiveness, of payday loans
relative to other forms of credit, even if
the consumer does not know the
specific APR or dollar cost of the
payday loan the consumer received. The
Bureau therefore determines that the
information from the Martin study about
consumer awareness of APRs or dollar
costs on payday loans does not indicate
that consumers lack understanding of
their risk of substantial injury from
taking out a payday loan where lenders
have not determined they have the
ability to repay them.
Evidence Available Subsequent to
Publication of the 2019 NPRM
Finally, the Bureau is not relying on
the Carvalho study and the Allcott study
because they do not show that
consumers lack the requisite
understanding of their risks of
substantial injury from taking out a
payday loan where lenders have not
determined they have the ability to
repay them.
The Carvalho study, as noted above,
pertained to Icelandic consumers and
found that about half of payday loan
dollars go to consumers in the bottom
20 percent of decision-making ability.
The primary data from the study
concerns Icelandic consumers, which
makes its usefulness unclear when
considering a regulatory intervention for
payday loan borrowers in the United
States—absent further research
demonstrating that additional key
characteristics (such as the liquidity of
Icelandic and U.S. borrowers) that could
affect their decisionmaking are
comparable. In any event, even if
Icelandic and United States consumers
are comparable in key characteristics,
the Bureau concludes that this study
does not demonstrate, let alone robustly
and reliably demonstrate, that payday
loan consumers lack the requisite
understanding of their risks of
substantial injury from taking out
payday loans where lenders have not
determined that they have the ability to
repay them. While consumers with low
decision-making ability could have
more difficulty than other consumers in
general understanding any credit,
financial, or other product, it does not
necessarily follow that if these
consumers take out payday loans they
lack an adequate understanding of their
substantial risks of injury from taking
out payday loans where lenders have
not determined that they have the
ability to repay them. The Carvalho
study does not show that these
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consumers do not understand the costs
and risks of their payday loan
transactions. The consumers in question
can be familiar with payday loans and
understand that they are a relatively
expensive source of credit, even if the
consumers generally have low decisionmaking ability. Moreover, even
assuming for the sake of the argument
that the subset of payday borrowers in
the lowest 20 percent of decisionmaking ability do not have the requisite
understanding of the risks of harm from
the practice at issue, roughly one-half of
the consumers in the Carvalho study are
not in the lowest 20 percent of decisionmaking ability and so any such
conclusion would not be applicable to
them. For all of the reasons discussed
above, the Carvalho study does not
support the conclusions in the 2017
Final Rule that consumers could not
reasonably avoid substantial injury from
the identified practice.
The Allcott study, as described above,
indicates that on average payday
borrowers are able to predict their
likelihood of reborrowing, but that
infrequent borrowers are much more
likely to underestimate their likelihood
of reborrowing. The Bureau believes
that the study does not demonstrate, let
alone robustly and reliably demonstrate,
that consumers lack the requisite
understanding of their risk of
substantial injury from taking out
payday loans where lenders have not
determined that they have the ability to
repay them. In the study borrowers were
able to predict their probability of
reborrowing on average, but the authors
did not establish whether the lender
determined borrowers’ ability to repay
their loans and they did not estimate the
net costs to consumers of requiring such
an assessment. As an additional reason,
the study involves a single lender in a
single State (Indiana). The Bureau
therefore believes that the study is not
sufficiently representative to serve as
the basis for making findings applicable
nationwide about all lenders making
payday loans to borrowers in all States.
For these reasons, the Bureau is not
relying on the Allcott study to support
any conclusions in this rulemaking
about reasonable avoidability.
For the reasons described above, the
Bureau determines that the available
evidence does not provide a sufficiently
robust and reliable basis to conclude
that consumers who use covered shortterm or longer-term balloon-payment
loans lack an adequate understanding of
their risk of substantial injury from
taking out payday loans where lenders
have not determined that they have the
ability to repay them. Accordingly, the
Bureau determines to revoke the 2017
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44405
Final Rule’s findings that any consumer
harm from payday loans is not
reasonably avoidable and that
consumers lack adequate understanding
of their risk of substantial injury from
taking out payday loans where lenders
have not determined that they have the
ability to repay them.
C. Countervailing Benefits to Consumers
and to Competition
The 2019 NPRM reconsidered
whether the identified practice’s
substantial injury to consumers which is
not reasonably avoidable was
outweighed by countervailing benefits
to consumers or to competition
pursuant to section 1031(c)(1)(B) of the
Dodd-Frank Act. The Bureau revisited
the 2017 Final Rule’s determination
regarding this element and preliminarily
determined that certain countervailing
benefits from the identified practice
were greater than the Bureau found in
the 2017 Final Rule. The Bureau
preliminarily revalued the
countervailing benefits, proposed to
find that they were greater than the
Bureau found in the 2017 Final Rule,
and proposed to find that the benefits to
consumers and competition from the
practice outweigh any such injury.
1. Reconsideration of the Dependence of
the Unfairness Identification on the
Principal Step-Down Exemption
Section 1031(b) of the Dodd-Frank
Act authorizes the Bureau to prescribe
rules ‘‘identifying as unlawful unfair,
deceptive, or abusive acts or practices’’
if the Bureau makes the requisite
findings with respect to such acts or
practices.209 The Bureau exercised this
authority in § 1041.4 to determine that
it is unfair and abusive for a lender to
make covered loans ‘‘without reasonably
determining that the consumers will
have the ability to repay the loans
according to their terms.’’ 210 The
Bureau also exercised its authority
under section 1031(b) of the Dodd-Frank
Act to impose ‘‘requirements for the
purpose of preventing such acts or
practices’’ by adopting requirements in
§ 1041.5 for how lenders should go
about making such an ability-to-repay
determination.211
In the section 1022(b)(2) analysis of
the 2017 Final Rule, the Bureau
estimated that if lenders ceased to
engage in the identified practice and
instead followed the mandatory
underwriting requirements designed to
prevent that practice, only one-third of
current borrowers would be able to
209 12
U.S.C. 5531(b).
CFR 1041.4 (emphasis added).
211 12 U.S.C. 5531(b); 12 CFR 1041.5.
210 12
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obtain any loans and, of those who
obtained a loan, only one-third would
be able to obtain a subsequent loan.212
The end result, the Bureau estimated,
would be to eliminate between 89 and
93 percent of all loans.213
In conducting its countervailing
benefits analysis, the 2019 NPRM stated
that the Bureau in the 2017 Final Rule
did not address the benefits to
consumers or competition from lenders
making covered short-term and longerterm balloon-payment loans without an
ability-to-repay determination. Rather
than focusing on the effects of the
identified practice itself, the 2019
NPRM stated that the Bureau interjected
into its analysis the effect of Rule
provisions that were intended to
mitigate the general effects of the
requirement that lenders make an
ability-to-repay determination.
Specifically, the Bureau included in
its countervailing benefits analysis the
principal step-down exemption in
§ 1041.6. The principal step-down
exemption permits a certain number of
covered short-term and longer-term
balloon-payment loans to be made
without assessing the consumer’s ability
to repay so long as the loans meet a
series of other conditions, including a
requirement that the loan amount is
amortized over successive loans by
stepping down the principal over such
loans. None of these conditions involve
any ability-to-repay determination by
the lender. Rather, the conditions
generally focus on whether the loan
amount is amortized (stepped down)
over successive loans. The Bureau
predicted that the novel principal stepdown exemption would actually be the
predominant approach that payday
lenders would use to comply with the
Mandatory Underwriting Provisions,
because of the substantial burdens the
Mandatory Underwriting Provisions
would impose on lenders.
The principal step-down exemption
was not part of the identified practice.
Rather, the exemption was added
pursuant to the Bureau’s authority to
create exemptions which the Bureau
deems ‘‘necessary or appropriate to
carry out the purposes and objectives
of’’ title X of the Dodd-Frank Act.214
The 2019 NPRM proposed to find that
the Bureau in the 2017 Final Rule did
not consider in the countervailing
benefits analysis the full benefits to
consumers and competition from the
identified practice of lenders making
covered loans without making an
FR 54472, 54833.
at 54826 (storefront payday), 54834
(vehicle title).
214 12 U.S.C. 5512(b)(3).
ability-to-repay determination. As the
2017 Final Rule stated, the combination
of the mandatory underwriting
requirements plus the principal stepdown exemption meant that only a
‘‘relatively limited number of
consumers’’ would face a ‘‘restriction on
covered loans’’ which ‘‘decreases the
cost of the remedy, which in turn
reduces the weight on the
countervailing benefits side of the
scale.’’ 215 This weight would have been
much greater had the Bureau properly
considered the full benefits from lenders
engaging in the identified practice.
The 2019 NPRM observed that the
approach taken by the Bureau in the
2017 Final Rule puts the proverbial cart
before the horse. A predicate for the
exemption is the existence of an act or
practice which is unfair—which is to
say, the existence of an act or practice
for which the substantial injury that
consumers cannot reasonably avoid
outweighs countervailing benefits to
consumers or to competition. According
to the 2019 NPRM, it follows that an
exemption predicated on the existence
of an unfair practice should not be taken
into account in determining whether a
particular act or practice is unfair (i.e.,
in assessing the countervailing benefits
of the act or practice at issue).
As the FTC Unfairness Policy
Statement explains, ‘‘[m]ost business
practices entail a mixture of economic
and other costs and benefits for
purchasers. . . . The [FTC] is aware of
these tradeoffs and will not find that a
practice unfairly injures consumers
unless it is injurious in its net
effects.’’ 216 In the 2017 Final Rule, the
Bureau declared a practice unfair based
on its net aggregate costs to consumers,
but in doing so it relied analytically on
a large-scale exemption to avoid fully
considering the practice’s benefits,
thereby discounting the benefits of the
practice relative to its costs. Because the
2017 Final Rule did not confront the
total tradeoffs between the benefits and
costs of the identified practice, the 2019
NPRM preliminarily determined that
the 2017 Final Rule undervalued
countervailing benefits. Doing so may
result in business practices being treated
as unfair even though they in fact are
beneficial on net to consumers or
competition.
Accordingly, the Bureau preliminarily
determined that when evaluating the
countervailing benefits of the identified
practice, the Bureau should have
accounted for the complete benefits
from that practice. The complete
benefits to consumers and competition
should reflect the benefits that would be
lost if the identified practice were
prohibited. Otherwise, it is not possible
to accurately assess (as the Bureau now
preliminarily interprets the unfairness
test as requiring) whether the benefits of
making such loans without determining
ability to repay outweigh the injury
from doing so.
Comments Received
Twelve State attorneys general
commented that the 2017 Final Rule
improperly considered the principal
step-down exemption. According to this
comment, this led the Bureau to
artificially reduce the costs of the
Mandatory Underwriting Provisions and
incorrectly determine that
countervailing benefits did not offset
substantial injury.
Other commenters stated that it was
appropriate to consider the principal
step-down exemption in the
countervailing benefits analysis.
Commenters stated that the principal
step-down exemption was part of the
remedy and consideration of the remedy
in a countervailing benefits analysis is
appropriate. In support of this
proposition, commenters cited the FTC
Unfairness Policy Statement, which
provides that an agency must ‘‘take
account of the various costs that a
remedy would entail,’’ which includes
compliance costs and costs to society
more broadly.217 At least one
commenter cited examples of remedies
being considered in other unfairness
rules, including the FTC’s Credit
Practices Rule and the FRB’s Credit
Cards Rule.218 The commenter stated
that these rules provide examples of
agencies assessing the real-world
benefits and costs and demonstrate that
the countervailing benefits analysis
should not assess the prohibition they
design in isolation.
A commenter stated that to exclude
the remedy is irrational because the
unfair practice could be reframed to
incorporate the remedy. The commenter
stated that the Bureau could have
defined the unfair practice to
incorporate the principal step-down
exemption in the following manner: The
practice of making covered loans
without making a reasonable
determination that a borrower will have
the ability to repay the loans according
their terms or without providing a
means to pay off the loans in a
reasonable number of installments when
it becomes evident that a borrower
212 82
213 Id.
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FR 54472, 54609, 54603.
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Harvester, 104 F.T.C. at 1074.
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217 Int’l
216 See
218 See
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Harvester, 104 F.T.C. at 1073.
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cannot repay the loans according to
their terms.
Some commenters asserted that the
countervailing benefits determination
did not depend on the principal stepdown exemption. At least one
commenter noted that the 2017 Final
Rule concluded that the countervailing
assessment based on the 2016 NPRM—
which the commenter suggested
(erroneously) did not propose a
principal step-down exemption—was
correct. This commenter states that the
Bureau implemented the principal stepdown exemption to not overly restrict
access to credit—not because the
principal step-down exemption was
essential to the countervailing benefits
analysis.219 Further, the commenter
asserted that the 2017 Final Rule could
not have taken the principal step-down
exemption into account for vehicle title
loans, for which no conditional
exemption is available.
Final Rule
After reviewing the comments
received, the Bureau concludes that it
should not have relied upon the
principal step-down exemption when
evaluating the countervailing benefits of
the identified practice.
As an initial matter, the Bureau
concludes that remedies are a proper
consideration in the countervailing
benefits analysis. As the FTC Unfairness
Policy Statement states, it is proper to
take ‘‘account of the various costs that
a remedy would entail.’’ 220 However,
the principal step-down exemption
simply does not represent a remedy for
the identified unfair practice of making
covered loans ‘‘without reasonably
determining that the consumers will
have the ability to repay the loans
according to their terms.’’ 221 The
principal step-down exemption
establishes approximately sixteen
conditions devised by the Bureau, none
of which call upon the lender to make
any determination of the consumer’s
ability to repay.222 And as the 2019
NPRM noted, the 2017 Final Rule
anticipated that the principal step-down
exemption would be the predominant
approach that payday lenders would use
to comply. In other words, the principal
step-down exemption was expected to
create a situation in which most lenders
engage in the identified unfair practice,
that is, making payday loans to
consumers where lenders have not
determined they have the ability to
219 See
82 FR 54472, 54603.
Harvester, 104 F.T.C. at 1073.
221 12 CFR 1041.4.
222 12 CFR 1041.6; see also 12 CFR part 1041,
supp. I, section 1041.6.
220 Int’l
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repay them. Certainly, the conditions
imposed by the principal step-down
exemption created a financial product
that the Bureau considered to be more
desirable than a product without those
conditions, but only by permitting most
lenders to continue to engage in the
purportedly unfair practice of making
payday loans to consumers where
lenders have not determined that they
have the ability to repay them. The
logical remedy to consider when
evaluating whether not making a
reasonable ability-to-repay
determination is unfair is the remedy of
requiring lenders to make a reasonable
ability-to-repay determination.223
The FTC precedents cited by some
commenters are not inconsistent with
this conclusion. For example, the FTC
Credit Practices Rule prohibited wage
assignments in consumer contracts with
some exceptions, such as revocable
wage assignments, that were deemed
‘‘noninjurious.’’ 224 The FTC Credit
Practices Rule also prohibited nonpurchase money security interests in
household goods, but allowed purchase
money loans and security interests in
valuable possessions because, unlike
blanket security interests, they were
necessary to preserve the commercial
viability of lenders.225 The FTC Credit
Practices Rule simply provides an
example of an agency defining the
appropriate scope of an unfair practice,
which is not comparable to the 2017
Final Rule’s use of the principal stepdown exemption. For instance, the FTC
Credit Practices Rule did not declare
that purchase money loans and security
interests in valuable possessions were
within the unfair practice, then exempt
them if they satisfied various conditions
specified by the agency, and then
disregard their countervailing benefits
in evaluating the overall countervailing
benefits of the unfair practice. Instead,
the FTC Credit Practices Rule excluded
certain transactions from the scope of
the unfair practice, and it did not
attempt to rely upon them in conducting
the countervailing benefits analysis that
was necessary to establish an unfair
practice. Revocable wage assignments
were allowed because they were noninjurious. Security interests in valuable
possessions were deemed to pose
limited consumer risk but provided
significant benefit to competition.
223 The agency’s chosen remedy can, of course,
include additional preventative requirements so
long as those have a ‘‘reasonable relation’’ to the
identified unfair practice. 82 FR 54472, 54519
(citing Am. Fin. Servs. Ass’n v. FTC, 767 F.2d 957,
988 (D.C. Cir. 1985)).
224 49 FR 7740, 7760–61.
225 Id. at 7766.
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Another rule cited by commenters,
the Federal Reserve’s Credit Card Rule,
identified applying excess payments to
different balances on a consumer credit
card ‘‘in a manner that does not apply
a significant portion of the amount to
the balance with the highest annual
percentage rate’’ as an unfair practice
under the FTC Act.226 When assessing
countervailing benefits, the Federal
Reserve recognized that the rule would
reduce lender revenue and potentially
increase interest rates on all loans. But
the Federal Reserve determined that
these costs would be muted because
lenders could choose between two
specified methodologies for applying
excess payments.227 These permitted
methodologies (i.e., specific methods
about how to apply excess payments)
were both effective in remedying the
identified unfair practice (i.e., not
applying a significant amount of an
excess payment to the balance with the
highest APR).
A commenter argued that the Bureau
should reframe the identified unfair
practice to incorporate the principal
step-down exemption. This commenter
argued that the Bureau should add the
following words to the identified unfair
practice: ‘‘or without providing a means
to pay off the loans in a reasonable
number of installments when it becomes
evident that a borrower cannot repay the
loans according to their terms.’’ In the
commenter’s view, this would provide a
basis for the principal step-down
exemption as a remedy for the modified
unfair practice. But if the identified
practice were redefined, then the
Bureau would have to reassess each of
the elements of unfairness for that
identified practice, not just reassess
countervailing benefits. The approach
proposed by the commenter would do
nothing to address the Bureau’s separate
conclusions regarding the reasonable
avoidability element of unfairness in
part V.B. Such a fundamental change
would entail an additional complex
rulemaking, which as the Bureau
explains in part VII on consideration of
alternatives is not consistent with the
Bureau’s rulemaking priorities.
Moreover, even if the Bureau was to
modify the unfair practice in the
manner suggested by the commenter,
the principal step-down exemption
includes various conditions that are
unrelated to remedying such a modified
unfair practice, such as the principal
limit of $500.
226 74
FR 5498, 5514.
at 5515. Among other prohibitions, the
Rule also found it unfair for lenders to increase APR
applicable to an outstanding balance on consumer
credit card, except in certain prescribed
circumstances. See id. at 5521.
227 Id.
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Some commenters pointed to
statements in the 2017 Final Rule that
they claim indicate that the Bureau did
not rely upon the principal step-down
exemption in its countervailing benefits
analysis. As background, in the 2016
NPRM, the Bureau had not proposed to
include the principal step-down
exemption in its countervailing benefits
analysis.228 The 2017 Final Rule does
contain a statement that the 2016
NPRM’s preliminary determination that
countervailing benefits element was
satisfied ‘‘was correct,’’ 229 and it
contains some other positive language
about the 2016 NPRM’s proposed
countervailing benefits analysis.230 But
these summary statements do not mean
that the 2017 Final Rule was based upon
and relied upon everything in the 2016
NPRM’s proposed analysis, as
commenters suggest.
And in fact, in both its description of
its countervailing benefits analysis and
in the substance of that analysis, the
2017 Final Rule relied upon the
principal step-down exemption. The
Bureau referred to the principal stepdown exemption’s impact on credit
access several times in the preamble to
§ 1041.4.231 In particular, in assessing
the countervailing benefits to a
particular group of covered loan users—
reborrowers—the Bureau explicitly
invoked the principal step-down
exemption’s mitigating effect.232
Further, when considering the 2017
Final Rule’s major impacts in the
section 1022(b)(2) analysis, the Bureau
cited a simulation that accounted for the
principal step-down exemption.233
Thus, the countervailing benefits
analysis did rely upon the conditional
exemption.
Finally, the Bureau does not agree
with the comment suggesting that the
fact that vehicle title loans cannot
qualify for the principal step-down
exemption but are included in the
definition of covered loan indicates that
the exemption did not affect the
countervailing benefits analysis;
borrowers’ and lenders’ activities across
228 See
81 FR 47863, 47939 n.540.
FR 54472, 54603.
230 Id. (suggesting that certain improvements at
the final rule stage resulted in the ‘‘injury from the
identified practice outweighing the countervailing
benefits to consumers by even more than it did at
the proposal stage’’).
231 See, e.g., id. at 54603, 54604, 54606.
232 Id. at 54606 (‘‘The Bureau concludes that this
aggregate injury to many ‘reborrowers’ outweighs
the countervailing access-to-credit benefits that
other ‘re-borrowers’ may receive as a result of
lenders not reasonably assessing the borrower’s
ability to repay the loan according to its terms, in
light of all the provisions of the final rule, including
the effect that § 1041.6 will have in reducing the
magnitude of those benefits.’’) (emphasis added).
233 Id. at 54817.
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the covered loan markets were
incorporated into the Bureau’s analysis.
As both the 2017 Final Rule and the
2019 NPRM noted, the relevant injuries
and countervailing benefits of the
identified unfair practice are considered
in the aggregate.234
The Bureau now determines that, by
relying upon the principal step-down
exemption in its countervailing benefits
analysis, the 2017 Final Rule failed to
acknowledge the full measure of the
Mandatory Underwriting Provisions’
costs to consumers and competition.
Based on the 2017 Final Rule’s
simulations, these unacknowledged
costs may have dramatic effects.235
Accordingly, the Bureau concludes that
the 2017 Final Rule should not have
relied on the principal step-down
exemption in its assessment of
countervailing benefits to consumers
and competition, and therefore the 2017
Final Rule undervalued the identified
practice’s benefits to consumers and
competition.
2. Effect of Undervaluing Countervailing
Benefits
In the 2019 NPRM the Bureau
preliminarily determined that after fully
accounting for the countervailing
benefits—including benefits it
disregarded in the 2017 Final Rule
because of its reliance on the principal
step-down exemption and also other
benefits that the 2017 Final Rule
undervalued—that the substantial injury
from the identified practice that
consumers cannot reasonably avoid is
outweighed by the aggregate
countervailing benefits to consumers
and competition of that practice.
As the 2017 Final Rule noted and the
2019 NPRM reiterated, the relevant
question under section 1031(c)(1)(B) of
the Dodd-Frank Act is whether the
countervailing benefits ‘‘outweigh the
substantial injury that consumers are
unable reasonably to avoid and that
stems from the identified practice.’’ 236
For purposes of the countervailing
benefits analysis, the 2019 NPRM
accepted the 2017 Final Rule’s
conclusion that there is injury that is
not reasonably avoidable (although
elsewhere the 2019 NPRM proposed to
withdraw that conclusion regarding
reasonable avoidability, and this rule
at 54602, 54591.
the 2017 Final Rule, when assuming the
existence of the conditional exemption, the Bureau
estimated that the Mandatory Underwriting
Provisions would decrease total covered loan
volume by 71 to 76 percent. But without the
conditional exemption, the Bureau estimated a
reduction of loan volume of approximately 92 to 93
percent. Id. at 54826.
236 82 FR 54472, 54602 (emphasis added).
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235 In
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withdraws that conclusion for the
reasons described in part V.B). The 2019
NPRM noted that the 2017 Final Rule
approached the countervailing benefits
analysis by first weighing the relevant
injury in the aggregate, then weighing
countervailing benefits in the aggregate,
and then assessing which of the two
predominates.237 As both the 2017 Final
Rule and the 2019 NPRM explained, the
substantial, not-reasonably-avoidable
injury ‘‘is weighed in the aggregate,
rather than simply on a consumer-byconsumer basis,’’ and conversely ‘‘the
countervailing benefits to consumers are
also measured in the aggregate, and the
Bureau includes the benefits even to
those consumers who, on net, were
injured.’’ 238
a. Countervailing Benefits to Consumers
The Bureau’s Proposal
In the 2017 Final Rule and the 2019
NPRM, the Bureau analyzed the
countervailing benefits separately for
three segments of consumers, defined by
their ex post behavior: Repayers (those
who repay a covered short-term or
longer-term balloon-payment loan when
due without the need to reborrow
within 30 days); reborrowers (those who
eventually repay the loan but after one
or more instances of reborrowing); and
defaulters (those who default either on
an initial loan or on a subsequent loan
that is part of a sequence of loans).239
In the 2019 NPRM, the Bureau
requested comment on whether these
were the appropriate categories to use to
analyze the existence of countervailing
benefits.
Repayers. In between 22 percent and
30 percent of payday loan sequences 240
and a smaller slice of vehicle title
sequences,241 borrowers obtain a single
loan, repay it in full when first due, and
do not reborrow again for a period of 14
to 30 days thereafter. In conducting the
countervailing benefits analysis in the
2017 Final Rule with respect to
repayers, the Bureau did not suggest
that the identified practice was without
benefit to these repayers. Rather, the
Bureau’s countervailing benefits
analysis in the 2017 Final Rule
237 Id.
238 Id.
at 54591.
at 54599–600.
240 See Supplemental Findings at 120. The higher
number uses a 14-day definition of loan sequence
and thus includes consumers who repay their first
loan and do not borrow within the ensuing two
weeks. The lower number uses a 30-day definition
and thus counts only those who do not reborrow
within 30 days after repayment.
241 See Bureau of Consumer Fin. Prot., SinglePayment Vehicle Title Lending, at 11 (May 2016),
https://files.consumerfinance.gov/f/documents/
201605_cfpb_single-payment-vehicle-titlelending.pdf (11 to 13 percent).
239 Id.
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effectively acknowledged the identified
practice had benefits for some repayers
because the Rule recognized that it was
important to avoid ‘‘false negatives,’’
i.e., consumers who in fact have the
ability to repay but who could not
establish it ex ante.242 However, the
Bureau determined that these
countervailing benefits were ‘‘minimal,’’
in part because the Bureau anticipated
that lenders would make substantially
all the loans permitted by the
Mandatory Underwriting Provisions of
the 2017 Final Rule and in part because
the Bureau believed that the principal
step-down exemption would mitigate
any false negative concerns.243
In the 2019 NPRM, the Bureau
preliminarily determined that in the
2017 Final Rule it understated the risk
that, under the mandatory underwriting
requirements, some consumers who
would be repayers and would benefit
from receiving a loan would nonetheless
be denied a loan. According to the 2019
NPRM, this risk arises in part from the
difficulty some borrowers may have in
proving their ability to repay and in part
from the fact that some lenders may
choose to ‘‘over-comply’’ in order to
reduce their legal exposure. Although
the 2017 Final Rule minimized the
possibility that lenders would take a
‘‘conservative approach . . . due to
concerns about compliance risk,’’ 244 the
Bureau preliminarily concluded in the
2019 NPRM that somewhat greater
weight should be placed on this risk. In
reaching this preliminary
determination, the Bureau cited its
experience in other markets which
indicates that some lenders generally
seek to take steps to avoid pressing the
limits of the law.
Moreover, from the perspective of the
repayers, the 2019 NPRM stated there
may also be significant effects of
requiring lenders to make ability-torepay determinations that might be
termed ‘‘system’’ effects. As previously
noted, the 2017 Final Rule’s assessment
of benefits and costs estimated that, if
covered short-term or longer-term
balloon-payment loans could be made
only to those consumers with an ability
to repay in a single installment without
reborrowing, lenders would not make
upwards of 90 percent of all loans and
of course not receive revenue from loans
that are not made. At a minimum, the
2019 NPRM stated that would lead to a
vast constriction of supply. The Bureau
in the 2019 NPRM preliminarily
determined that a 90 percent reduction
in revenue would produce at least a
242 See
82 FR 54472, 54603–04.
243 Id.
244 Id.
at 54603.
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corresponding reduction in supply 245
and could have even a more profound
effect if the remaining revenue were
insufficient for lenders to remain in
operation using their current business
model. In other words, the Bureau
preliminarily believed that one of the
countervailing benefits of permitting
lenders to engage in the identified
practice is that it makes it possible to
offer loans on a wide-scale basis to the
repayers. According to the 2019 NPRM,
prohibiting such lending will
necessarily decrease the ability of the
repayers to obtain covered short-term
and longer-term balloon-payment loans.
Reborrowers. As the Bureau noted in
the 2017 Final Rule, over 55 percent of
both payday and vehicle title sequences
result in the consumer reborrowing one
or more times before finally repaying
and not borrowing again for 30 days.246
The Bureau acknowledged that some of
these borrowers who are unable to repay
in a single installment (i.e., without
reborrowing) may nonetheless benefit
from having access to covered shortterm and longer-term balloon-payment
loans because the borrowers may be
income-smoothing across a longer time
span. These borrowers also may benefit
because they may face eviction, overdue
utility bills, or other types of expenses,
with paying such expenses sometimes
creating benefits for consumers that
outweigh the costs associated with the
payday loan sequence. But the Bureau
in the 2017 Final Rule stated that the
principal step-down exemption—which
it said is ‘‘worth emphasizing’’ in this
context—would ‘‘reduc[e] the
magnitude’’ of the countervailing
benefits flowing from the identified
practice.247 After taking into account
this reduction, the Bureau in the 2017
Final Rule concluded, however, that the
remaining countervailing benefits were
outweighed by the injury to those
reborrowers who find themselves
‘‘unexpectedly trapped in extended loan
sequences.’’ 248
The 2019 NPRM stated that, on its
own terms, this reasoning has no
applicability with respect to vehicle title
reborrowers for whom the principal
step-down exemption would not be
available and who thus would lose the
ability to income smooth over more than
one vehicle title loan or deal with the
expenses referenced above. According
id. at 54817, 54842 (estimating that the
2017 Final Rule as a whole, including the principal
step-down exemption, would reduce loan volume
by between 62 and 68 percent and would result in
a corresponding reduction in the number of retail
outlets).
246 Id. at 54605.
247 Id. at 54606.
248 Id. at 54605.
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44409
to the 2019 NPRM, this reasoning
similarly does not apply to payday loan
reborrowers who cannot qualify for the
principal step-down exemption, for
example, borrowers who find that they
have a new need for funds but have
already exhausted the various
borrowing limits imposed by the
exemption.249 Moreover, the Bureau
preliminarily determined that this
reliance on the principal step-down
exemption was inappropriately
considered.
The Bureau in the 2019 NPRM
preliminarily believed that the
consequences of this reliance on the
exemption are profound. Under an
ability-to-repay regime, assuming the
systemic effects did not eliminate the
industry completely, the 2019 NPRM
stated that most of the 58 percent of
payday borrowers or 55 percent of
vehicle title borrowers would lose
access to covered short-term and longerterm balloon-payment loans because
reborrowers lack the ability to repay the
loans according to their terms. To the
extent some consumers passed an
ability-to-repay assessment and needed
to reborrow, the 2019 NPRM stated that
most would be precluded from taking
out a second loan. In other words, the
practice of making covered short-term or
longer-term balloon-payment loans to
consumers who cannot satisfy the
mandatory underwriting requirement is
the linchpin of enabling the reborrowers
to access these types of loans.
The Bureau acknowledged in the 2019
NPRM that among reborrowers there is
a sizable segment of consumers who end
up in extended loan sequences before
repaying and thus incur significant
costs. But even for these borrowers,
there is some countervailing benefit in
being able to obtain access to credit,
typically through the initial loan, that is
used to meet what the Bureau
acknowledged in the 2017 Final Rule to
be an ‘‘urgent need for funds’’ 250—for
example, to pay rent and stave off an
eviction or a utility bill and avoid a
shutdown, or to pay for needed medical
care or food for their family.251
Moreover, over 35 percent of the
reborrowers required only between one
and three additional loans before being
able to repay and stop borrowing for 30
days and an additional almost 20
249 12
CFR 1041.6.
FR 54472, 54620.
251 As discussed in the Rule, id. at 54538, surveys
which ask borrowers about the reasons for
borrowing may elicit answers regarding the
immediate use to which the loan proceeds are put
or about a past expense shock that caused the need
to borrow, making interpretation of the survey
results difficult. But what seems beyond dispute is
that these borrowers have a pressing need for
additional money.
250 82
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percent of the reborrowers required
between four and six additional loans
before being able to repay.252 The 2019
NPRM stated that these shorter-term
reborrowers would forgo any benefits
associated with these additional loans if
lending was limited to those who can
demonstrate an ability to repay in a
single installment.
In sum, the Bureau preliminarily
believed that there are substantial
countervailing benefits for reborrowers
that flow from the identified practice
that the Bureau preliminarily
determined should not have been
discounted in the 2017 Final Rule by
relying on the principal step-down
exemption.
Defaulters. The third group of
borrowers discussed in the 2017 Final
Rule were those whose sequences end
in default. As to this group, representing
20 percent of payday borrowers 253 and
32 percent of vehicle title borrowers,254
the Bureau in the 2017 Final Rule
acknowledged that ‘‘these borrowers
typically would not be able to obtain
loans under the terms of the final rule’’
(and thus the Bureau did not rely on the
principal step-down exemption in
assessing the effects on these
consumers).255 The Bureau went on to
note that ‘‘losing access to nonunderwritten credit may have
consequences for some consumers,
including the ability to pay for other
needs or obligations’’ and the Bureau
stated that this is ‘‘not an insignificant
countervailing benefit.’’ 256 But the
Bureau went on to state that these
borrowers ‘‘are merely substituting a
payday lender or title lender for a
preexisting creditor’’ and obtaining ‘‘a
temporary reprieve.’’ 257
According to the 2019 NPRM, it is not
necessarily true that all defaulters use
their loan proceeds to pay off other
outstanding loans; at least some use the
money to purchase needed goods or
services, such as medical care or food.
Moreover, the Bureau expressed
concern that in the 2017 Final Rule it
minimized the value to consumers of
substituting a payday lender for other
creditors, such as a creditor with the
power to initiate an eviction or shut off
utility services or refuse medical care.
The Bureau also expressed concern that
the 2017 Final Rule minimized the
252 See
Supplemental Findings at 122 (fig. 36).
id. at 120 (tbl. 23).
254 See Bureau of Consumer Fin. Prot., SinglePayment Vehicle Title Lending, at 11 (May 2016),
https://files.consumerfinance.gov/f/documents/
201605_cfpb_single-payment-vehicle-titlelending.pdf.
255 82 FR 54472, 54604.
256 Id.
257 Id. at 54604, 54590.
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value of a ‘‘temporary reprieve’’ which
may enable defaulters to stave off more
dire consequences than the
consequences of defaulting on a payday
loan.
Conclusion. In sum, the Bureau
preliminarily concluded that the 2017
Final Rule’s approach to its
countervailing benefits analysis caused
it to underestimate the countervailing
benefits to consumers in terms of access
to credit that flows from the identified
practice. According to the 2019 NPRM,
it is not just the benefit of access to
credit for those payday loan consumers
who would lose access under the
principal step-down exemption that
should be weighed; rather the systemic
effects of ending the identified practice
and eliminating over 90 percent of all
payday and vehicle title loans would
adversely affect the interests of all
borrowers—including even those with
the ability to repay. Furthermore, the
Bureau preliminarily believed that it
underestimated the benefits of access to
credit for a large segment of reborrowers
and even for some defaulters—including
the benefits of a temporary reprieve, of
substituting a payday or vehicle title
lender for some other creditor and, for
the reborrowers, the benefit of
smoothing income over a period longer
than a single two-week or 30-day loan.
The Bureau preliminarily determined
that after giving appropriate weight to
the interests of all affected consumers,
the countervailing benefits to consumers
that flow from the practice of making
covered short-term and longer-term
balloon-payment loans without making
an ability-to-repay determination
outweigh the substantial injury that the
Bureau considered in the 2017 Final
Rule to not be reasonably avoidable by
consumers. The Bureau invited
comment on these preliminary
conclusions.
Comments Received
Industry, trade association, tribal, and
other commenters largely agreed that
the 2017 Final Rule undervalued
benefits to consumers. Commenters
stated that the 2017 Final Rule will limit
access to short-term credit, particularly
for financially distressed consumers
who lack access to traditional forms of
credit, including credit from depository
institutions. A commenter noted that
lenders will not be able to obtain
information for underwriting for
‘‘unscorable’’ consumers without credit
files.
These commenters stated that the
2017 Final Rule would cause consumers
to resort to unregulated or more
expensive credit alternatives, including
overdraft protection or pawnbrokers.
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Commenters stated that consumers may
suffer financial harms, including
overdrawing accounts, bouncing checks,
missing payments, accruing late fees, or
defaulting. Commenters cited studies of
Georgia, North Carolina, and New York
as evidence that consumers suffer
adverse consequences where payday
loans are restricted.258
These commenters also responded to
the 2019 NPRM’s preliminary
reassessment of the 2017 Final Rule’s
effects on specific groups of consumers,
including reborrowers and defaulters.259
These commenters agreed that the 2017
Final Rule underestimated the benefit of
covered loans to reborrowers, including
hourly or gig economy workers with
fluctuating incomes, who benefit from
income smoothing and the ability to
access credit in an emergency. These
commenters agreed that the 2017 Final
Rule minimized the value of the
temporary reprieve to defaulters.
Other commenters stated that the
2019 NPRM appropriately emphasizes
consumer sentiment and a balanced
consideration of consumer sentiment
measures, including complaints, which
suggests that payday loans benefit
consumers.
By contrast, some consumer groups
and other commenters characterized
covered loans as dangerous financial
products that provide no productive
economic value and trap vulnerable
consumers in cycles of debt. These
commenters stated that covered lenders
do not provide access to productive
credit that helps bridge a short-term
financial shortfall—they flip borrowers
from one unaffordable loan to another
for as long as possible. Some other
commenters similarly stated that payday
loan use is often driven by insufficient
income to cover expenses and that
small-dollar loans do not fix this
underlying problem—they exacerbate it
by becoming an additional liability.
Other commenters stated that the
2019 NPRM mischaracterized the 2017
Final Rule’s findings with respect to the
Mandatory Underwriting Provisions’
258 See Donald P. Morgan & Michael R. Strain,
How Payday Credit Access Affects Overdrafts and
Other Outcomes, 44 J. Money Credit & Banking 519,
521 (2012), and Payday Holiday: How Households
Fare after Payday Credit Bans (Feb. 2008), https://
www.newyorkfed.org/medialibrary/media/research/
staff_reports/sr309.pdf (borrowers were more likely
to experience an adverse change after a decrease in
the number of payday lenders in Oregon); Piotr
Danisewicz & Ilaf Elard, The Real Effects of
Financial Technology: Marketplace Lending and
Personal Bankruptcy (July 2018), https://
www.ssrn.com/abstract=3208908 (the reduction in
marketplace credit following Madden v. Midland
Funding, LLC, 786 F.3d 246 (2d Cir. 2015), led to
an 8 percent increase in personal bankruptcies in
New York and Connecticut).
259 See 84 FR 4252, 4272–74.
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impact on access to credit. They
claimed that the 2019 NPRM
paraphrased the 2017 Final Rule’s
calculations of reduced covered loan
volume and lender revenue to imply a
commensurate reduction in access to
credit, but the 2017 Final Rule did not
reach this conclusion.
Some commenters stated that the
2017 Final Rule would preserve
appropriate access to covered loans.
With respect to the specific covered
loan consumers (i.e., repayers,
reborrowers, and defaulters) that the
2019 NPRM identified, at least one
commenter stated that repayers would
maintain access to covered loans.
Another commenter stated that shortterm reborrowers could continue to take
out one or two loans to address a
temporary financial hardship under the
2017 Final Rule. At least one
commenter stated that the inability to
access covered loans would be
concentrated among consumers who
lack the ability to repay and are most
likely to be injured by covered loans.
Some commenters stated that the
2017 Final Rule would not prevent
consumers from accessing credit and
non-credit alternatives to covered loans.
These commenters stated that the
experience of consumers in States with
payday loan restrictions evidence this
fact. Some commenters stated that the
2019 NPRM failed to take into account
that covered lenders can shift to
installment or longer-term loans, which
was the experience in some States after
payday lending restrictions were
adopted, including Colorado, Illinois,
New Mexico, Ohio, Texas, Virginia, and
Wisconsin.260 For example, a
commenter noted that a prominent
payday lender recently disclosed that
only 19 percent of its revenue came
from multi-payment loans in 2010, but
by the third quarter of 2018, that figure
had quadrupled to 77 percent.261
Another commenter stated that in at
least 26 of the 32 States where payday
and vehicle title lenders operate today,
non-bank small-dollar lenders can
already offer loans with terms beyond
45 days.262
A commenter faulted the 2019 NPRM
for attempting to compare the number of
260 These comments tend to support the
conclusion that consumers can turn to alternative
products to avoid injury from taking out a covered
loan.
261 See CURO Group, Presentation at Jefferies
Consumer Finance Summit, at 9 (Dec. 2018),
https://ir.curo.com/events-and-presentations.
262 See Pew Charitable Trusts, From Payday to
Small Installment Loans: Risks, opportunities, and
Policy Proposals for Successful Markets (Aug.
2016), https://www.pewtrusts.org/en/research-andanalysis/issue-briefs/2016/08/from-payday-tosmall-installment-loans.
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consumers in specific groups who are
benefitted and harmed by covered
loans—i.e., repayers, reborrowers, and
defaulters—without considering the
magnitude of harm across those groups.
According to this commenter, even if
the number of consumers that receive
some benefit from covered loans
exceeds the number of harmed
consumers, the product may not
produce a countervailing benefit if the
harm experienced by consumers is
sufficiently severe.
Some commenters stated that the
2019 NPRM did not introduce new
evidence in support of the proposed
reassessment of countervailing benefits
to consumers. These commenters stated
that the 2019 NPRM fails to provide any
data to dispute the 2017 Final Rule’s
findings and instead speculates about
alternative scenarios and differences in
weights to hypothetical benefits. A
commenter argued that the 2019
NPRM’s approach to countervailing
benefits is inconsistent with the
proposal’s emphasis on robust and
reliable evidence in other contexts in
within the 2019 NPRM.
Final Rule
After reviewing the comments, the
Bureau concludes that the 2017 Final
Rule underestimated the identified
practice’s countervailing benefits to
consumers in terms of access to credit
that flows from the identified practice.
At the outset, the Bureau
reemphasizes one point made by the
2017 Final Rule regarding how evidence
is considered in a countervailing
benefits analysis. Consistent with the
approach to unfairness under the FTC
Act, the Bureau does not ‘‘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.’’ 263 The
Bureau does ‘‘carefully evaluate the
benefits and costs of each exercise of its
unfairness authority, gathering and
considering reasonably available
evidence.’’ 264 But as case law regarding
FTC unfairness rules has recognized,
‘‘much of a cost-benefit analysis
requires predictions and
speculation.’’ 265 The 2017 Final Rule’s
countervailing benefits analysis was
indeed limited and qualitative in some
respects, which compelled the Bureau
in the 2017 Final Rule to make some
predictions and speculations.
263 S. Rep. No. 103–130, at 13 (1994) (quoted at
82 FR 54472, 54521 n.386).
264 Id.
265 Pa. Funeral Dirs. Ass’n v. FTC, 41 F.3d 81, 91
(3d Cir. 1994) (quoted at 82 FR 54472, 54521 n.386).
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44411
Limitations in evidence may require
prediction or speculation. Such
prediction or speculation is a matter of
degree based on the evidence available.
The Bureau’s reconsideration is based
on the same record as the 2017 Final
Rule.
The Bureau is not persuaded by
commenters that the approach to
evidence in the context of reasonable
avoidability is inconsistent with the
approach to evidence in the context of
countervailing benefits. As explained in
part V.B.2, the Bureau has decided to
require robust and reliable evidence in
order to conclude that consumers
cannot reasonably avoid injury, in light
of the dramatic impacts of the
Mandatory Underwriting Provisions on
the payday market and in turn
consumer choice. But for purposes of
this countervailing benefits analysis, the
Bureau assumes that the relevant group
of longer-term borrowers cannot
reasonably avoid injury, and so those
concerns about consumer choice are not
determinative of the quality and
quantity of evidence that is appropriate
when weighing countervailing benefits.
Instead, the Bureau must decide
whether the relevant detrimental effects
or beneficial effects of the identified
practice predominate, including those
effects that are significant without being
quantifiable.
Turning to the substance of the
countervailing benefits analysis, the
Bureau notes that commenters disagreed
on whether the 2017 Final Rule would
result in reduced access to credit.
Industry and consumer groups largely
divided along this question. After
considering the evidence cited in the
2019 NPRM and information submitted
in comments to the proposal, the Bureau
concludes that the 2017 Final Rule
would dramatically reduce access to
covered loans to the detriment of
consumers. As the 2017 Final Rule
explained, a Bureau simulation that
excluded the principal step-down
exemption estimated that the ability-torepay requirement would reduce
storefront and online payday loan
volume and lender revenue by 92 to 93
percent.266 The simulation also
estimated that restrictions on short-term
vehicle title lending will reduce loan
volume and revenue by 89 and 93
percent.267 Given these dramatic
impacts, the Bureau has substantial
concerns about the ongoing viability of
the covered loan market more broadly
and its effects on consumer access to
credit.
266 82
267 Id.
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As discussed in part V.B.1, the Bureau
concludes that consumers would have
access to credit and non-credit covered
loan alternatives if the 2017 Final Rule
went into effect. These would include a
variety of payday loan alternatives and
credit offered by fintechs, credit unions,
and other mainstream financial
institutions.
But the Bureau also concludes that
the 2017 Final Rule’s systemic impacts
on the payday market, absent the
principal step-down exemption, would
prevent consumers who prefer covered
loans from accessing them,
notwithstanding the availability of other
products that they may not prefer. For
purposes of this countervailing benefits
analysis, the Bureau accepts the 2017
Final Rule’s conclusion that the longerterm borrowers identified by the Bureau
cannot reasonably avoid taking out
loans. Thus, for purposes of this
analysis, the Bureau does not posit that
these longer-term borrowers prefer
payday loans. But the 2017 Final Rule
also emphasized that it did not disagree
with Professor Mann that there are also
‘‘borrowers who remain in debt for a
relatively short period, who constitute a
majority of all borrowers, and who do
not appear to systematically fail to
appreciate what will happen to them
when they re-borrow.’’ 268 As the Rule
noted, there are ‘‘many individuals’’
who ‘‘appear to have anticipated short
durations of use with reasonable
accuracy.’’ 269 Many borrowers appear to
prefer payday loans to other products
that are currently available to them.
This could be for a number of reasons,
depending upon the individual,
including the speed and convenience of
the borrowing process, easy loan
approval, and the ability to take out a
loan without a traditional credit check.
The available data does not explain the
precise characteristics of borrowers’
preferences for payday loans compared
to other current alternatives, and there
is also some uncertainty about how
those alternatives may evolve in the
future. Nevertheless, the Bureau
believes that the Rule’s large impacts on
the payday market, absent the principal
268 82
FR 54569.
at 54570. Research by the Bureau found
that 80 percent to 85 percent of payday borrowers
succeed in repaying their loans, of which between
22 percent and 30 percent do so after receiving a
single loan while the remainder repaid after
reborrowing one or more times. The Bureau found
that borrowers end up taking out seven or more
loans in a row 27 to 33 percent of the time. Bureau
of Consumer Fin. Prot., Supplemental findings on
payday, payday installment, and vehicle title loans
and deposit advance products, at 120, 123 (June
2016), https://files.consumerfinance.gov/f/
documents/Supplemental_Report_060116.pdf.
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step-down exemption, will deprive
them of their preferred form of credit.
The Bureau also finalizes its more
specific preliminary determinations
regarding the 2017 Final Rule’s effects
on certain segments of covered loan
users: Repayers, reborrowers, and
defaulters. With respect to repayers, the
Bureau concludes that the 2017 Final
Rule understated the risk that repayers
would be denied a loan and that a
countervailing benefit of permitting
lenders to engage in the identified
practice is that it makes it possible to
offer loans on a wide-scale basis to
repayers. With respect to reborrowers,
the Bureau concludes that there are
substantial countervailing benefits that
flow from the identified practice, such
as income-smoothing and avoiding a
greater harm (e.g., eviction, overdue
utility bills, or other types of expenses),
which the 2017 Final Rule discounted.
With respect to defaulters, the Bureau
concludes that the 2017 Final Rule
erroneously minimized the value of the
temporary reprieve.
In support of these conclusions, the
Bureau notes that industry commenters
who provided feedback on the topic
uniformly agreed with the proposed
reassessment in the 2019 NPRM of the
benefits to repayers, reborrowers, and
defaulters. The Bureau acknowledges
that consumer group commenters
generally disagreed with the 2019
NPRM’s reweighing of benefits to
certain groups, but these commenters
did not provide evidence or raise
arguments that lead the Bureau to
reconsider its preliminary
determinations. In particular, the
Bureau is unpersuaded by a comment
that the 2017 Final Rule would preserve
appropriate access to covered loans for
repayers and reborrowers and only
restrict covered loans among defaulters
who are most likely to be injured by
covered loans. Given the 2017 Final
Rule’s dramatic impacts—which itself
estimated would extinguish 89 to 93
percent of covered loan volume—the
Bureau does not believe that there
would be a viable market to provide
covered loans to repayers and
reborrowers because most lenders
(especially those that only offer covered
loans) could not continue to provide
covered loans in such a shrunken
market.
With respect to a comment that the
2019 NPRM’s proposed reassessment
did not consider the magnitude of harm
across groups (i.e., the harm suffered by
defaulters is greater than the benefit to
repayers and reborrowers), the Bureau
disagrees. The Bureau has consistently
emphasized, in both the 2017 Final Rule
and the 2019 NPRM, that the
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appropriate approach to this analysis is
to compare the aggregate substantial
injury that is not reasonably avoidable
across all consumers experiencing such
injury with the aggregate benefits to all
consumers who are benefitted,
quantifying aggregate injury and
benefits if feasible but relying on
qualitative analysis if it is not. This is
different from simply counting the
numbers of individual consumers who
experienced a net harm or net benefit.
The 2019 NPRM did not reconsider the
2017 Final Rule’s characterization of the
aggregate injury. In reconsidering the
aggregate benefits, the 2019 NPRM
provided a qualitative description of
why the Bureau is reconsidering the
magnitudes of the countervailing
benefits to repayers, reborrowers, and
defaulters.
The Bureau notes that although the
2017 Final Rule would reduce access to
covered loans, commenters did not
provide evidence that the rule would
drive consumers toward unregulated or
more expensive alternatives. The 2017
Final Rule determined that limiting the
number of covered loans would not lead
to more unregulated or illegal loans, and
the Bureau concludes that the
evidentiary record is not sufficient to
revoke this specific finding.270
The Bureau is also unpersuaded by
the specific argument that consumer
sentiment measures, such as
purportedly low volumes of consumer
complaints about payday loans, which
are typically made without an ability-torepay assessment, are indicative of
consumer benefit. As the Bureau has
suggested before, this argument is based
on a flawed premise. An absence of
consumer complaints does not lead to
an inference of consumer benefit. There
are many reasons why consumers do not
complain even though they may not
benefit from a product, or, more
specifically here, from a practice
relating to a product.
The Bureau also disagrees with
commenters that argued that the 2019
NPRM mischaracterized the 2017 Final
Rule’s findings. In asserting that the
2017 Final Rule would reduce payday
loan revenue and volume by 89 to 93
percent of all loans, the Bureau based
this statement on simulations from the
2017 Final Rule.271 By using the phrase
‘‘of all loans,’’ the 2019 NPRM
implicitly referred to all ‘‘covered’’
loans, which are at issue in this
rulemaking, not access to credit
270 82 FR 54472, 54610 (citing Pew Charitable
Trusts, Payday Lending in America: Who Borrows,
Where They Borrow, and Why, at 19–24, https://
www.pewtrusts.org/-/media/legacy/uploadedfiles/
pcs_assets/2012/pewpaydaylendingreportpdf.pdf).
271 Id. at 54817, 54834–35.
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generally. Although the 2019 NPRM
specifically discussed covered loans in
this passage, the Bureau reiterates its
broader concerns that the 2017 Final
Rule’s dramatic impacts on revenue and
volume will critically undermine the
viability of covered loans to the
detriment of consumers.
Accordingly, the Bureau concludes
that the 2017 Final Rule underestimated
the identified practice’s benefits to
consumers. The 2017 Final Rule found
that ‘‘a substantial population of
borrowers is harmed, many severely,’’
by the identified unfair practice.272 The
Bureau is conscious of the 2017 Final
Rule’s findings regarding that injury and
has not reconsidered them in this
rulemaking. Nevertheless, the 2017
Final Rule believed that identifying an
unfair practice with the goal of
protecting longer-term borrowers would
have relatively little cost for the broader
population of borrowers who take out
covered loans. But this analysis was
reliant upon a principal step-down
exemption that obscured the true impact
on borrowers if the identified unfair
practice were proscribed, and it placed
too little weight on the benefits to
borrowers from access to their preferred
form of credit.
b. Countervailing Benefits to
Competition
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The Bureau’s Proposal
As with its discussion of the
countervailing benefits to consumers,
the 2017 Final Rule analyzed the
countervailing benefits to competition
through the lens of the principal stepdown exemption. Specifically, the 2017
Final Rule acknowledged that ‘‘a certain
amount of market consolidation may
impact . . . competition’’ but asserted
that this effect would be modest and
would not reduce meaningful access to
credit because of the principal stepdown exemption.273 For the reasons
previously discussed, in the 2019 NPRM
the Bureau preliminarily determined
that the Bureau should not have
factored into its analysis this exemption
but rather should have analyzed the
effect on competition from the
identified practice. Lenders would not
be able to make upwards of 90 percent
of the loans they would be able to make
if the identified practice were not
prohibited. The Bureau preliminarily
determined in the 2019 NPRM that this
decrease in lending activity would have
a dramatic effect on competition,
especially if lenders cannot stay in
272 Id.
273 Id.
business in the face of such decreases in
revenue from lending.
The Bureau recognized in the 2019
NPRM that because of State-law
regulation of interest rates, the effect of
reduced competition may not manifest
itself in higher prices. However,
according to the 2019 NPRM, payday
and vehicle title lenders compete on
non-price dimensions and a rule which
caused at least a 90 percent reduction in
lending would likely materially impact
such competition.
The Bureau also noted that, as the
2017 Final Rule recognized, a number of
innovative products are seeking to
compete with traditional short-term
lenders. Some of these products assist
consumers in finding ways to draw on
the accrued cash value of wages that
have been earned but not yet paid,
while other products take the form of
extensions of credit.274 Other innovators
are also providing emergency assistance
at no cost to consumers through a tip
model.275 The 2017 Final Rule included
exclusions to accommodate these
emerging products, thereby recognizing
that providers offering these products
were doing so without assessing the
consumers’ ability to repay without
reborrowing. The Bureau therefore
preliminarily believed that a prohibition
of making short-term or longer-term
balloon-payment loans without
assessing consumers’ ability to repay
would constrain innovation in this
market.
The Bureau preliminarily determined
in the 2019 NPRM that these
countervailing benefits to competition
provide an additional reason to
conclude that the countervailing
benefits to consumers and to
competition outweigh the substantial
injury that the Bureau considered in the
2017 Final Rule to not be reasonably
avoidable by consumers. The Bureau
invited comment on these preliminary
conclusions.
Comments Received
Some commenters stated that the
2017 Final Rule would negatively
impact competition by reducing the
number of covered lenders. At least one
commenter stated that ability-to-repay
determination requirements would
impose burdensome manual
administrative processes and
information gathering requirements for
income verification, which are not costefficient for small-dollar lending. A
commenter stated that the 2017 Final
Rule would be particularly burdensome
for small entities. Some commenters
at 54591.
at 54611–12.
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274 12
275 12
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CFR 1041.3(d)(8).
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44413
criticized the Bureau for not adequately
studying the economic impacts of the
2017 Final Rule. For example, a
commenter asserted that the Bureau
never conducted a ‘‘profitability
analysis’’ to determine how many stores
would stay in business if the Mandatory
Underwriting Provisions went into
effect.
Two academic commenters stated that
fewer market participants may lead to a
lower supply of credit and higher prices
because loan prices and loan sizes do
not invariably rise to State-level
maximums. Other commenters agreed
that the price of credit would increase
and stated that lenders may limit credit
approvals to borrowers with higher
credit profiles.276 Some commenters
stated that fewer market participants
would increase consumer search costs,
particularly for rural consumers.277
Several commenters stated that the
2017 Final Rule would constrain
innovation, particularly in credit risk
models and underwriting strategies.
Some commenters stated that the 2017
Final Rule could hinder innovation at
community banks and credit unions,
even though these institutions largely
are exempt from the ability-to-repay
requirements pursuant to 12 CFR
1041.3(e)(4) and (f), and that it is crucial
that the Bureau provide these
institutions with the flexibility to
underwrite and structure small-dollar
loans. A trade association stated that the
elimination of the 2017 Final Rule’s
Mandatory Underwriting Provisions
will likely encourage credit unions and
banks to adopt short-term, small-dollar
lending programs.
In contrast, other commenters stated
that the 2017 Final Rule would have a
limited impact on competition. As
discussed above, some commenters
276 A commenter noted that when the UK
Financial Conduct Authority capped interest rates
on payday loans in 2015, the ensuing 60 percent
plunge in loan originations was accompanied by a
decline in the share of low-borrowers, from 50
percent to 35 percent of loans. Fin. Conduct Auth.,
High-Cost Credit: Including Review of the High-Cost
Short-Term Credit Price Cap (July 2017), https://
www.fca.org.uk/publication/feedback/fs17-02.pdf;
Social Market Foundation, A Modern Credit
Revolution: An Analysis of the Short-Term Credit
Market (2016), https://cfa-uk.co.uk/wp-content/
uploads/2016/11/SMF-Report-AKT10796.pdf.
277 Commenters cited several studies to suggest
that lenders in rural areas would see a steeper
revenue decline than those in urban areas. See
Thomas Miller & Onyumbe Enumbe Ben Lukongo,
Adverse Consequences of the Binding
Constitutional Interest Rate Cap in the State of
Arkansas (Oct. 2017), https://www.mercatus.org/
publications/constitutional-interest-rate-caparkansas; Charles River Assocs., Economic Impact
on Small Lenders of the Payday Lending Rules
under Consideration by the CFPB (2015), https://
www.crai.com/publication/economic-impact-smalllenders-payday-lending-rules-under-considerationcfpb.
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believed that the 2019 NPRM
mischaracterized the 2017 Final Rule,
which did not conclude that a decrease
in covered loan volume and revenues
would lead to a commensurate decrease
in overall credit availability. Other
commenters also stated that the 2019
NPRM adduced no new evidence
regarding the number of storefront
payday lenders that will be affected by
the 2017 Final Rule.
Some commenters stated that, even if
the 2017 Final Rule resulted in fewer
covered lenders, consumers would not
be negatively affected. In reaction to the
2019 NPRM, an academic commenter
accused the Bureau of confusing
‘‘competitors’’ with ‘‘competition.’’
Some commenters stated that the 2017
Final Rule found that while
consolidation may occur in the market,
competitiveness would not be affected
in the form of higher consumer prices—
because lenders uniformly charge the
maximum permitted by State law—or
the distance that consumers would have
to travel to procure loans.278 One
commenter stated that a decrease in the
covered lenders and loan volume might
actually lead to healthier competition
that enhances consumer welfare.
According to the commenter, payday
lending is an unusual market in which
low barriers to entry and few unique
consumers per store result in
cannibalistic competition that drives up
prices. Citing the experience in
Colorado, the commenter stated that
with fewer lenders in the market, there
would be more borrowers per store and
lower prices per borrower as costs
would be amortized over a larger
borrower base.279
Some commenters stated that the
2017 Final Rule would benefit, not
hinder, innovation. These commenters
stated that payday lenders crowd out
alternative forms of credit by
disadvantaging lenders that underwrite
or provide more fulsome disclosures.
Some commenters state that restrictions
on covered loans creates space for
innovation for loans at various price
points and durations greater than 45
days, expanding access to manageable
credit, driving out inferior products, and
improving consumer choice over time.
A commenter cited a study to support
the notion that borrowers desire
alternatives to covered loans that can be
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278 82
FR 54472, 54601.
its reform, the number of payday
lenders in Colorado substantially contracted, but
the lending volume remained stable and the cost of
loans dropped. See Pew Charitable Trusts, Trial,
Error, and Success in Colorado’s Payday Lending
Reforms (Dec. 2014), https://www.pewtrusts.org/∼/
media/assets/2014/12/pew_co_payday_law_
comparison_dec2014.pdf.
279 Following
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repaid in longer terms and smaller
installments.280
Other commenters noted that in the
2019 NPRM the Bureau did not offer
evidence showing how not assessing
ability-to-repay improves the
availability of affordable products for
consumers. A commenter stated that in
unregulated States, there is no evidence
that increased competition creates better
products for consumers. A commenter
stated that without guardrails and
regulation, revoking the 2017 Final Rule
would encourage new types of business
models that harm consumers.
Final Rule
The Bureau concludes that the
reduction in covered loan volume and
revenue resulting from the Mandatory
Underwriting Provisions would result in
a corresponding reduction in
competition in the covered loan market.
The 2017 Final Rule’s estimates
predicted that without the conditional
exemption covered loan revenue and
volume would fall by 89 to 93
percent.281 The Bureau determines that
competition inevitably would suffer
from a contraction in loan volume and
revenues of this magnitude. The 2017
Final Rule itself compels a conclusion
that this contraction will impact the size
of the covered loan market. According
to the 2017 Final Rule, ‘‘[to] the extent
that lenders cannot replace reductions
in revenue by adapting their products
and practices, Bureau research suggests
that the ultimate net reduction in
revenue will likely lead to contractions
of storefronts of a similar magnitude, at
least for stores that do not have
substantial revenue from other lines of
business. . . .’’ 282
The Bureau concludes that this
reduction in covered loan providers
would harm competition. As noted in
the 2019 NPRM, the Bureau recognizes
that higher loan prices may not
necessarily result from reduced
competition assuming that covered
lenders typically charge State-level
maximums so covered lenders generally
are unable lawfully to raise prices for
credit.283 But the reduction in covered
lenders may have effects on non-price
competition among lenders, including
competing on the basis of convenience
through number of locations, thereby
increasing consumer search costs when
280 See Pew Charitable Trusts, Payday Loan
Customers Want More Protections, Access to LowerCost Credit From Banks (Apr. 2017), https://
www.pewtrusts.org/en/research-and-analysis/issuebriefs/2017/04/payday-loan-customers-want-moreprotections-access-to-lower-cost-credit-from-banks.
281 82 FR 54472, 54817, 54834–35.
282 Id. at 54835.
283 84 FR 4252, 4274.
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seeking covered loans. This increase
will particularly affect rural consumers,
especially those with limited internet
access.
The Bureau also concludes that the
2017 Final Rule would constrain rapid
innovation in the market. The 2017
Final Rule would stifle lender
innovation, particularly in developing
credit risk models and underwriting
strategies that better meet both lenders’
and consumers’ needs. The Bureau
points to the remarkable innovation in
the short-term, small-dollar credit
market that has occurred in the absence
of the 2017 Final Rule’s Mandatory
Underwriting Provisions. The Bureau is
concerned that, if not revoked, the
Mandatory Underwriting Provisions
may stifle this activity. For example, the
Bureau determines that, as commenters
suggested, not revoking the Mandatory
Underwriting Provisions may hinder the
adoption of short-term, small-dollar
lending programs by lenders that adopt
new credit risk models and strategies.
These new methods do not appear to
meet or be likely to meet the specific
ability-to-repay requirements that were
set forth in the Mandatory Underwriting
Provisions of the 2017 Final Rule, and,
therefore, consumers might not be able
to choose these products if such
requirements were applicable.
Accordingly, the Bureau concludes
that the 2017 Final Rule undervalued
the identified practice’s benefits to
competition. The 2017 Final Rule would
reduce the number of lenders
nationwide, which would have nonprice effects, including increasing
consumer search costs. This increase
will particularly affect rural consumers,
especially those without internet access.
The Bureau also determines that the
2017 Final Rule would constrain
innovation, including in the
development of credit risk models and
underwriting strategies.
3. Conclusion on Countervailing
Benefits
Accordingly, the Bureau concludes
that the identified practice’s
countervailing benefits to consumers
and to competition must be reweighed.
After doing so, the Bureau concludes
that these countervailing benefits in the
aggregate outweigh any substantial, notreasonably-avoidable injury to
consumers where lenders make covered
loans to them without determining
consumers’ ability to repay those loans.
The 2017 Final Rule found that ‘‘a
substantial population of borrowers is
harmed, many severely,’’ by the
identified unfair practice.284 The Bureau
284 82
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assumes for purposes of this
countervailing benefits analysis the
2017 Final Rule’s findings regarding
that injury. Nevertheless, in its
countervailing benefits analysis, the
2017 Final Rule determined that
identifying an unfair practice with the
goal of protecting longer-term borrowers
would have relatively little cost for the
broader population of covered loan
users and for competition. But the 2017
Final Rule’s analysis relied on a
principal step-down exemption that
obscured the true impact of proscribing
the identified unfair practice, and it
undervalued the benefits to borrowers
from having access to their preferred
form of credit and to the benefits to
competition. Reconsidering these
factors, the Bureau concludes that these
countervailing benefits to consumers
and to competition, in the aggregate,
outweigh the relevant injury,285 and,
therefore, the identified practice does
not satisfy the final prong of the test for
unfairness under section 1031(c) of the
Dodd-Frank Act.
D. Conclusion on Unfairness
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Based on its analysis in parts V.B
through V.C above, the Bureau
concludes that it should no longer
identify an unfair under section 1031(c)
of the Dodd-Frank Act the practice set
out in § 1041.4. Three discrete and
independent grounds justify this
conclusion. First, as set out in part
V.B.1, the Bureau determined that the
2017 Final Rule should have applied a
different interpretation of the reasonable
avoidability element of unfairness under
section 1031(c)(1)(A) of the Dodd-Frank
Act. The Bureau concludes that the
findings of an unfair practice as
identified in § 1041.4 rested on
applications of section 1031(c) of the
Dodd-Frank Act that the Bureau should
no longer use given the identification of
better interpretations of these statutory
provisions.
Second, as set out in part V.B.2, the
Bureau determined that even under the
2017 Final Rule’s interpretation of
reasonable avoidability, the evidence
underlying this finding is insufficiently
robust and reliable.
Third, the Bureau also determines
that countervailing benefits to
consumers and to competition in the
aggregate outweigh the substantial
285 Because the Bureau is finalizing the 2019
NPRM’s conclusions that both the benefits to
consumers and the benefits to competition should
be weighed more heavily than in the 2017 Final
Rule, and that together they outweigh the relevant
injury, the Bureau need not decide whether the
benefits to consumers alone or the benefits to
competition alone would outweigh the relevant
injury.
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injury that is not reasonably avoidable
as identified in the 2017 Final Rule,
injury which the Bureau assumes for
purposes of this analysis. That is, as set
out in part V.C.1, the Bureau should
have excluded the principal step-down
exemption in its calculation of
countervailing benefits in the 2017 Final
Rule, and in light of this and other
factors, as set out in part V.C.2, the
countervailing benefits to the identified
practice outweigh substantial injury that
is not reasonably avoidable.
Based on these cumulative findings,
the Bureau revokes the portion of
§ 1041.4 which identifies the failure to
conduct an ability-to-repay assessment
in connection with making a covered
short-term or longer-term balloonpayment loan as an unfair practice.
VI. Amendments to the 2017 Final Rule
To Eliminate Its Mandatory
Underwriting Provisions—Revoking the
Identification of Abusive Practices
The Bureau determines that the
factual and legal grounds provided in
the 2017 Final Rule do not support its
conclusion that the identified practice is
abusive under section 1031 of the DoddFrank Act, thereby eliminating that as a
basis for the Mandatory Underwriting
Provisions to address that conduct.286
Part VI.A considers the core
principles of abusiveness under DoddFrank Act section 1031(d). Part VI.B
reviews the factual findings and legal
conclusions underlying this use of
authority in the 2017 Final Rule. Part
VI.C considers the two different
abusiveness theories underlying the
abusiveness finding in § 1041.4 of the
2017 Final Rule: The ‘‘lack of
understanding’’ theory, and the
‘‘inability to protect’’ theory. First, part
VI.C.1 reviews the Bureau’s reasons for
determining that, under section 1031(d)
of the Dodd-Frank Act, the Bureau no
longer identifies the practices as abusive
under a ‘‘lack of understanding’’ theory
as set out in § 1041.4 of the 2017 Final
Rule. Second, part VI.C.2 sets forth the
Bureau’s reasons for determining that,
under section 1031(d) of the DoddFrank Act, the Bureau no longer
identifies the practices as abusive under
an ‘‘inability to protect’’ theory as set
286 The rulemaking addresses the legal and
evidentiary bases for particular rule provisions
identified in this final rule. It does not prevent the
Bureau from exercising tool choices, such as
appropriate exercise of supervision and
enforcement tools, consistent with the Dodd-Frank
Act and other applicable laws and regulations. It
also does not prevent the Bureau from exercising its
judgment in light of factual, legal, and policy factors
in particular circumstances as to whether an act or
practice meets the standards for abusiveness under
section 1031 of the Dodd-Frank Act.
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out in § 1041.4 of the 2017 Final
Rule.287
A. Background on Abusiveness
Section 1031(a) of the Dodd-Frank Act
provides that the Bureau may use its
enforcement authority, among other
things, to prevent a covered person or
service provider from committing or
engaging in an unfair, deceptive, or
abusive act or practice under Federal
law in connection with any transaction
with a consumer for a consumer
financial product or service, or the
offering of a consumer financial product
or service.288 Since its inception, the
Bureau has used its supervisory and
enforcement authority to identify and
seek relief where covered persons
engage in unfair, deceptive, or abusive
acts or practices (UDAAPs).
The statutory standard for what the
Bureau has authority to declare an
‘‘abusive act or practice’’ is set forth in
section 1031(d) of the Dodd-Frank Act.
Specifically, section 1031(d) states that
the Bureau shall have no authority
under this section to declare an act or
practice abusive in connection with the
provision of a consumer financial
product or service, unless the act or
practice—(1) materially interferes with
the ability of a consumer to understand
a term or condition of a consumer
financial product or service; or (2) 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; (B)
the inability of the consumer to protect
the interests of the consumer in
selecting or using a consumer financial
product or service; or (C) the reasonable
reliance by the consumer on a covered
person to act in the interests of the
consumer.289
287 The Bureau notes that, alongside covered
short-term loans, the 2017 Final Rule included
covered longer-term balloon-payment loans within
the scope of the identified unfair and abusive
practice. The Bureau stated that it was concerned
that the market for covered longer-term balloonpayment loans, which is currently quite small,
could expand dramatically if lenders were to
circumvent the Mandatory Underwriting Provisions
by making these loans without assessing borrowers’
ability to repay. 82 FR 54472, 54583–84. The
Bureau did not separately analyze the elements of
unfairness and abusiveness for covered longer-term
balloon-payment loans. See id. at 54583 n.626.
Because the Bureau’s identification in the Rule as
to covered longer-term balloon-payment loans was
predicated on its identification as to covered shortterm loans, the Bureau proposed that if the latter
is revoked the former should also be revoked. The
Bureau received no comments that change this
conclusion as to covered longer-term balloonpayment loans and finalizes it as proposed.
288 Public Law 111–203, tit. X, sec. 1031(a), 124
Stat. 1376, 2005 (2010) (codified at 12 U.S.C.
5531(a)).
289 12 U.S.C. 5531(d).
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Through the language in section
1031(d), Congress defined the
abusiveness standard in general terms
and did not attempt to include a
complete list of abusive practices. To
demonstrate a violation of section
1031(d), the Bureau therefore must
satisfy the specific elements of sections
1031(d)(1), 1031(d)(2)(A), 1031(d)(2)(B),
or 1031(d)(2)(C).
At the Federal level, the FTC and
Federal banking regulators traditionally
have protected consumers through the
prohibitions on unfair and deceptive
acts and practices in the FTC Act as
well as through the prohibitions and
requirements included in special
statutes, such as the Truth in Lending
Act 290 and the Fair Credit Reporting
Act.291 The Dodd-Frank Act added to
these consumers protections the first
Federal prohibition on abusive acts or
practices with respect to consumer
financial products and services
generally.292 Although Congress,
through the language in section 1031(d),
provided some indication of the
abusiveness standard, the Dodd-Frank
Act does not further elaborate on the
meaning of the terms used in section
1031(d), and there is relatively limited
legislative history discussing the
meaning of the language in section
1031(d) (including in distinguishing the
abusiveness standard from the
deception and unfairness standards).293
290 15
U.S.C. 1601 et seq.
U.S.C. 1681 et seq.
292 Certain other Federal consumer financial laws,
including the Fair Debt Collection Practices Act
(FDCPA) and the Home Ownership and Equity
Protection Act (HOEPA), reference either the term
‘‘abusive’’ or ‘‘abuse.’’ See 15 U.S.C. 1692d
(FDCPA), 12 U.S.C. 1639(p)(2)(B) (HOEPA). The
Telemarketing and Consumer Fraud and Abuse
Prevention Act, Public Law 103–297, 108 Stat. 1545
(1994), also directed the FTC to ‘‘prescribe rules
prohibiting deceptive telemarketing acts or
practices and other abusive telemarketing acts or
practices.’’ See 15 U.S.C. 6102(a)(1).
293 See, e.g., S. Rep. No. 111–176, at 172 (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’’); see also S.
Rep. No. 111–176, at 9 n.19 (‘‘Today’s consumer
protection regime . . . could not stem a plague of
abusive and unaffordable mortgages.’’); id. at 11
(‘‘This financial crisis was precipitated by the
proliferation of poorly underwritten mortgages with
abusive terms.’’); H.R. Rep. No. 111–376, at 91
(2009) (‘‘Th[e] disparate regulatory system has been
blamed in part for the lack of aggressive
enforcement against abusive and predatory loan
products that contributed to the financial crisis,
such as subprime and nontraditional mortgages.’’);
H.R. Rep. No. 111–517, at 876–77 (2010) (Conf.
Rep.) (‘‘The Act also prohibits financial incentives
. . . that may encourage mortgage originators . . .
to steer consumers to higher-cost and more abusive
mortgages.’’). See also the legislative history
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Moreover, the abusiveness standard
does not have the long and rich history
of the deception and unfairness
standards. The FTC has used its
authority under the FTC Act to address
unfair and deceptive acts or practices
(UDAPs) for more than 80 years, over
which time policy statements,
administrative and judicial precedent,
and statutory amendments have
provided important clarifications about
the meaning of unfairness and
deception.294 Federal prudential
regulators have also enforced the UDAP
prohibitions in the FTC Act since before
the Bureau’s existence.
The Dodd-Frank Act authorizes the
Bureau to engage in supervision,
enforcement, and rulemaking for the
purpose of ensuring that ‘‘consumers are
protected from unfair, deceptive, or
abusive acts and practices.’’ 295 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.296 As relevant to this
rulemaking, section 1031(d)(2) protects
consumers that have the particular
vulnerabilities that Congress identified
in the statute from harms that
unreasonably take advantage of those
vulnerabilities.
B. Overview of the Factual Predicates
and Legal Conclusions Underlying the
Identification of Abusive Practices in
Section 1041.4
Section 1031(d)(2) of the Dodd-Frank
Act states in pertinent part that the
Bureau shall have no authority to
declare an act or practice abusive unless
the act or practice ‘‘takes unreasonable
advantage’’ of either (A) ‘‘a lack of
understanding on the part of the
consumer of the material risks, costs, or
conditions of the product or service;’’ or
discussed in the 2017 Final Rule, 82 FR 54472,
54521.
294 See, e.g., Letter from the FTC to Hon. Wendell
Ford and Hon. John Danforth, Comm. on
Commerce, Science and Transportation, U.S.
Senate, Commission Statement of Policy on the
Scope of Consumer Unfairness Jurisdiction (Dec.
17, 1980), reprinted in In re Int’l Harvester Co., 104
F.T.C. 949, 1070, 1073 (1984); Letter from the FTC
to Hon. John D. Dingell, Chairman, Comm. on
Energy and Commerce, U.S. House of
Representatives (Oct. 14, 1983) (FTC policy
statement on deception), reprinted in In re Cliffdale
Assocs., Inc., 103 F.T.C. 110, 174 (1984); Int’l
Harvester Co., 104 F.T.C. at 949; AFSA, supra;
section 5(n) of the FTC Act, 15 U.S.C. 45(n), as
enacted by the Federal Trade Commission Act
Amendments of 1994, Public Law 103–312, sec. 9,
108 Stat. 1691, 1695.
295 12 U.S.C. 5511(b)(2).
296 See 82 FR 54472, 54621.
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(B) ‘‘the inability of the consumer to
protect the interests of the consumer in
selecting or using a consumer financial
product or service.’’ 297 The Bureau, in
imposing the Mandatory Underwriting
Provisions, relied on both of these
prongs of the abusiveness standard.
With respect to the ‘‘lack of
understanding’’ prong set forth in
section 1031(d)(2)(A) of the Dodd-Frank
Act, the Bureau acknowledged in the
2017 Final Rule that consumers who
take out covered short-term or longerterm balloon-payment loans ‘‘typically
understand that they are incurring a
debt which must be repaid within a
prescribed period of time and that if
they are unable to do so they will either
have to make other arrangements or
suffer adverse consequences.’’ 298
However, in the 2017 Final Rule the
Bureau interpreted ‘‘understanding’’ to
require more than a general awareness
of possible negative outcomes. Rather,
the Bureau stated that consumers lack
the requisite level of understanding if
they do not understand both their own
individual ‘‘likelihood of being exposed
to the risks’’ of the product or service in
question and ‘‘the severity of the kinds
of costs and harms that may occur.’’ 299
The Bureau in the 2017 Final Rule
found that ‘‘a substantial portion of
borrowers, and especially those who
end up in extended loan sequences, are
not able to predict accurately how likely
they are to reborrow.’’ 300 This finding
also was based primarily on the
Bureau’s interpretation of limited data
from the Mann study and is discussed
further below.301
With respect to the alternative
‘‘inability to protect’’ prong of
abusiveness set forth in section
1031(d)(2)(B) of the Dodd-Frank Act, the
Bureau began by finding in the 2017
Final Rule that consumers who lack an
understanding of the material costs and
risks of a product often will be unable
to protect their interests.302 The
Bureau’s analysis found that consumers
who use short-term loans ‘‘are
financially vulnerable and have very
limited access to other sources of
credit’’ and that they have an ‘‘urgent
need for funds, lack of awareness or
availability of better alternatives, and no
297 12 U.S.C. 5531(d)(2)(A), (B). Section
1031(d)(1) and (d)(2)(C) of the Dodd-Frank Act
provide alternative grounds on which a practice
may be deemed to be abusive, but the Bureau did
not rely on either of those grounds for the
Mandatory Underwriting Provisions.
298 82 FR 54472, 54615 (summarizing the
Bureau’s rationale for the 2016 NPRM).
299 Id. at 54617.
300 Id. at 54615.
301 See id.
302 Id. at 54618.
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time to shop for such alternatives.’’ 303
The Bureau also found in the 2017 Final
Rule that consumers who take out an
initial loan without the lender’s
reasonably assessing the borrower’s
ability to repay were generally unable to
protect their interests in selecting or
using further loans.304 According to the
2017 Final Rule, consumers who obtain
loans without an ability-to-pay
determination and who in fact lack the
ability to repay may have to choose
between competing injuries—default,
delinquency, reborrowing, and default
avoidance costs, including forgoing
essential living expenses.305 The Bureau
concluded that, ‘‘though borrowers of
covered loans are not irrational and may
generally understand their basic terms,
these facts do[ ] not put borrowers in a
position to protect their interests.’’ 306
In support of the conclusion that
consumers with payday loans could not
protect their own interests, in the 2017
Final Rule the Bureau relied primarily
on a survey of payday borrowers
conducted by the Pew Charitable Trusts
(Pew study).307 In the Pew study, 37
percent of borrowers reported that at
some point in their lives they had been
in such financial distress that they
would have taken a payday loan on
‘‘any terms offered.’’ 308 The Bureau
viewed this study as showing that
borrowers of short-term loans ‘‘may
determine that a covered loan is the
only option they have.’’ 309 The Pew
study is discussed further below in part
VI.C.2.b(1).
After determining that consumers lack
understanding of the material risks,
costs, or conditions of covered shortterm and longer-term balloon-payment
loans and that consumers are unable to
protect their interests in selecting or
using such products, the Bureau went
on to conclude in the 2017 Final Rule
that by making such loans to consumers
without first assessing the consumers’
ability to repay, lenders took
unreasonable advantage of these
consumers’ vulnerabilities. In reaching
this conclusion, the Bureau
acknowledged that section 1031(d) of
the Dodd-Frank Act ‘‘does not prohibit
financial institutions from taking
advantage of their superior knowledge
303 Id.
304 Id.
at 54618–20.
at 54619.
305 Id.
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306 Id.
at 54620.
Charitable Trusts, How Borrowers Choose
and Repay Payday Loans (2013), https://
www.pewtrusts.org/∼/media/assets/2013/02/20/
pew_choosing_borrowing_payday_feb2013-(1).pdf.
308 See id. (citing the Pew study at 20); see also
82 FR 54472, 54618–19 (further discussing the Pew
study).
309 82 FR 54472, 54619.
307 Pew
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or bargaining power’’ and that ‘‘in a
market economy, market participants
with such advantages generally pursue
their self-interests.’’ 310 The Bureau
stated, however, that section 1031(d) 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 the Bureau
understood the statute to delegate to the
Bureau ‘‘the responsibility for
determining when that line has been
crossed.’’ 311 The Bureau in the 2017
Final Rule did not identify any specific
threshold, but nonetheless found that
‘‘many lenders who make such loans
have crossed the threshold.’’ 312
In support of its conclusion that
lenders take unreasonable advantage of
consumers of covered short-term and
longer-term balloon-payment loans, the
Bureau in the 2017 Final Rule pointed
to a range of lender practices, including
the design of the loan products, the way
they are marketed, the absence of
meaningful underwriting, the limited
repayment options and the way those
are presented to consumers, and the
collection tactics used when consumers
fail to repay.313 The Bureau stated that
‘‘the ways lenders have structured their
lending practices here fall well within
any reasonable definition’’ of what it
means to take unreasonable advantage
under section 1031(d) of the DoddFrank Act.314 The Bureau then singled
out specifically the failure to underwrite
and concluded that lenders take
unreasonable advantage in
circumstances if they make covered
short-term loans or covered longer-term
balloon-payment loans without
reasonably assessing the consumer’s
ability to repay the loan according to its
terms.315
C. Abusiveness Theories
1. Takes Unreasonable Advantage of
Consumers’ Lack of Understanding of
Material Risks, Costs or Conditions
a. Takes Unreasonable Advantage
The Bureau’s Proposal
In the 2019 NPRM, the Bureau
reconsidered how the 2017 Final Rule
applied section 1031(d)(2) of the DoddFrank Act, which proscribes abusive
conduct that takes ‘‘unreasonable
advantage’’ of certain consumer
vulnerabilities enumerated in the
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310 Id.
at 54621.
311 Id.
312 Id.
at 54622.
at 54622–23.
314 Id. at 54623.
315 Id.
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statute. As described above, the Bureau
in the 2017 Final Rule focused on two
such vulnerabilities in connection with
evaluating lenders making covered
loans without making an ability-torepay determination—both lack of
consumer understanding and inability
to protect their own interests. The
Bureau in the 2017 Final Rule stated
that there comes a point at which a
financial institution’s conduct in
leveraging its superior information or
bargaining power relative to consumers
becomes unreasonable advantage-taking,
and that the Dodd-Frank Act delegates
to the Bureau the responsibility for
determining when advantage-taking has
become unreasonable.316 The Bureau’s
unreasonable advantage analysis
applied a multi-factor analysis,
concluding that:
At a minimum lenders take unreasonable
advantage of borrowers when they [1]
develop lending practices that are atypical in
the broader consumer financial marketplace,
[2] take advantage of particular consumer
vulnerabilities, [3] rely on a business model
that is directly inconsistent with the manner
in which the product is marketed to
consumers, and [4] eliminate or sharply limit
feasible conditions on the offering of the
product (such as underwriting and
amortization, for example) that would reduce
or mitigate harm for a substantial population
of consumers.317
The Bureau in the 2019 NPRM
decided to reassess this application of
section 1031(d)(2) of the Dodd-Frank
Act in light of the four factual
considerations identified in the 2017
Final Rule. According to the 2019
NPRM, this inquiry is inherently a
question of judgment in light of the
factual, legal, and policy considerations
that can inform what is taking
reasonable or unreasonable advantage in
particular circumstances. Upon further
consideration of the approach in the
2017 Final Rule, the Bureau
preliminarily determined in the 2019
NPRM that the application of the factual
circumstances cited in the 2017 Final
Rule do not support the conclusion that
payday lenders took unreasonable
advantage of consumers through making
payday loans to them without
determining they had the ability to
repay those loans.
First, insofar as the Bureau in the
2017 Final Rule focused on the
atypicality of granting credit without
assessing ability to repay, the Bureau in
the 2019 NPRM questioned whether this
practice was an appropriate indicator
that lenders took unreasonable
advantage of consumers. Although the
313 Id.
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316 Id.
317 Id.
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at 54623 (bracketed numbers added).
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Bureau pointed to the fact that the
practice of extending credit without
assessing ability to repay is an unusual
one, the 2019 NPRM stated that it is
common with regard to credit products
for consumers who lack traditional
indicia of creditworthiness—for
example, credit products for consumers
with little or no credit history, loans for
students, or reverse mortgages for the
elderly. Further, the Bureau
preliminarily determined that
innovators and new entrants into
product markets often engage in
practices that deviate from established
industry norms and conventions. Many
such practices are by definition atypical.
Thus, according to the 2019 NPRM, to
presume that atypicality is inherently
suggestive that a lender has taken
unreasonable advantage of consumers
would risk stifling innovation. The 2019
NPRM stated that this reasoning
suggests that even if payday lenders not
making ability-to-repay determinations
about consumers before extending them
loans was atypical, it still should not be
viewed as inherently suggestive that
lenders took unreasonable advantage of
consumers in these circumstances,
given differences between particular
consumer financial markets and the
needs of consumers in such varying
markets.
Second, with regard to whether
lenders making payday loans to
consumers without determining that
they have the ability to repay them takes
unreasonable advantage of the particular
consumer vulnerabilities, as discussed
in greater detail in parts VI.C.1 and
VI.C.2 below, the Bureau in the 2019
NPRM stated its preliminary conclusion
that limitations in the record of the 2017
Final Rule, including issues related to
the Bureau’s interpretation of limited
data from the Mann study and its
interpretation of the Pew study, call into
question the support for the Bureau’s
findings in the 2017 Final Rule
regarding the degree of vulnerabilities of
covered short-term and longer-term
balloon-payment loan users. Even if the
Bureau’s findings in the 2017 Final Rule
regarding user vulnerabilities were
valid, the Bureau stated in the 2019
NPRM that it did not believe that they
would independently support an
unreasonable advantage-taking
determination. The ‘‘takes unreasonable
advantage’’ element in section
1031(d)(2) of the Dodd-Frank Act
requires that an act or practice take
advantage of a vulnerability specified
by, as relevant here, section
1031(d)(2)(A) (lack of understanding) or
section 1031(d)(2)(B) (inability to
protect). The Bureau preliminarily
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determined in the 2019 NPRM that the
2017 Final Rule did not adequately
explain how the practice of not
reasonably assessing a consumer’s
ability to repay a loan according to its
terms leveraged particular consumer
vulnerabilities. On the contrary, the
2019 NPRM noted that covered shortterm and longer-term balloon-payment
loans are made available to the general
public on standard terms, and the 2017
Final Rule did not conclude, for
example, that lenders had the ability to
identify consumers with particular
vulnerabilities prior to lending and use
that information to treat some
consumers differently than others, for
example, by charging them different
prices or including different terms in
contracts for them.318
Third, the 2019 NPRM asserted that
the 2017 Final Rule conflated the
significance of a consumer’s
understanding of a company’s business
model with the consumer’s
understanding of that company’s
products or services. The 2017 Final
Rule stated that lenders’ ‘‘business
model—unbeknownst to borrowers—
depends on repeated re-borrowing.’’ 319
The 2017 Final Rule concluded that
lenders take unreasonable advantage of
consumers when they, in addition to
other factors, ‘‘rely on a business model
that is directly inconsistent with the
manner in which the product is
marketed to consumers.’’ 320
According to the 2019 NPRM,
whether or not consumers understand
the lender’s revenue structure does not
in itself determine whether they lack
understanding about the features of the
loan that they choose to take out. The
2019 NPRM stated that the Bureau in
the 2017 Final Rule did not offer
evidence that consumers erroneously
believe or are misinformed by lenders
that loans are offered only to those
consumers who have the ability to repay
without reborrowing. In the 2019 NPRM
318 As previously noted, due to similarities
between the unfairness provisions in the DoddFrank Act and the FTC Act, FTC Act precedent
helps to inform the Bureau’s understanding of
unfairness under the Dodd-Frank Act. Although
Dodd-Frank Act abusiveness authority is distinct,
FTC Act precedent provides some factual examples
that may help illustrate leveraging particular
vulnerabilities of consumers. See, e.g., FTC
Unfairness Policy Statement, Int’l Harvester, 104
F.T.C. at 1074 (unfair practices may include
exercising ‘‘undue influence over highly susceptible
classes of purchasers, as by promoting fraudulent
‘cures’ to seriously ill cancer patients’’); In re Ideal
Toy Corp., 64 F.T.C. 297, 310 (1964) (‘‘False,
misleading and deceptive advertising claims
beamed at children tend to exploit unfairly a
consumer group unqualified by age or experience
to anticipate or appreciate the possibility that
representations may be exaggerated or untrue.’’).
319 82 FR 54472, 54621.
320 Id. at 54623.
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the Bureau expressed doubts that an
inconsistency between a company’s
business model and its marketing of a
product or service is a pertinent factor
in assessing whether the method of
deciding to extend credit constitutes
unreasonable advantage-taking.
According to the 2019 NPRM, the 2017
Final Rule noted that ‘‘covered shortterm loans are marketed as being
intended for short-term or emergency
use,’’ 321 but that appears to be a
statement about how most consumers
use these loans, not a statement about
the lenders’ revenue structures.322
Fourth, in considering whether
payday lenders take unreasonable
advantage of consumers through
extending them loans without
determining that consumers could repay
them, the Bureau in the 2017 Final Rule
considered lenders eliminating or
sharply limiting feasible conditions that
would reduce harm for a substantial
portion of consumers. In the 2019
NPRM, the Bureau questioned whether
a lender’s decision not to offer such
conditions constitutes unreasonable
advantage-taking in this context.
According to the 2019 NPRM, a lender’s
decision not to offer a short-term, nonamortizing product for which it does not
determine whether consumers have the
ability to repay may be reasonable given
that some States constrain the offering
of longer-term products. In addition,
even if State law were not a constraint,
longer-term, amortizing products would
require lenders to assume credit risk
over a longer period of time. The Bureau
therefore preliminarily determined in
the 2019 NPRM that this factor is not of
significant probative value concerning
whether lenders take unreasonable
advantage of consumers by making
payday loans to them without
determining they have the ability to
repay those loans.
For these reasons, the Bureau
preliminarily determined in the 2019
NPRM that it did not have a sufficient
basis to find that lenders take
unreasonable advantage of consumers
under section 1031(d)(2) of the DoddFrank Act by making covered short-term
loans or covered longer-term balloonpayment loans without reasonably
assessing the consumer’s ability to repay
the loan according to its terms.
321 Id.
at 54616.
to the extent that certain lenders are
using particular language to mislead consumers
regarding either the features of loans or the lenders’
own revenue structures, it is not clear that this is
related to a failure to make an ability-to-repay
determination. Rather, that would appear to be a
fact-specific problem that is already unlawful under
the Dodd-Frank Act’s prohibition on deceptive acts
or practices. See 12 U.S.C. 5531(a).
322 Moreover,
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In the 2019 NPRM, the Bureau sought
comment on this issue, including how
the Bureau should interpret ‘‘taking
unreasonable advantage’’ and the
appropriate test for distinguishing
between reasonable and unreasonable
conduct under section 1031(d)(2) of the
Dodd-Frank Act. The Bureau also
sought comment about the extent to
which firms make loans for other
consumer financial products without
engaging in traditional underwriting,
such as what a bank would do before
making an automobile loan or a
consumer finance lender would do for
a small business loan.
Comments Received
Industry-affiliated commenters
generally agreed with the 2019 NPRM’s
preliminary determination. The majority
of relevant industry comments
addressed abusiveness in general terms.
Without citing specific authority, a
commenter stated that the revised
interpretation of unreasonable
advantage-taking better aligned with
FTC precedent. Several commenters
argued that under the common law and
by common definition, an advantage is
only unreasonable if it is extreme or
excessive, outside the bounds of normal
conduct, or there must be no rational
reason to support the unfavorable
advantage. According to commenters,
the Bureau cannot find that covered
loans, which are used by millions of
consumers and permitted by a majority
of State legislatures, are outside the
bounds of normal conduct.
A number of commenters expressed
general support for the preliminary
findings in the 2019 NPRM regarding
the factors in the 2017 Final Rule’s fourfactor test for determining whether a
lender or other consumer financial
services provider has taken
unreasonable advantage of consumers.
The one element of the four-factor test
that commenters addressed in detail
was whether atypicality is an
appropriate indicator of unreasonable
advantage-taking. A payday lender
argued that the 2017 Final Rule
presented no evidence that lenders do
not assess ability-to-repay through
manual underwriting at storefronts or
centrally by use of credit reporting data.
Other commenters argued that lenders
employ various underwriting strategies
and that foregoing burdensome
underwriting is what makes it feasible
for lenders to offer small-dollar loans.
In contrast, other commenters stated
that the 2017 Final Rule correctly
determined that lenders making payday
loans without determining that
consumers have the ability to repay
takes unreasonable advantage of
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consumers. Some commenters generally
argued that consciously lending to
consumers with damaged credit who are
unlikely to repay means that lenders are
taking unreasonable advantage of
consumers.
Commenters also specifically
addressed the 2019 NPRM’s analysis of
the 2017 Final Rule’s four-factor test for
lenders taking unreasonable advantage
of consumers. With respect to the first
factor, some commenters argued that
atypicality is an appropriate indicator of
unreasonable advantage-taking. A
commenter stated that mainstream
consumer lending is based on ability to
repay and atypicality is relevant because
the unusual nature of a product speaks
to whether consumers understand the
product and can protect their interests.
Further, commenters stated that the
examples cited by the 2019 NPRM of
consumer financial products offered
without underwriting are misleading as
many of those products do incorporate
ability-to-repay assessments.
Commenters suggested that Federal
student loans have a back-end abilitytorepay requirement in the form of
income-driven repayment options and
private student lenders do underwrite.
Another commenter stated that reverse
mortgage providers evaluate a
borrower’s ability to repay in the sense
they evaluate a borrower’s home equity.
A commenter noted that FHA-insured
reverse mortgages and secured credit
cards have formal ability-to-repay
requirements pursuant to 24 CFR
206.205 and 15 U.S.C. 1665e,
respectively. Further, a commenter
argued that some of the 2019 NPRM’s
examples of other credit offered without
an ability-to-repay assessment are
provided to consumers with little or no
credit history: according to this
commenter this is not analogous to
covered loan users who typically have
bad credit histories and significant
indicia of an inability to pay.
With respect to the second factor,
some commenters disagreed with the
2019 NPRM’s preliminary
determination that lenders do not take
advantage of particular consumer
vulnerabilities. Commenters stated that
payday lenders may offer products to
the general public on uniform terms, but
consumers in financial distress frequent
covered lenders, not the general public.
Commenters also noted that the 2017
Final Rule specifically found that
covered lenders target particular
consumers through advertising and
marketing.323 Commenters also cited
studies that they stated show higher
densities of covered loan providers in
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FR 54472, 54562 n.506.
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44419
rural communities and communities
with high concentrations of low-income,
minority, and elderly consumers.324
Commenters suggested that veterans are
particularly vulnerable to covered
loans.325
With respect to the third factor, some
commenters offered few comments on
whether inconsistencies between a
company’s business model and its
marketing of a product or service are
pertinent. An academic commenter
stated that consumers expect a lender to
conduct underwriting and a lender’s
failure to do so can lull a consumer into
thinking that they can repay the loan
according to its original terms. Another
commenter stated that the finding that
lenders take unreasonable advantage of
consumers does not depend on their
understanding this disconnect—it only
requires that the mismatch exist and
that lenders take advantage of
consumer’s lack of understanding that
many consumers are unable to repay
their loan.
With respect to the fourth factor and
whether a lender’s decision not to offer
feasible conditions to reduce harm has
significant probative value toward
finding unreasonable advantage-taking,
one commenter stated that the 2019
NPRM did not cite examples of State
laws that would constrain lenders from
amortizing loans or offering longer
terms. Another commenter also noted
the 2019 NPRM’s determination that
amortizing products would require
lenders to assume more credit risk is
merely another way of pointing out that
covered lenders shift a disproportionate
share of credit risk onto borrowers.
Final Rule
After reviewing the comments
received, the Bureau concludes that the
practice of making covered short-term
324 See section VI of the Bates White Report; CRL,
Power Steering: Payday Lending Targeting
Vulnerable Michigan Communities (Aug. 2018),
https://www.responsiblelending.org/sites/default/
files/nodes/files/research-publication/crl-michiganpaydaylending-aug2018_0.pdf; CRL, Perfect Storm:
Payday Lenders Harm Florida Consumers Despite
State Law (Mar. 2016), https://
www.responsiblelending.org/sites/default/files/
nodes/files/research-publication/crl_perfect_storm_
florida_mar2016_0.pdf; Fannie Mae Foundation,
Analysis of Alternative Financial Service Providers
(Feb. 2004); California Dep’t of Bus. Oversight, The
Demographics of California Payday Lending: A Zip
Code Analysis of Storefront Locations (Dec. 2016),
https://dbo.ca.gov/wp-content/uploads/sites/296/
2019/02/The-Demographics-of-CA-Payday-LendingA-Zip-Code-Analysis-of-Storefront-Locations.pdf.
325 Ann Baddour et al., Thank You For Your
Service: The Effects of Payday and Vehicle Title
Loans on Texas Veterans (Mar. 2019), https://
www.texasappleseed.org/sites/default/files/
ThankYouForYourService_March%202019_0.pdf
(noting that Texas veterans are six times as likely
as the general population to get caught in a payday
or vehicle title loan.).
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loans without reasonably assessing the
borrower’s ability to repay the loan
according to its terms does not take
unreasonable advantage of consumers
for purposes of section 1031(d)(2) of the
Dodd-Frank Act.
As a preliminary matter, the Bureau
declines to use this rulemaking to
articulate general standards addressing
whether the conduct of lenders or other
financial services providers take
unreasonable advantage of consumers.
Instead, the Bureau will articulate and
apply such standards, including the
2017 Final Rule’s four-factor analysis, to
the extent necessary to decide the
specific issue in this rulemaking,
namely, whether lenders take
unreasonable advantage of consumers if
the lenders make covered loans without
determining whether borrowers have
the ability to repay them. Further, some
comments suggested that lenders could
never take unreasonable advantage of
consumers by providing covered loans
because millions of consumers take out
such loans and a majority of State
legislatures permit lenders to make such
loans to their citizens. However, the
Bureau does not find this general
argument persuasive, because it
addresses the product rather than the
practice and because FTC precedent
suggests that an act or practice can be
an unfair, deceptive, or abusive even if
it is prevalent in the marketplace.326
Turning to the four-factor analysis the
2017 Final Rule applied in concluding
that lenders take unreasonable
advantage of consumers through making
loans without determining if they have
the ability to repay them, the Bureau
focuses first on whether payday loan
borrowers were particularly vulnerable
to being taken advantage of by payday
lenders. The Bureau concludes that
record does not support the conclusion
that payday borrowers had any
particular vulnerability or that payday
lenders took unreasonable advantage of
that particular vulnerability.
First, in the 2017 Final Rule, the
Bureau noted that its ‘‘primary concern
is for those longer-term borrowers who
find themselves in extended loan
sequences.’’ 327 The Bureau, however,
did not indicate what characteristic of
these borrowers made them more
vulnerable to the conduct of payday
lenders than other payday loan
borrowers. FTC precedent has analyzed
whether consumers are particularly
vulnerable to the acts and practices
because the consumers are part of a
326 See, e.g., AFSA, 767 F.2d at 976–77 (contract
provisions were found to be unfair even though
they were industry-wide boilerplate).
327 Id.
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group that would respond differently to
conduct than the general population,
such as cancer patients having a
different take away than the general
population from cancer cure advertising
claims for a product or children having
a different take away than adults from
advertising claims for products.328
Assuming for the sake of the argument
that there are payday loan borrowers
who lenders can take unreasonable
advantage of because of a particular
vulnerability, in practice the 2017 Final
Rule applied to all consumers (i.e., up
to 12 million consumers annually) who
take out payday loans, not just
borrowers who find themselves in
extended loan sequences. Indeed, the
2017 Final Rule’s analysis and
provisions apply to all payday loan
consumers, even consumers who
successfully repaid their loans without
reborrowing—a group of consumers that
the Bureau itself in the 2017 Final Rule
acknowledged benefitted from payday
loans.
In the 2017 Final Rule, the Bureau
reasoned that lenders took unreasonable
advantage of payday loan borrowers by
targeting prospective borrowers through
advertising, marketing, or store
placement. The Bureau emphasizes that
businesses engaging in efforts to identify
and persuade prospective customers to
purchase their products is very common
commercial conduct. Indeed, such
efforts often are an important form of
competition among firms that results in
lower prices and innovation. The
Bureau declines to conclude that the
mere fact the payday lenders advertised,
marketed, selected store placement, or
otherwise generally promoted their
loans to consumers who may be
interested in them indicates that the
lenders were using such conduct to take
unreasonable advantage of consumers.
Moreover, even if the Bureau were to
consider longer-term borrowers with
extended sequences to be particularly
vulnerable to being taken advantage of,
in the 2017 Final Rule the Bureau did
not find that payday lenders targeted
their loans to these borrowers. In fact,
payday lenders do not know which
prospective borrowers will become
longer-term borrowers with extended
sequences at the time that lenders are
advertising, marketing, placing, or
328 See, e.g., FTC Unfairness Policy Statement,
Int’l Harvester, 104 F.T.C. at 1074 (unfair practices
may include exercising ‘‘undue influence over
highly susceptible classes of purchasers, as by
promoting fraudulent ‘cures’ to seriously ill cancer
patients’’); Ideal Toy, 64 F.T.C. at 310 (‘‘False,
misleading and deceptive advertising claims
beamed at children tend to exploit unfairly a
consumer group unqualified by age or experience
to anticipate or appreciate the possibility that
representations may be exaggerated or untrue.’’).
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otherwise promoting initial payday
loans to prospective customers.
Finally, even assuming payday loan
borrowers who are longer-term
borrowers with extended sequences are
particularly vulnerable and that payday
lenders had a vehicle through which
they could take unreasonable advantage
of those vulnerabilities, there is no
evidence in the 2017 Final Rule that
supports the conclusion that lenders do
so. Even commenters who did not
support the 2019 NPRM acknowledged
that covered lenders offer loans on
uniform terms to the general public and
treat consumers substantially the same.
Lenders do not increase prices or offer
unfavorable changes to contract terms to
those consumers who reborrow
extensively. Thus, the Bureau concludes
that the information in the record does
not support the conclusion that payday
lenders take advantage of particular
consumer vulnerabilities if they make
loans to consumers without determining
if they have the ability to repay them.
The Bureau in the 2017 Final Rule
also determined that lenders making
payday loans without determining if
borrowers had the ability to repay was
an atypical lending practice in the
broader marketplace, and that this was
a factor indicating that lenders were
taking unreasonable advantage of
consumers through not making this
determination. At the outset, the Bureau
notes that whatever analysis covered
lenders conduct as to their likely return
before making payday loans, most
covered lenders do not assess ability to
repay similar to what the 2017 Final
Rule would require.329 But the Bureau
disputes the characterization of this
practice of not assessing ability to repay
as atypical among markets for consumer
financial products and services. In light
of some comments, the Bureau believes
that the 2019 NPRM may have
overstated the extent to which providers
of particular consumer financial
products extend credit without
assessing ability to repay. Some of the
consumer financial products that the
2019 NPRM cited for not assessing
ability to repay may incorporate abilityto-repay assessments, including private
329 The Bureau acknowledges that the Community
Financial Services of America, a trade association
representing payday and small-dollar lenders,
revised its best practices to add that its members
should, before extending credit, ‘‘undertake a
reasonable, good-faith effort to determine a
customer’s creditworthiness and ability to repay the
loan.’’ This practice applies to other small-dollar
loans the member makes. See Cmty. Fin. Servs. of
Am., Best Practices for the Small-Dollar Loan
Industry, https://www.cfsaa.com/files/files/CFSABestPractices.pdf (last visited Apr. 28, 2020).
However, this best practice is not detailed or
prescriptive and ‘‘reasonable’’ and ‘‘good faith’’ are
not defined.
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student loans, secured credit cards, and
reverse mortgages. However, the
examples of particular consumer
financial products set out in the 2019
NPRM were illustrative. There are other
alternative products that do not require
an ability-to-repay assessment, such as
long-term installment loans, as set out
in the 2016 NPRM.330
Assuming for the sake of the argument
that lenders making payday loans
without determining that consumers
have the ability to repay them is an
atypical lending practice, it does not
follow that lenders are taking
unreasonable advantage of consumers
through this different lending practice.
Neither the 2017 Final Rule nor
commenters have explained why the
atypicality of this practice shows that
lenders use it to take unreasonable
advantage of consumers. A commenter
argued that atypicality is relevant
because if a lender’s practice is unusual,
then consumers may not expect the
lender to engage in it, which, in turn,
could permit the lender to take
unreasonable advantage of them. But
even if it was atypical in the experience
of consumers with other financial
products for lenders not to make an
ability-to-repay determination before
extending credit, millions of consumers
take out payday loans without providing
lenders with the information or the
access to information that lenders
would need to make traditional credit
underwriting decisions. The 2017 Final
Rule offered no evidence that
consumers erroneously thought that
payday lenders were making such an
ability-to-repay determination when
they in fact were not. So, even if payday
lenders not conducting an ability-torepay analysis was atypical (which the
Bureau does not determine is the case),
there is no evidence to support the
conclusion that lenders used that
atypicality to take unreasonable
advantage of consumers.
The Bureau emphasizes that an
especially careful and close analysis is
needed before concluding that the acts
and practices of firms take unreasonable
advantage of and abuse consumers
simply because those acts and practices
are atypical. As the 2019 NPRM
explained, innovators and new entrants
into product markets (for instance, in
this context, providers of wage access
and fintech products) often engage in
acts and practices that deviate from
330 81 FR 47863, 47886 (‘‘The Bureau believes
based on market outreach, that some lenders use
similar underwriting practices for both singlepayment 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.’’).
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established industry norms and
conventions. Such atypical acts and
practices can be beneficial to consumers
and they can be an important form of
competition among firms, which, in
turn, may also benefit consumers.
The 2017 Final Rule further
concluded that the differences between
how payday lenders marketed their
loans and their business model shows
that payday lenders took unreasonable
advantage of consumers. The Bureau
received few comments that addressed
this factor, but those which did
primarily focused on the potential for
consumer misunderstanding, arising in
large part from lender advertising and
marketing, that would allow payday
lenders to take unreasonable advantage
of them. However, this is not a concern
resulting from a mismatch between
payday lending marketing and the
payday lending business model.
Because there does not seem to be a
viable theory linking this mismatch to
payday lenders taking unreasonable
advantage of consumers, much less
evidence that the lenders are actually
doing so, the Bureau concludes that the
record does not support the 2017 Final
Rule’s conclusion that this factor
indicates that payday lenders took
unreasonable advantage of consumers
through making loans to consumers
without determining their ability to
repay those loans.
Finally, the 2019 NPRM preliminarily
determined that, in contrast to the 2017
Final Rule, a payday lender’s decision
not to offer conditions that would
eliminate or sharply limit feasible
conditions that would reduce harm for
a substantial portion of consumers is not
of significant probative value
concerning whether the identified
practice constitutes unreasonable
advantage-taking.331 Several
commenters noted that the 2019 NPRM
did not cite examples of State laws that
prevent lenders from offering products
with features, such as longer loan terms
or amortization options, that would
reduce potential harm related to
reborrowing and default. The Bureau is
persuaded by these comments and the
real-world examples of lenders shifting
to alternative loan products (discussed
above in the reasonable avoidability
section) and concludes that the majority
of State laws may not constrain covered
lenders from designing covered loan
products that would incorporate such
features.
331 The 2019 NPRM offered a lender’s decision to
offer longer-term, amortizing products as an
example of a condition that would eliminate or
reduce harm for a substantial population of
consumers. See 84 FR 4252, 4276.
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44421
However, the Bureau determines that
a decision not to offer products with
such features may be reasonable given
business considerations, including a
lender’s desire not to assume credit risk
over a longer period of time. The 2017
Final Rule did not suggest that the
identified practice interfered with
consumers taking steps on their own to
reduce or mitigate harm. Virtually every
credit product presents some risks to
consumers that could potentially be
limited, although doing so likely would
come at the cost of the lender’s profits
and potentially its viability as an
ongoing concern. If it were the case that
lenders in a systematic fashion offered
an inferior, ‘‘risky’’ product to one
group of consumers and a superior,
‘‘safe’’ product to another, this could
indicate that lenders were taking
advantage of some consumers through
the offering of that risky product. But
there is no evidence that payday lenders
are engaged in such conduct.
Accordingly, the Bureau finalizes the
2019 NPRM and concludes based on an
application of the factual cirumstances
cited in the 2017 Final Rule that payday
lenders do not take unreasonable
advantage of consumers through
engaging in the identified practice.
b. Consumer Lack of Understanding of
Material Risks, Costs and Conditions
(1) Legal
The Bureau’s Proposal
Under section 1031(d)(2)(A) of the
Dodd-Frank Act it is an abusive practice
to take unreasonable advantage of a lack
of understanding on the part of the
consumer of the material risks, costs, or
conditions of a consumer financial
product or service. In the Mandatory
Underwriting Provisions of the 2017
Final Rule, the Bureau took a similar
approach to interpreting this provision
as it took with respect to the reasonable
avoidability element of unfairness. The
Bureau in the 2017 Final Rule
interpreted this statutory language to
mean that consumers lack
understanding if they fail to understand
either their personal ‘‘likelihood of
being exposed to the risks’’ of the
product or service in question or ‘‘the
severity of the kinds of costs and harms
that may occur.’’ 332
The 2019 NPRM stated that, unlike
the elements of unfairness specified in
section 1031(c) of the Dodd-Frank Act,
the elements of abusiveness do not have
a long history or governing precedents.
Rather, the Dodd-Frank Act marked the
first time that Congress defined
‘‘abusive acts or practices’’ as generally
332 82
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unlawful in the consumer financial
services sphere. The Bureau
preliminarily determined in the 2019
NPRM that this element of the
abusiveness test should be treated as
similar to reasonable avoidability. That
is, the Bureau preliminarily determined
that the approach taken in the 2017
Final Rule was problematic. As
discussed below, in the 2019 NPRM the
Bureau applied an approach under
which ‘‘lack of understanding’’ would
not require payday borrowers to have a
specific understanding of their personal
risks such that they can accurately
predict how long they will be in debt
after taking out a covered short-term or
longer-term balloon-payment loan.
Rather, the Bureau preliminarily
believed that consumers have a
sufficient understanding under section
1031(d)(2)(A) of the Dodd-Frank Act if
they understand the magnitude and
likelihood of risk of harm associated
with covered loans sufficient for them to
anticipate that harm and understand the
necessity of taking reasonable steps to
prevent resulting injury. The Bureau in
the 2017 Final Rule did not offer
evidence that consumers lack such an
understanding with respect to the
material risks, costs or conditions on
covered short-term and longer-term
balloon-payment loans. In the absence
of such evidence, the Bureau
preliminarily determined it should not
have concluded in the 2017 Final Rule
that the identified practice was an
abusive act or practice pursuant to
section 1031(d)(2)(A) of the Dodd-Frank
Act.
For these reasons, which are set forth
in more detail in part V.B.1 above
regarding reasonable avoidability, the
Bureau preliminarily determined in the
2019 NPRM that its interpretation of
‘‘lack of understanding on the part of
the consumer of the material risks,
costs, or conditions of the product or
service’’ in the 2017 Final Rule was too
broad. The Bureau sought comment on
how the Bureau should interpret section
1031(d)(2)(A) of the Dodd-Frank Act.
Comments Received
Some commenters stated that the
2019 NPRM properly links the ‘‘lack of
understanding’’ analysis pursuant to
section 1031(d)(2)(A) of the Dodd-Frank
Act with whether a consumer’s injury is
reasonably avoidable. At least one
commenter stated that consumer
‘‘understanding’’ in this context has
long been understood to mean a general
awareness of possible outcomes and that
the 2019 NPRM correctly determined
that section 1031(d)(2)(A) does not
require payday borrowers to accurately
predict how long they individually will
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be in debt after taking out a loan.
Commenters also stated that the 2017
Final Rule’s interpretation of this
element was inconsistent with the
statutory language, which focuses on
‘‘understanding’’ the risks and costs of
‘‘the product,’’ not on predictions about
the consequences of an individual
consumer’s use of it.
Trade association commenters stated
that the plain text of the Dodd-Frank
Act and its supplemental history,
including legislative history, indicate
that the abusiveness standard as set
forth in section 1031 is intended to be
viewed on an individual, case-by-case
basis.
In contrast, other commenters,
including consumer groups, disagreed
with the proposal, stating that the 2017
Final Rule applied an appropriate
standard for section 1031(d)(2)(A) of the
Dodd-Frank Act and correctly
determined that a significant population
of consumers do not understand the
material risks and costs of unaffordable
loans that are made without reasonably
assessing the borrower’s ability to repay
the loan according to its terms.
Commenters also cited behavioral
economics factors and other research to
suggest that consumers do not
understand covered loan costs and
terms.333
Some consumer groups and a group of
25 State attorneys general argued that
the 2019 NPRM erroneously conflated
the unfairness and abusiveness
standards by treating the lack of
understanding analysis as similar to
reasonable avoidability. Some
commenters asserted that the statutory
standard requires understanding of
‘‘material risks, costs, or condition’’ of a
product—not the knowledge of lending
generally.
Final Rule
After reviewing the comments
received, while the statutory language
for reasonable avoidability and lack of
understanding is different, the Bureau
determines that the lack of
understanding element of abusiveness
pursuant to section 1031(d)(2)(A) of the
Dodd-Frank Act should be treated as
similar to the requisite level of
understanding for reasonable
avoidability. For the same reasons that
the Bureau concluded that there was an
333 See section VI of Bates White Economic
Consulting, Report Reviewing Research on Payday,
Vehicle Title, and High-Cost Installment Loans
(May 2019), https://lawyerscommittee.org/wpcontent/uploads/2019/05/Report-reviewingresearch-on-payday-vehicle-title-and-high-costinstallment-loans.pdf (providing an overview of
studies addressing consumer understanding); see
also Martin study.
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insufficient basis to support the 2017
Final Rule’s finding that substantial
injury from the identified practice was
not reasonably avoidable, the Bureau
now concludes that there is an
insufficient basis to conclude that
consumers lack understanding of the
material risks, costs, or conditions of
covered loans.
The Bureau declines to follow certain
recommendations in comments
suggesting that the statutory language of
Dodd-Frank Act section 1031(d)(2)(A)
requires merely a general awareness of
possible outcomes.
In finalizing the 2019 NPRM’s
preliminary determination, the Bureau
concludes that the 2017 Final Rule
should have applied a different
interpretation and incorrectly
determined that consumers lack
requisite understanding. As discussed
in the reasonable avoidability section,
the 2017 Final Rule did not offer
specific evidence on what consumers
specifically understand with respect to
material risks, costs, or conditions of
covered loans. Although the 2017 Final
Rule concluded that a significant
population of consumers do not
understand the material risks and costs
of covered loans, the 2017 Final Rule
extrapolated or inferred this conclusion
from the Bureau’s interpretation of
limited data from the Mann study,
which examined the different question
of whether consumers are unable to
predict how long they would be in debt.
The limited data from the Mann study
does not address whether consumers
lack an understanding of the material
risks, costs, or conditions of covered
loans. For instance, the 2017 Final Rule
did not consider evidence that directly
addressed whether consumers are aware
of the particular risks flowing from
extended loan sequences or understand
that a significant portion of consumers
end up in extended loan sequences.
Commenters point to evidence that the
Bureau had considered in the 2016
NPRM preceding the 2017 Final Rule,
which suggests a lack of understanding
about particular terms of covered
loans—principally, the Martin
study 334—but this evidence has
limitations as described below in part
VI.C.2.b, and does not offer support for
the 2017 Final Rule’s findings as to
consumer understanding of covered
loan risks, costs, or conditions more
broadly.
In addition, the Bureau disagrees with
comments that the 2019 NPRM
erroneously conflates unfairness and
abusiveness in analyzing the ‘‘lack of
understanding’’ element. Although the
334 See
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2019 NPRM proposed to evaluate
understanding in the unfairness and
abusiveness analyses in a similar
manner, reasonable avoidability has a
‘‘means to avoid’’ requirement that is
absent from the abusiveness standard.
Thus, in certain circumstances,
abusiveness could prohibit some
conduct that unfairness would permit.
But in light of the Bureau’s proposal,
and an analysis of the comments
received, the Bureau determines that it
is appropriate to treat reasonable
avoidability and ‘‘lack of
understanding’’ as similar but distinct.
Accordingly, the Bureau concludes
that the 2017 Final Rule failed to show
that consumers lack understanding of
the material risks, costs, or conditions of
the practice of making covered shortterm loans without reasonably assessing
the borrower’s ability to repay the loan
according to its terms.
(2) Reconsidering the Evidence for the
Factual Analysis of Consumer Lack of
Understanding in Light of the Impacts of
the Mandatory Underwriting Provisions
In the 2019 NPRM, the Bureau
preliminarily believed that the Mann
study was not sufficiently robust and
reliable, in light of the Rule’s dramatic
impacts in restricting consumer access
to payday loans, to be the linchpin for
a finding that consumers lack
understanding of the material risks,
costs, or conditions of such loans. The
2019 NPRM also proposed that other
findings and evidence were not
sufficiently robust and reliable to
support the Bureau’s finding in the 2017
Final Rule that consumers lacked an
understanding of the possible risks and
consequences associated with taking out
payday loans.
The Bureau finds that the analysis of
the factual underpinnings of consumer
lack of understanding is the same as it
is for the reasonable avoidability
analysis. The same factual
underpinnings supported, in the 2017
Final Rule, the finding that consumers
lacked understanding for purposes of
abusiveness and unfairness. Similarly,
the 2019 NPRM addressed the same set
of shared facts in reconsidering the 2017
Final Rule’s analysis of lack of
understanding and reasonable
avoidability. The consideration of
comments and additional analysis,
addressed above in parts V.B.2.a
through V.B.2.d, therefore apply equally
here to the factual underpinnings of
consumer lack of understanding.
For the reasons set out above in parts
V.B.2.a through V.B.2.d and VI.C.1.b(1),
the Bureau concludes that the available
evidence does not provide a sufficiently
robust and reliable basis to conclude
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that consumers who use covered shortterm or longer-term balloon-payment
loans lack understanding of the material
risks, costs and conditions of payday
loans.
2. Takes Unreasonable Advantage of
Consumers’ Inability To Protect
Themselves
a. Takes Unreasonable Advantage
For the reasons set out above in part
VI.C.1.a, the Bureau finalizes the 2019
NPRM and concludes that the factors
cited in the 2017 Final Rule do not
constitute unreasonable advantagetaking of consumers’ inability to protect
themselves. The Bureau withdraws its
determination in the 2017 Final Rule
that the four factors it identified—
atypicality, taking advantage of
particular vulnerabilities, reliance on a
business model inconsistent with the
manner in which the product is
marketed to consumers, and limitations
on means of reducing or mitigating
harm for many consumers—constituted
unreasonable advantage taking of
consumers’ inability to protect
themselves, assumed for purposes of
this analysis.
b. Consumers’ Inability To Protect
Themselves—Factual Reconsideration
(1) The Pew Study and the Finding
Based On It
The Bureau’s Proposal
In part V.B.3 of the 2019 NPRM, the
Bureau preliminarily found that a
survey of payday borrowers conducted
by the Pew Charitable Trusts (Pew
study) 335 does not provide a sufficiently
robust and reliable basis for the
Bureau’s finding in the 2017 Final Rule
that consumers who use covered shortterm or longer-term balloon-payment
loans lack the ability to protect
themselves in selecting or using these
products. In the study, 37 percent of
borrowers answered in the affirmative to
the question ‘‘Have you ever felt you
were in such a difficult situation that
you would take [a payday loan] on
pretty much any terms offered?’’
The 2019 NPRM stated that the Pew
study asked respondents about their
feelings, not about their actions; and,
that respondents were not asked
whether they had in fact taken out a
payday loan at a time when they would
have done so on any terms. The 2019
NPRM also stated that the Pew study
contains a number of other findings that
cast doubt on whether payday
335 Pew Charitable Trusts, How Borrowers Choose
and Repay Payday Loans (2013), https://
www.pewtrusts.org/∼/media/assets/2013/02/20/
pew_choosing_borrowing_payday_feb2013-(1).pdf.
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borrowers cannot explore available
alternatives that would protect their
interests. For example, the Pew study
found that 58 percent of respondents
had trouble meeting their regular
monthly bills half the time or more,
suggesting that these borrowers are, in
fact, accustomed to exploring
alternatives to payday loans to deal with
cash shortfalls.
The 2019 NPRM also cited to other
evidence that it preliminarily
determined casts doubt on the
robustness and reliability of the Pew
study.336
Comments Received
Industry commenters and others
stated that the Pew study provided an
inadequate basis for the 2017 Final Rule
to have drawn broad conclusions about
consumers’ ability to protect their own
interests. Industry commenters stated
that the inverse of the Pew study’s 37
percent is that 63 percent of consumers
would seek alternatives if they
perceived the payday loans as harmful.
Industry commenters further stated that
consumers generally act in a utilityenhancing way when opting for and
using a payday loan. They also stated
that payday loan consumers have
numerous alternatives to obtain shortterm financial assistance, including
through check cashing and pawn
broking as well as through loans from
personal finance companies and
financial institutions.
Consumer group commenters and
others noted that the Pew study was
limited to payday loans borrowers. That
sample set, they stated, indicates that
respondents were speaking about actual
payday loan experience. Moreover, in
their view a reasonable reading of the
study’s survey question is that it asks for
respondents to recall a situation in the
past when they took out a payday loan.
They stated that the 2019 NPRM
provides no basis for assuming that
respondents were not answering in the
affirmative based on an actual
experience with payday loans. Further,
they stated, the survey responses about
regular difficulty paying bills does not
indicate that borrowers are accustomed
to exploring alternatives. The more
straightforward interpretation, they said,
is that many payday borrowers often
find themselves in situations where
payday loans appear to be the only
alternative.
Consumer group commenters stated
that the other evidence cited by the
2019 NPRM as casting doubt on the Pew
study was itself dubious or not
applicable to payday borrowers. These
336 84
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commenters also sought to rebut the
other evidence the 2019 NPRM cited.
They argued that, even if its validity
were accepted, in the view of these
commenters this other evidence does
not undermine the 2017 Final Rule’s
finding of consumer inability to protect
interests.
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Final Rule
For the reasons set out in the 2019
NPRM and reiterated here, the Bureau
determines that the Pew study does not
provide a sufficiently robust and
reliable basis for the Bureau’s finding in
the 2017 Final Rule that consumers who
use covered short-term or longer-term
balloon-payment loans lack the ability
to protect themselves in selecting or
using these products. Consumer group
commenters’ observations—that the Pew
study surveyed actual payday loan
borrowers and that those surveyed
could have understood the question to
be asking about their actual payday loan
experience—do not change the fact, as
preliminarily set forth in the 2019
NPRM, that the question posed was not
the question directly relevant to the
issue at hand (whether consumers take
out payday loans because they have no
alternative). The question asked was
hypothetical (‘‘would you have’’ taken
out a loan on any terms offered) and did
not ask directly about the actual
experience of those surveyed. Further,
the Bureau concludes, as was stated in
the 2019 NPRM, that the Pew study
does not establish—whether robustly or
otherwise—that consumers lack access
to alternative sources of credit before
consumers take out the first loan in a
sequence of payday loans. Indeed, the
Bureau concludes that payday loan
consumers do have access to alternative
sources of credit. As noted above,
consumers who live in States where
covered loans are restricted are able to
find credit alternatives without turning
to illegal loans or harmful alternatives.
Newly available alternatives include
credit offered by fintechs, credit unions,
and other mainstream financial
institutions. Further, as was stated in
the 2019 NPRM,337 in a report issued by
the Federal Reserve Board regarding the
economic well-being of U.S.
households, consumers who reported
that they would have difficulty covering
a $400 emergency expense were asked
how they would cope were such an
emergency to arise. These consumers
pointed to a variety of potential
mechanisms including borrowing from a
friend or family member (26 percent) or
selling something (19 percent). Only 5
337 84
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percent reported that they would use a
payday loan or similar product.338
Finally, regarding consumer group
commenters’ criticisms of the other
evidence cited by the 2019 NPRM as
casting doubt on the Pew study, the
2019 NPRM cited this evidence merely
to corroborate the Bureau’s concerns
about the Pew study. The Bureau’s
determination that the Pew study does
not provide a sufficiently robust and
reliable basis for the 2017 Final Rule’s
finding that payday loan consumers lack
the ability to protect themselves is not
dependent upon the other evidence
cited by the 2019 NPRM.
(2) Other Evidence Pertaining to
Inability To Protect
The Bureau’s Proposal
In part V.B.4 of the 2019 NPRM, the
Bureau preliminarily found that the
evidence other than the Pew study cited
by the 2017 Final Rule for consumer
inability to protect interests was
insufficient to sustain a determination
that consumers are not able to protect
their own interests. That is, the Bureau
preliminarily found that the evidence
other than the Pew study cited by the
2017 Final Rule for consumer inability
to protect interests did not suffice to
compensate for the insufficient
robustness and reliability of the Pew
study.
Comments Received
Industry commenters and others
stated that many of the studies, other
than the Pew study, cited by the 2017
Final Rule did not support the Rule or,
even if in part supportive of aspects of
the Rule (e.g., substantial injury), the
studies also contained other relevant
findings that suggest that payday loan
consumers are able to protect their
interests. They also stated that payday
loan consumers have alternatives to
payday loans, with which payday loans
compete, and that the availability of
these alternatives suggests that
consumers are able to protect
themselves in selecting and using
payday loans. They also stated that
there is no evidence of market failure in
the competition among these various
alternative forms of credit, including
payday loans, for the business of
consumers.
In addition, these commenters noted,
the rate of consumer complaints about
payday loans is low relative to other
consumer financial products, which
338 Bd. of Governors of the Fed. Reserve Sys.,
Report on the Economic Well-Being of U.S.
Households in 2017, at 21 (2018), https://
www.federalreserve.gov/publications/files/2017report-economic-well-being-us-households201805.pdf.
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indicates that consumers do not see
themselves as being harmed by the
products. Further, of the payday loan
complaints that are submitted,
according to commenters, many are
about unregulated offshore lenders and
illegal operators, and others do not
actually relate to payday lenders but are
in fact about debt collection or other
issues. Finally, these commenters noted,
the Bureau has acknowledged that
consumer complaints related to payday
loans have been declining for the past
several years.
Consumer group commenters and
others stated that there was a substantial
amount of robust and reliable evidence,
other than the Pew study, that the 2017
Final Rule pointed to as showing
consumer inability to protect interests.
And, they said, the 2019 NPRM did not
address or consider this evidence.
Specifically, the evidence in the 2017
Final Rule record that consumer group
commenters asserted that the 2019
NPRM did not address, and which they
said robustly shows consumer inability
to protect interests, is the same evidence
listed above in part V.C.4 of the 2019
NPRM (and numbered (1) to (5))
regarding whether consumer injury is
not reasonably avoidable due to
consumers’ lack of specific
understanding of their personal risks.
Since publication of the NPRM in
February 2019, two relevant studies
have become available: The Carvalho
study and the Allcott study, which are
described in part V.B.2 above.
Final Rule
The Bureau has considered all of the
applicable evidence, including all of the
evidence raised by commenters. For the
following reasons, the Bureau
determines that the evidence does not
provide a sufficiently robust and
reliable basis to conclude that
consumers who use covered short-term
or longer-term balloon-payment loans
are unable to protect their interests in
selecting or using the loans.
Evidence of Repeated Reborrowing Prior
to Default
With respect to the evidence showing
that substantial numbers of payday loan
consumers reborrow repeatedly prior to
defaulting on their loans, the Bureau
determines that that evidence does not
suggest—whether robustly and reliably
or otherwise—that consumers are
unable to protect themselves before they
take out the first loan in a sequence. The
evidence of reborrowing prior to default
does not, for example, suggest that
consumers have inadequate information
about or do not have alternatives to
payday loans. Further, as noted above,
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the Bureau does not believe that
whenever a consumer makes a choice
that turns out to have been suboptimal
it follows that the consumer lacked
understanding, or was unable to protect
his or her interests, at the time the
choice was made. Consumers often
make decisions in conditions of
uncertainty—uncertainty of which the
consumers are aware—and those
decisions sometimes turn out to be
suboptimal, but it does not follow that
the consumers at the time of their
decisions were unable to protect their
own interests.
Analyzing that same evidence of
repeated reborrowing prior to default,
consumer group commenters argued, as
noted above, that the 2019 NPRM
ignored the 2017 Final Rule’s point that
the evidence shows that consumers
cannot protect themselves after they
have taken out the first loan in a
sequence. However, the requirement in
the 2017 Final Rule that lenders assess
consumers’ ability to repay applies to all
consumers of payday loans, not just
those consumers who are already
engaged in a sequence of short-term
payday loans. That is, the 2017 Final
Rule’s requirement to assess consumers’
ability to repay applies to all consumers
who take out a payday loan and it
applies before a consumer takes out the
first loan in a sequence. The Bureau
further responds that the focus of DoddFrank Act section 1031(d)(2)(B) is on
whether consumers are unable to
protect their own interests. In the
context of the 2017 Final Rule’s finding
that the practice of failing to assess
ability to repay takes unreasonable
advantage of consumers who take out
covered loans, if the consumers can
protect their interests before they take
out the first loan in a sequence of
covered loans, they do not lack the
ability to protect their own interests. In
other words, because the 2017 Final
Rule’s requirement to assess consumers’
ability to repay applies before a
consumer takes out the first loan in a
sequence, the Bureau determines that
the Bureau must find that consumers are
unable to protect themselves both (i)
before they take out the first loan in a
sequence and (ii) after they take out the
first loan, in order for the Bureau to find
that the practice of making a payday
loan without assessing ability to repay
takes unreasonable advantage of
consumers’ inability to protect
themselves (pursuant to Dodd-Frank Act
section 1031(d)(2)(B)).339 And, as stated
339 The 2017 Final Rule, 82 FR 54472, 54619–21,
explained its view that consumers can protect their
interests neither before they take out the initial
payday loan nor after. This is because it was
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above, the Bureau has determined that
the evidence indicating that consumers
reborrow repeatedly prior to defaulting
does not suggest, whether robustly and
reliably or otherwise, that consumers
are unable to protect themselves before
they take out the first loan. The Bureau
therefore determines that that evidence
does not suggest that consumers are
unable to protect themselves in
selecting or using payday loans.
Evidence of Harmed Consumers
Initiating Payday-Loan Sequences
Recurringly
Regarding the evidence that consumer
group commenters asserted shows that
some consumers harmed by payday
loans enter into loan sequences
recurringly, the Bureau determines that
that evidence does not indicate that
consumers do not have alternatives to
payday loans, nor that consumers are
unable to protect themselves before they
take out the first loan in a sequence. The
evidence does not suggest that
consumers have inadequate information
about or do not have alternatives to
payday loans. Indeed, the Bureau
determines that the evidence is
reasonably viewed as indicating that the
consumers, making their own choices,
have decided that payday loans are the
best option among the alternatives
available to them. That is, this evidence
does not suggest that consumers are
unable to decide for themselves among
the options available to them. The
evidence therefore does not suggest that
consumers are unable to protect their
own interests.
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lending, and responses to changes in
State regulations for small-dollar
lending, all of which provide useful
context and evidence on how the market
functions and how consumers engage
with these products. But these studies
do not constitute robust and reliable
evidence regarding the specific factual
finding the Bureau would have to make
to conclude that the identified practice
was abusive, namely, that consumers
are unable to protect their interests
before they take out a payday loan.
Other Miscellaneous Sources of
Evidence Cited by Commenters
The other miscellaneous evidence
pointed to by consumer group
commenters (see part VI.C.2.b(2) above)
does not robustly and reliably indicate
that consumers are unable to protect
their own interests in selecting or using
payday loans. Some of these sources of
information were cited by the 2017
Final Rule for various purposes, but
they were not the basis for the 2017
Final Rule’s determination that
consumers are unable to protect their
own interests. This is because these
sources are even less probative of this
issue than the Pew study that the
Bureau focused on in the 2017 Final
Rule.
The Martin Study
Other Studies Mentioned by the 2017
Final Rule
In addition, the Bureau has
determined that the other studies—e.g.,
the ‘‘150 studies’’ pointed to by
consumer group commenters—
mentioned by the 2017 Final Rule are
not relevant to the specific issue at hand
here. Instead of considering the number
of studies that may be relevant to an
issue, the Bureau considers the
relevance, rigor, and consistency of
findings across studies in determining
the probative value of research on that
issue. The large set of studies discussed
in the 2017 Final Rule concerned the
experiences of low-income consumers,
State reports on payday and vehicle-title
The Bureau did not rely on the Martin
study in the 2017 Final Rule and does
not rely upon it in this rulemaking. The
Bureau does not believe that
commenters’ arguments regarding the
Martin study suggest that consumers are
unable to protect their own interests in
selecting or using payday loans.
The Martin study reported that 60
percent of payday loan borrowers did
not know the APR of their loans. Even
were the Bureau to grant that this study
suggests that some consumers might not
know the exact price of their payday
loans (i.e., in APR terms), the Bureau
believes that such lack of knowledge
does not indicate that consumers are
unable to protect their interests before
they take out a payday loan. A
consumer can have access to other
alternative sources of credit, and be
familiar with payday loans and
understand that they are a relatively
expensive source of credit,340 even if the
necessary for the 2017 Final Rule to show that there
was no time when consumers could protect their
interests. That is, because the 2017 Final Rule’s
ability-to-repay requirement applies before a
consumer takes out the first loan in a sequence, if
the consumer were able to protect his or her
interests before she takes out the initial payday
loan, there would be no ‘‘inability to protect,’’ even
if the consumer has less ability or even no ability
to protect their interests afterward.
340 As noted above, evidence is mixed as to
whether consumers understand the price of their
loans in dollar-cost terms (e.g., $15 for $100 for 2
weeks), even if they might not remember or
understand the loans’ APR. For example, the
Elliehausen study, at 36–37, found that most
payday loan consumers said they were aware of the
finance charge of their payday loans and noted most
borrowers reported what the study considered
plausible finance charges for their loans.
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consumer does not know the APR of a
payday loan. For example, the consumer
might have prior experience using
payday loans or might have family,
friends, or neighbors who have used
payday loans and other forms of credit
and from whom the consumer might
have developed a reasonable sense of
how payday loans compare to other
forms of credit, even if the consumer
does not know the specific APR of the
payday loan the consumer received. The
Bureau therefore determines that the
Martin study does not show that
consumers are unable to protect their
interests in selecting or using payday
loans.
Evidence Available Subsequent to
Publication of the 2019 NPRM
Finally, the Bureau turns to the two
studies—the Carvalho study and the
Allcott study—that became available
since publication of the 2019 NPRM.
The Bureau is not relying upon these
studies in this rulemaking because they
do not show that consumers are unable
to protect their own interests in
selecting or using payday loans.
The Carvalho study, as noted above,
pertained to Icelandic consumers and
found that about half of payday loan
dollars go to consumers in the bottom
20 percent of decision-making ability.
The data from the study primarily
concerns Icelandic consumers, which
makes its usefulness unclear when
considering a regulatory intervention for
payday loan borrowers in the United
States. In any event, the Bureau
concludes that this study does not
demonstrate, let alone robustly and
reliably demonstrate, that payday loan
consumers are unable to protect their
own interests in selecting or using
payday loans. While consumers with
low decision-making ability may have
more difficulty than other consumers in
selecting or using any credit, financial,
or other product, these consumers (like
all other consumers) choose among
available credit and financial products
as well as a myriad of other products.
In other words, consumers being in the
bottom 20 percent of the population in
terms of decision-making ability does
not necessarily mean they are incapable
of protecting their own interests in
financial transactions. Moreover, the
2017 Final Rule’s identified practice
and corresponding Rule provisions
apply to all payday loan borrowers, not
just those who are in the bottom 20
percent of the population in terms of
decision-making ability. The Carvalho
study does not suggest that the
consumers in question do not have
access to the same credit product
alternatives to payday loans that are
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available to the general public. For all
of the reasons discussed above, the
Bureau is not relying on the Carvalho
study to support conclusions in this
rulemaking about inability to protect
interests.
The Allcott study, as described above,
finds that many payday loan borrowers
have a desire to be incentivized not to
take out the loans in the future. Most
surveyed borrowers said they would
‘‘very much’’ like to give themselves
extra motivation to avoid payday loan
debt and a supermajority (about 90
percent) would at least somewhat like to
give themselves extra motivation. The
study finds that borrowers in their
sample do put more weight on nearterm payoffs, but that they are also
aware of this. Moreover, the borrowers’
self-control issues, if present, would
likely be present irrespective of which
credit or financial products they chose
to use. That is, the study does not
suggest that consumers have inadequate
information about, or do not have
alternatives to, payday loans. Indeed,
the study would be entirely consistent
with consumers making their own
choices and deciding that payday loans
are the best option among the
alternatives available to them. The
Bureau believes that this study does not
indicate that consumers are unable to
protect their own interests in selecting
or using payday loans. As an additional
reason, the study involves a single
lender in a single State (Indiana). The
Bureau therefore believes that the study
is not sufficiently representative to serve
as the basis for making findings
applicable nationwide about all lenders
making payday loans to borrowers in all
States. For these reasons, the Bureau is
not relying on the Allcott study to
support any conclusions in this
rulemaking about inability to protect
interests.
For the reasons described above, the
Bureau determines that the available
evidence does not provide a sufficiently
robust and reliable basis to conclude
that consumers who use covered shortterm or longer-term balloon-payment
loans are unable to protect their
interests in selecting or using the loans.
Accordingly, the Bureau determines to
revoke the 2017 Final Rule’s finding
that consumers are unable to protect
themselves in selecting or using payday
loans.
D. Conclusion on Abusiveness Theories
As set out in part VI.C above, the
Bureau determines that there are
insufficient factual and legal bases for
the 2017 Final Rule to identify the
practice as abusive. As to the lack of
understanding theory of abusiveness,
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there are three discrete and independent
grounds that justify revoking the
identification of an abusive practice: (1)
That there is no taking unreasonable
advantage of consumers in that context;
(2) that the 2017 Final Rule should have
applied a different interpretation of the
lack of understanding element of
abusiveness under section 1031(d)(2)(A)
of the Dodd-Frank Act; and (3) that the
evidence was insufficiently robust and
reliable in support of a factual
determination that consumers lack
understanding.
As to the inability to protect theory of
abusiveness, there are two independent
grounds that justify revoking the
identification of an abusive practice: (1)
That there is no unreasonable
advantage-taking of consumers; and (2)
there are insufficient legal or factual
grounds to support the identification of
consumer vulnerabilities, specifically a
lack of understanding and an inability
to protect consumer interests.
In the aggregate, the Bureau concludes
that there are independent legal and
factual conclusions sufficient to finalize
revocation of the Bureau’s identification
of abusive practices under both the
consumer lack of understanding and the
consumer inability to protect theories.
VII. Consideration of Alternatives and
Conclusion
A. Consideration of Alternatives
The Bureau generally considers
alternatives in its rulemakings. Here, the
context for the consideration of
alternatives is that the Bureau, for the
reasons set forth above, is revoking the
Mandatory Underwriting Provisions of
the 2017 Final Rule, which were based
on the Bureau’s discretionary authority,
not a specific statutory directive.341 The
2017 Final Rule would eliminate most
covered short-term and longer-term
balloon-payment loans.
The Bureau’s Proposal
In part V.D of the 2019 NPRM, the
Bureau set forth its preliminary
consideration of alternatives. The
Bureau stated that, in light of the fact
that the Bureau is revoking the
Mandatory Underwriting Provisions of
the 2017 Final Rule, the Bureau does
not believe that the alternative
interventions to the Mandatory
Underwriting Provisions considered in
the 2017 Final Rule are viable
alternatives to the Bureau’s proposed
revocation of the Mandatory
Underwriting Provisions, because the
341 12 U.S.C. 5531(b) (‘‘The Bureau may prescribe
rules applicable to a covered person or service
provider identifying as unlawful unfair, deceptive,
or abusive acts or practices.’’) (emphasis added).
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Bureau is proposing to revoke the
underlying findings concerning the
existence of an unfair and abusive
practice.342 The Bureau stated that it
also does not believe that the
expenditure of substantial Bureau
resources on the development of
possible alternative theories of unfair or
abusive practices and corollary
preventative remedies is warranted
given the likely complexity of such an
endeavor. Additionally, the Bureau
stated that it is not choosing to exercise
its rulemaking discretion in order to
pursue new mandated disclosure
requirements pursuant to section 1032
of the Dodd-Frank Act.
In parts V.B.1 and V.B.3 of the 2019
NPRM, the Bureau stated its preliminary
view that it cannot in a timely and costeffective manner develop evidence that
might corroborate the 2017 Final Rule’s
interpretation of the limited data from a
portion of the Mann study and the
results of the Pew study that the 2017
Final Rule relied on to support its key
findings.
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Comments Received
Consumer groups and others stated
that one viable alternative would be for
the Bureau to withdraw the 2019 NPRM,
allow implementation of the 2017 Final
Rule to proceed, and analyze the effects
of the Mandatory Underwriting
Provisions after implementation.
Another alternative, they said, would be
additional research, which would not be
too complex or costly, because the
Bureau has a Congressionally mandated
Office of Research with extensive
research capabilities, as well as a new
office focused on cost-benefit analysis,
and available budget authority that it is
not using. Further, they said, timeliness
is not a concern here, because there is
no deadline or requirement for the
Bureau to reconsider its own rule. Thus,
they stated, the Bureau declining to
conduct new research would appear to
be nothing more than a pretext to justify
its chosen result. Finally, consumer
groups stated, a Bureau declination of
conducting additional research in this
area would conflict with the Bureau’s
stated commitment to encourage
consumer savings and to ensure that the
market for liquidity-bridge loan
products is fair, because if such loan
products are expensive, misleadingly
offered, or difficult to use safely, it can
be harder for consumers to build
savings.
342 This includes, for instance, the payment-toincome alternative, limits on the number of loans
in a sequence, the various State law regulatory
approaches such as loan caps, and other
interventions. See 82 FR 54472, 54636–40.
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Industry commenters and others
stated that the 2019 NPRM properly did
not adopt any of the alternative
approaches that it considered. These
commenters stated that mandating new
disclosures would change little. They
also stated that the alternatives
considered in the 2017 Final Rule rest
on the same insufficient findings as the
Mandatory Underwriting Provisions and
it would not be a good use of the
Bureau’s limited resources to develop
new evidence to support such
alternatives; instead, those resources
would be better spent on Office of
Innovation initiatives. Some industry
commenters noted that the 2017 Final
Rule acknowledged that short-duration
sequences of short-term payday loans
can be welfare enhancing for
consumers. And, they stated, to the
extent any problem was identified by
the 2017 Final Rule, it was short-term
loan sequences of long duration. At least
one industry commenter stated that the
appropriate remedy for such harm if it
exists would be to address loan
sequence duration directly rather than
apply Mandatory Underwriting
Provisions to all covered loans at the
time a consumer initially takes out a
loan. This commenter stated that the
mismatch between the injurious
practice asserted by the Bureau and the
Bureau’s chosen remedy of the
Mandatory Underwriting Provisions
means that the 2017 Final Rule’s
Mandatory Underwriting Provisions are
arbitrary and capricious.
One commenter that is one of the
three nationwide credit bureaus stated
that it sees its short-term lender
customers using a combination of
traditional and alternative credit data,
and that traditional lenders also use
traditional and alternative credit data.
As a result, it said, the previously
different underwriting policies and
credit data requirements of short-term
and traditional lenders are becoming
quite similar. The commenter further
stated that short-term lending appears to
be undergoing a shift in the type of
loans being requested by consumers and
therefore provided by lenders.
Specifically, the credit bureau stated, its
data shows that the number of singlepayment loans reported to it in 2018
grew 17 percent, while the number of
short-term installment loans grew 82
percent. The commenter also cited to
industry data showing that singlepayment loans declined 4 percent in
2018 while installment loans grew by 18
percent. This commenter concluded that
these market changes offer benefits to
consumers and obviate the need for the
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specific underwriting requirements in
the 2017 Final Rule.
Final Rule
For the reasons set forth above, the
Bureau has determined that it should
not have identified an unfair and
abusive practice as set out in § 1041.4 of
the 2017 Final Rule and the Bureau has
therefore determined to revoke § 1041.4
and its related provisions. Because the
Bureau has determined that it should
not have identified an unfair and
abusive practice in § 1041.4, the Bureau
determines that it would not be proper
to allow implementation of the
Mandatory Underwriting Provisions of
the 2017 Final Rule to proceed.
Absent an identified unfair or abusive
practice, the Bureau does not have the
authority to implement alternatives to
the 2017 Final Rule’s Mandatory
Underwriting Provisions that are based
in the Bureau’s UDAAP authority in
section 1031 of the Dodd-Frank Act.
Moreover, the Bureau is not exercising
its discretion to undertake additional
research in an attempt to support the
unfairness and abusiveness
identifications of the 2017 Final Rule, or
to do so with respect to any of the
alternatives based in the Bureau’s
UDAAP authority that the Bureau
considered and dismissed in the course
of issuing the 2017 Final Rule. The
Bureau believes that innovation is
occurring rapidly in the small-dollar
lending market and that some lenders
are underwriting small-dollar loans in
new ways that better meet both lenders’
and consumers’ needs. These new
methods do not appear to meet or be
likely to meet the specific ability-torepay requirements that were set forth
in the Mandatory Underwriting
Provisions of the 2017 Final Rule, and,
therefore, consumers might not be able
to choose these products if such
requirements were applicable. But even
independent of that consideration, the
Bureau does not view as promising the
prospect that additional Bureau research
would seek to develop the necessary
support for UDAAP findings such as
that consumers lack the requisite
understanding of the risk of substantial
injury where they take out payday loans
where lenders have not determined that
they have the ability to repay them, that
consumers are unable to protect their
own interests before they take out
payday loans, or that lenders’ common
business practices take unreasonable
advantage of consumers.343 Moreover,
343 Consumer protection issues have arisen and
will continue to arise in the payday market, as in
other markets, as a result of a given lender’s specific
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any Bureau research effort in this area
pursuant to a possible UDAAP
rulemaking would require significant
resources and a substantial but
uncertain amount of time. The Bureau
has a busy rulemaking agenda with
many other rulemakings that the Bureau
views as more promising to prioritize in
order to achieve the Bureau’s mission of
preventing consumer harm.344 Finally,
the Bureau does not believe it would be
sensible to further delay the compliance
date of the Mandatory Underwriting
Provisions based solely on the uncertain
prospect that additional Bureau research
might develop further support for the
unfairness and abusiveness
identifications in the 2017 Final Rule.
On the other hand, the Bureau
believes that disclosures constitute a
more promising avenue for research.
This research would not be focused on
developing mandated disclosures under
section 1031 of the Dodd-Frank Act to
prevent UDAAPs, but rather would be
focused on developing potential
disclosures under section 1032 of the
Dodd-Frank Act to provide consumers
with information to help them
understand better certain features of
payday loans. The Bureau believes that
payday loans can provide benefits to
certain consumers. At the same time,
the Bureau believes that improved
disclosures could be helpful to
consumers and therefore expects to
consider them further. The Bureau
views disclosures as a more promising
investment of resources than the other
alternatives discussed above, for the
following reasons.
There have been two disclosure
interventions in the payday loan market
evaluated so far. The first was a
randomized controlled trial testing three
different disclosures in a short-run
experiment across 11 States.345 The
three disclosures were presented on the
envelope containing the borrower’s loan
proceeds and included information on
either (a) the APR of payday loans and
other products, (b) the dollar cost of
charges on a payday loan and credit
card for different lengths of time, or (c)
the share of people who will borrow a
payday loan for different sequence
practices, and the Bureau is prepared to address
those issues (for example, through supervision and
enforcement against deceptive claims in advertising
or marketing for payday loans).
344 E.g., Semiannual Regulatory Agenda, 84 FR
71231 (Dec. 26, 2019). With respect to comments on
the Bureau’s general budget, the Bureau notes that
it exercises its discretion to make budgetary
decisions based on policy considerations that are
well beyond the scope of this rulemaking.
345 Marianne Bertrand & Adair Morse,
Information Disclosure, Cognitive Biases and
Payday Borrowing, 66 J. of Fin. 1865, 1865–93 (Dec.
2011) (Bertrand & Morse).
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lengths. The authors found that the
dollar cost disclosure reduced
reborrowing by about 11 percent, while
the APR disclosure had a more modest
effect. The disclosure highlighting
reborrowing length had an insignificant
effect.
Following this study, in 2012 Texas
began requiring a disclosure that
incorporates elements of the study’s
dollar and APR disclosures in addition
to other information for all payday and
vehicle title loans. Bureau researchers
examined the effects of this policy
change and found a reduction in payday
loan volume of 13 percent, similar to
what was found in the aforementioned
randomized controlled trial.346
The 2019 NPRM noted that the Texas
disclosures discussed above had
‘‘limited’’ effects and suggested this
might be because payday loan users
were already aware that such loans can
result in extended loan sequences.
However, as noted above, the reduction
in payday loan borrowing was 11 to 13
percent, which suggests that a nontrivial share of consumers in the payday
market may have responded to the
additional information and/or to
changes in how the information is
presented by changing their borrowing
behavior.347
The Bureau believes that the existing
research in this area is promising but
sparse. The Bureau will soon begin
conducting research to better
understand what information about
payday loans consumers want to know
as well as how consumers process,
comprehend, and use that information
in their decisions about payday loan
use. In designing and testing disclosure
forms, Bureau researchers plan to
consider existing but limited research
on payday disclosures, States’
experiences in this market, Bureau
researchers’ subject-matter expertise,
and the information and views
consumers, consumer advocates,
industry participants, and other
stakeholders have shared with the
Bureau. Measurable data from Bureau
disclosure research will enable the
Bureau to make stronger and more
reliable inferences about the potential
impact of model disclosures on the
346 Bureau of Consumer Fin. Prot., Supplemental
Findings on Payday, Payday Installment, and
Vehicle Title Loans, and Deposit Advance Products
(June 2016), https://files.consumerfinance.gov/f/
documents/Supplemental_Report_060116.pdf.
347 Bertrand & Morse also argue ‘‘it is important
to cast the 11% reduction in borrowing in light of
the low cost and benign nature of information
disclosure, relative to other policy alternatives’’ and
note that other interventions may have larger effects
but may also negatively affect consumers who are
not the intended target of those interventions.
Bertrand & Morse at 1891.
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payday loan market than is possible
with current data.
Conclusion
The Bureau believes that each of the
concerns raised and finalized above are
sufficiently serious in their own right to
merit reconsideration of the 2017 Final
Rule, and even more so when
considered in combination. The Bureau
now concludes that the 2017 Final Rule
should have used an alternate approach
in applying section 1031 of the DoddFrank Act in determining what kind of
consumer understanding is necessary to
make the findings on reasonable
avoidability and lack of understanding
required to support a determination that
the identified practice was unfair or
abusive; and in evaluating whether the
factors set forth in the 2017 Final Rule
are the appropriate standard for taking
unreasonable advantage of consumers
and, if so, whether the Bureau properly
applied that standard. The Bureau also
believes that the 2017 Final Rule
provided an insufficient basis for
finding that consumers cannot protect
their interests. The Bureau concludes
that it is appropriate to revoke § 1041.4
and that it is also appropriate to revoke
the remainder of the Mandatory
Underwriting Provisions of the 2017
Final Rule.
The technical aspects of this
revocation and additional, more specific
questions with regard to the specific
amendments to the 2017 Final Rule are
discussed in more detail in part VIII
below.
VIII. Section-by-Section Analysis
As described in greater detail in parts
V, VI and VII above, the Bureau is
revoking §§ 1041.4 and 1041.5 and
related provisions of the 2017 Final
Rule, which respectively identify the
failure to reasonably determine whether
consumers have the ability to repay
certain covered loans as an unfair and
abusive practice and establish certain
underwriting requirements to prevent
that practice. The Bureau is also
revoking certain derivative provisions
that are premised on these two core
sections, including a principal stepdown exemption for certain loans in
§ 1041.6, two provisions (§§ 1041.10 and
1041.11) that facilitate lenders’ ability to
obtain certain information about
consumers’ past borrowing history from
information systems that have registered
with the Bureau, and certain
recordkeeping requirements in
§ 1041.12. The Bureau concludes that,
because §§ 1041.4 and 1041.5 are being
revoked, these derivative provisions no
longer serve the purposes for which
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they were included in the 2017 Final
Rule and are now revoked as well.
This part VIII describes the particular
modifications the Bureau is making in
order to implement the revocation of
these various Mandatory Underwriting
Provisions. Specifically, as discussed in
more detail below, the Bureau is
removing in their entirety the regulatory
text and associated commentary for
subpart B of the Rule (§§ 1041.4 through
1041.6) and certain provisions of
subpart D (§§ 1041.10 and 1041.11, and
parts of § 1041.12). The Bureau is also
amending other portions of regulatory
text and commentary in the 2017 Final
Rule that refer to the Mandatory
Underwriting Provisions or the
requirements therein.
As this part VIII is describing the
specific modifications to regulatory text
and commentary that the Bureau is
making, it refers to ‘‘removing’’ text
rather than ‘‘revoking’’ it, consistent
with the language agencies use to
instruct the Office of the Federal
Register as to changes to be made in the
Code of Federal Regulations.348 In order
to avoid confusion, the Bureau is not
renumbering the sections or paragraphs
that it is not removing; rather, the
Bureau now marks the removed section
and paragraph numbers as ‘‘[Reserved]’’
so that the remaining provisions will
continue with the same numbering as
they have currently.
Due to changes in requirements by the
Office of the Federal Register, when
amending commentary the Bureau is
now required to reprint certain
subsections being amended in their
entirety rather than providing more
targeted amendatory instructions. The
sections of commentary included in this
document show the language of those
sections now that the Bureau is
adopting its changes as proposed. The
Bureau is releasing an unofficial,
informal redline to assist industry and
other stakeholders in reviewing the
changes that it is making to the
regulatory text and commentary of the
2017 Final Rule.349
The Bureau did not receive comments
on these proposed modifications. The
sections below describe the Bureau’s
final actions regarding these provisions.
348 As noted previously, while most of the 2017
Final Rule has a compliance date of August 19,
2019, the Rule became effective on January 16,
2018.
349 This redline can be found on the Bureau’s
regulatory implementation page for the Rule at
https://www.consumerfinance.gov/policycompliance/guidance/payday-lending-rule/. If any
conflicts exist between the redline and the text of
the 2017 Final Rule or this final rule revoking the
Mandatory Underwriting Provisions, the documents
published in the Federal Register are the
controlling documents.
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Subpart A—General
Section 1041.1
Authority and Purpose
1(b) Purpose
Section 1041.1 sets forth the Rule’s
authority and purpose. The Bureau is
removing the last sentence of
§ 1041.1(b), which currently provides
that part 1041 also prescribes processes
and criteria for registration of
information systems. The Bureau is
making this change for consistency with
the removal of §§ 1041.10 and 1041.11
discussed below.
Section 1041.2
Definitions
2(a) Definitions
2(a)(5) Consummation
Section 1041.2(a)(5) defines the term
consummation. Comment (a)(5)–2
describes what types of loan
modifications trigger underwriting
requirements pursuant to § 1041.5. The
Bureau is removing comment 2(a)(5)–1
for consistency with the removal of
§ 1041.5 discussed below.
2(a)(14) Loan Sequence or Sequence
Section 1041.2(a)(14) defines the
terms loan sequence and sequence to
mean a series of consecutive or
concurrent covered short-term loans, or
covered longer-term balloon loans, or a
combination thereof, in which each of
the loans (other than the first loan) is
made during the period in which the
consumer has a covered short-term or
longer-term balloon-payment loan
outstanding and for 30 days thereafter.
These terms are used in §§ 1041.5,
1041.6, and 1041.12(b)(3), and related
commentary. The Bureau is removing
and reserving § 1041.2(a)(14) for
consistency with the removal of the
provisions in which these terms appear,
as discussed below.
2(a)(19) Vehicle Security
Section 1041.2(a)(19) defines the term
vehicle security to generally mean an
interest in a consumer’s motor vehicle
obtained by the lender or service
provider as a condition of the credit.
This term is used in §§ 1041.6 and
1041.12(b)(3) and in commentary
accompanying §§ 1041.5(a)(8) and
1041.6. The Bureau is removing and
reserving § 1041.2(a)(19) for consistency
with the removal of the provisions in
which this term appears, as discussed
below.
The Bureau requested comment on
whether there are any other definitional
terms or portions thereof, in addition to
the terms loan sequence or sequence
and vehicle security, that it should
similarly remove for consistency with
the proposed revocation of the
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Mandatory Underwriting Provisions.
The Bureau received no such comments
and finalizes this provision as proposed.
Section 1041.3 Scope of Coverage;
Exclusions; Exemptions
3(e) Alternative Loan
Section 1041.3(e) provides a
conditional exemption for alternative
loans from the requirements of 12 CFR
part 1041, which are covered loans that
satisfy the conditions and requirements
set forth in § 1041.3(e). The Bureau is
revising two comments accompanying
§ 1041.3(e) that reference the Mandatory
Underwriting Provisions, as described
below.
3(e)(2) Borrowing History Condition
Section 1041.3(e)(2) addresses a
consumer’s borrowing history on other
alternative loans. Comment 3(e)(2)–1
describes the relevant records a lender
may use to determine that the
consumer’s borrowing history on
alternative covered loans meets the
criteria set forth in § 1041.3(e)(2). The
Bureau is revising the second sentence
of this comment to remove language that
refers to consumer reports obtained
from information systems registered
with the Bureau. The Bureau is
changing this for consistency with the
removal of § 1041.11 discussed below.
3(e)(3) Income Documentation
Condition
Section 1041.3(e)(3) requires a lender
to maintain and comply with policies
and procedures for documenting proof
of recurring income. Comment 3(e)(3)–
1 generally describes the income
documentation policies and procedures
that a lender must maintain to satisfy
the income documentation condition of
the conditional exemption. The Bureau
is removing the second sentence of the
comment, which distinguishes the
income document condition of
§ 1041.3(e)(3) from the income
documentation procedures required by
§ 1041.5(c)(2). The Bureau is revising
this comment for consistency with the
removal of § 1041.5 discussed below.
Subpart B—Underwriting
Subpart B sets forth the rule’s
underwriting requirements in §§ 1041.4
through 1041.6. The Bureau is removing
and reserving the heading for subpart B;
the removal of its contents is discussed
below.
Section 1041.4 Identification of Unfair
and Abusive Practice
Section 1041.4 provides that it is an
unfair and abusive practice for a lender
to make covered short-term or longerterm balloon-payment loans without
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reasonably determining that the
consumers will have the ability to repay
the loans according to their terms. For
the reasons set forth above, the Bureau
is removing and reserving § 1041.4 and
removing the commentary
accompanying § 1041.4.
Section 1041.5 Ability-to-Repay
Determination Required
Section 1041.5 generally requires a
lender to make a reasonable
determination that a consumer has the
ability to repay a covered short-term or
a longer-term balloon-payment loan
before making such a loan or increasing
the credit available under such a loan.
It also sets forth certain minimum
requirements for how a lender may
reasonably determine that a consumer
has the ability to repay such a loan. For
the reasons set forth above, the Bureau
is removing and reserving § 1041.5 and
removing the commentary
accompanying § 1041.5.
Section 1041.6 Principal Step-Down
Exemption for Certain Covered ShortTerm Loans
Section 1041.6 provides a principal
step-down exemption for covered shortterm loans that satisfy requirements set
forth in § 1041.6(b) through (e);
§§ 1041.4 and 1041.5 do not apply to
such conditionally exempt loans. For
the reasons set forth above and for
consistency with the removal of
§§ 1041.4 and 1041.5, the Bureau is
removing and reserving § 1041.6 and
removing the commentary
accompanying § 1041.6.
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Subpart D—Information Furnishing,
Recordkeeping, Anti-Evasion,
Severability, and Dates
Subpart D contains the rule’s
requirements regarding information
furnishing (§ 1041.10), registered
information systems (§ 1041.11), and
compliance programs and record
retention (§ 1041.12); sets forth a
prohibition against evasion (§ 1041.13);
addresses severability (§ 1041.14); and
sets forth effective and compliance dates
(§ 1041.15). The Bureau is removing the
portion of the subpart’s heading that
refers to information furnishing for
consistency with the removal of
§§ 1041.10 and 1041.11. Specific
amendments to this subpart’s contents
are discussed below.
Section 1041.10 Information
Furnishing Requirements
Among other things §§ 1041.5 and
1041.6, discussed above, require lenders
when making covered short-term and
longer-term balloon-payment loans to
obtain consumer reports from
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information systems registered with the
Bureau pursuant to § 1041.11. Section
1041.10, in turn, requires lenders to
furnish certain information about each
covered short-term and longer-term
balloon-payment loan to each registered
information system. For the reasons set
forth above and for consistency with the
other changes announced herein, the
Bureau is removing and reserving
§ 1041.10 and removing the commentary
accompanying § 1041.10.
Section 1041.11 Registered
Information Systems
Section 1041.11 sets forth processes
for information systems to register with
the Bureau, describes the conditions
that an entity must satisfy in order to
become a registered information system,
addresses notices of material change,
suspension and revocation of a
registration, and administrative appeals.
For the reasons set forth above and for
consistency with the other changes
announced herein, the Bureau is
removing and reserving § 1041.11 and
removing the commentary
accompanying § 1041.11.
Section 1041.12 Compliance Program
and Record Retention
12(a) Compliance Program
Section 1041.12 provides that a lender
making a covered loan must develop
and follow written policies and
procedures that are reasonably designed
to ensure compliance with the
requirements of part 1041. Comment
12(a)–1, in part, lists the various
sections of the rule that must be
addressed in the compliance program.
The Bureau is removing from that
comment the references to the ability-torepay requirements in § 1041.5, the
alternative requirements in § 1041.6,
and the requirements on furnishing loan
information to registered and
preliminarily registered information
systems in § 1041.10.
Comment 12(a)–2 explains that the
written policies and procedures a lender
must develop and follow under
§ 1041.12(a) depend on the types of
covered loans that the lender makes,
and provides certain examples. The
Bureau is removing this comment as its
examples are largely focused on
compliance with §§ 1041.5, 1041.6, and
1041.10. The Bureau does not believe
that it is useful to retain the remaining
portion of this comment focusing solely
on disclosures related to § 1041.9,
although of course it remains true
pursuant to § 1041.12(a) itself that a
lender that makes a covered loan subject
to the requirements of § 1041.9 must
develop and follow written policies and
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procedures to provide the required
disclosures to consumers.
The Bureau is making these changes
for consistency with the removal of
§§ 1041.5, 1041.6, and 1041.10
discussed above.
12(b) Record Retention
Section 1041.12(b) provides that a
lender must retain evidence of
compliance with part 1041 for 36
months after the date on which a
covered loan ceases to be an outstanding
loan. Section 1041.12(b)(1) through (5)
sets forth particular requirements for
retaining specific records, including:
Retention of the loan agreement and
documentation obtained in connection
with originating a covered short-term or
longer-term balloon-payment loan
(§ 1041.12(b)(1)); retention of electronic
records in tabular format for covered
short-term or longer-term balloonpayment loans regarding origination
calculations and determinations under
§ 1041.5 (§ 1041.12(b)(2)) as well as loan
type, terms, and performance
(§ 1041.12(b)(3)); and retention of
records relating to payment practices for
covered loans (§ 1041.12(b)(4) and (5)).
Revisions to the regulatory text of
§ 1041.12(b)(1) through (5), and related
commentary, are discussed in turn
further below.
Comment 12(b)–1 addresses record
retention requirements generally. The
Bureau is removing the portion of this
comment explaining that a lender is
required to retain various categories of
documentation and information
specifically in connection with the
underwriting and performance of
covered short-term and longer-term
balloon-payment loans, while retaining
(with minor revisions for clarity) the
reference to records concerning
payment practices in connection with
covered loans. The comment also
explains that the items listed in
§ 1041.12(b) are non-exhaustive as to the
records that may need to be retained as
evidence of compliance with part 1041.
The Bureau is removing the remainder
of this sentence, which specifically
refers to loan origination and
underwriting, terms and performance,
and payment practices (the specific
mention of which is no longer necessary
if the other references are removed). The
Bureau is making these changes for
consistency with the removal of
§§ 1041.4 through 1041.6 discussed
above as well as the changes to
§ 1041.12(b)(1) discussed below.
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12(b)(1) Retention of Loan Agreement
and Documentation Obtained in
Connection With Originating a Covered
Short-Term or Covered Longer-Term
Balloon-Payment Loan
Section 1041.12(b)(1) requires that, in
order to comply with the requirements
in § 1041.12(b), a lender must retain or
be able to reproduce an image of the
loan agreement and certain
documentation obtained in connection
with the origination of a covered shortterm or longer-term balloon-payment
loan. The Bureau is removing the
language in the heading and in the
introductory text for § 1041.12(b)(1) that
refers to certain documentation obtained
in connection with a covered short-term
or longer-term balloon-payment loan, as
well as the entirety of § 1041.12(b)(1)(i)
through (iii) that specifies particular
categories of such documentation. As
proposed, the remainder of this
provision requires a lender to retain or
be able to reproduce an image of the
loan agreement for each covered loan.
Retaining a copy of the loan agreement
is necessary for all lenders, pursuant to
the requirement in § 1041.12(b) that
lenders retain evidence of compliance
for covered loans, in order to determine
covered loan status for purposes of
determining compliance with the
Payment Provisions; the Bureau
explicitly is retaining this requirement
in § 1041.12(b)(1), for all covered loans,
to avoid potential confusion. The
Bureau is also removing the
commentary accompanying
§ 1041.12(b)(1). The Bureau is making
these changes for consistency with the
other changes announced herein.
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12(b)(2) Electronic Records in Tabular
Format Regarding Origination
Calculations and Determinations for a
Covered Short-Term or Covered LongerTerm Balloon-Payment Loan Under
§ 1041.5
Section 1041.12(b)(2) requires lenders
to retain records regarding origination
calculations and determinations for a
covered short-term or longer-term
balloon-payment loan, including
specific required information listed in
§ 1041.12(b)(2)(i) through (v). It requires
lenders to retain these records in an
electronic, tabular format. For
consistency with the removal of
§ 1041.5, the Bureau is removing and
reserving § 1041.12(b)(2) and removing
the commentary accompanying
§ 1041.12(b)(2).
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12(b)(3) Electronic Records in Tabular
Format Regarding Type, Terms, and
Performance for Covered Short-Term or
Covered Longer-Term Balloon-Payment
Loans
Section 1041.12(b)(3) requires lenders
to retain records regarding the type,
terms, and performance of a covered
short-term or longer-term balloonpayment loan, including specific
required information listed in
§ 1041.12(b)(3)(i) through (vii). It
requires lenders to retain these records
in an electronic, tabular format. The
Bureau is removing and reserving
§ 1041.12(b)(3) and removing the
commentary accompanying
§ 1041.12(b)(3), for consistency with the
removal of §§ 1041.5 and 1041.6
discussed above.
12(b)(5) Electronic Records in Tabular
Format Regarding Payment Practices for
Covered Loans
Section 1041.12(b)(5) requires lenders
to retain records regarding the payment
practices for covered loans, including
specific required information listed in
§ 1041.12(b)(5)(i) and (ii). It requires
lenders to retain these records in an
electronic, tabular format. For
consistency with the other changes
announced herein, the Bureau is
revising comment 12(b)(5)–1 by
removing most of its content, which
focuses on compliance with
§ 1041.12(b)(2) and (3) in conjunction
with § 1041.12(b)(5), and in its place the
Bureau is incorporating the description
of how a lender complies with the
requirement to retain records in a
tabular format, which is currently set
forth in comment 12(b)(2)–1.
Section 1041.15 Effective and
Compliance Dates
15(d) November 19, 2020 Compliance
Date
Section 1041.15 states the effective
and compliance dates for various
aspects of 12 CFR part 1041. In
§ 1041.15, for the reasons set forth above
and for consistency with the other
changes announced herein, the Bureau
is removing paragraph (d), which
provides that the compliance date for
§§ 1041.4 through 1041.6, 1041.10, and
1041.12(b)(1) through (3) is November
19, 2020.
Appendix A to Part 1041—Model Forms
A–1 Model Form for First § 1041.6 Loan
Section 1041.6(e)(2)(i) requires a
lender that makes a first loan in
sequence of loans under the principal
step-down exemption in § 1041.6 to
provide a consumer with a notice that
includes certain information and
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statements, using language that is
substantially similar to the language set
forth in Model Form A–1. For the
reasons sets forth above and for
consistency with the removal of
§ 1041.6, the Bureau is removing and
reserving Model Form A–1.
A–2 Model Form for Third § 1041.6
Loan
Section 1041.6(e)(2)(ii) requires a
lender that makes a third loan in
sequence of loans under the principal
step-down exemption in § 1041.6 to
provide a consumer with a notice that
includes certain information and
statements, using language that is
substantially similar to the language set
forth in Model Form A–2. For the
reasons sets forth above and for
consistency with the removal of
§ 1041.6, the Bureau is removing and
reserving Model Form A–2.
IX. Compliance and Effective Dates
The Bureau proposed that this final
rule take effect 60 days after publication
in the Federal Register.350 As discussed
above, the current compliance date for
the Mandatory Underwriting Provisions
of the 2017 Final Rule was changed
from August 19, 2019, as originally set
out in the 2017 Final Rule, to November
19, 2020, as set out in the final rule
delaying this compliance date.
The Bureau sought comment on this
aspect of the proposal. The Bureau
received none. However, in order to
ensure sufficient time to comply with
procedures for submitting the rule to
Congress under the Congressional
Review Act, the Bureau has determined
that the effective date for this revocation
will be 90 days after publication in the
Federal Register.
X. Dodd-Frank Act Section 1022(b)(2)
Analysis
A. Overview
In developing this rule, the Bureau
considered the potential benefits, costs,
and impacts as required by section
1022(b)(2)(A) of the Dodd-Frank Act.351
Specifically, section 1022(b)(2)(A) of the
Dodd-Frank Act calls for the Bureau to
consider the potential benefits and costs
350 Section 553(d) of the APA generally requires
that the effective date of a final rule be at least 30
days after publication of that final rule, except for
(1) a substantive rule which grants or recognizes an
exemption or relieves a restriction; (2) interpretive
rules or statements of policy; or (3) as otherwise
provided by the agency for good cause found and
published with the rule. 5 U.S.C. 553(d). This final
rule does not establish any requirements; instead,
it revokes the relevant provisions of the 2017 Final
Rule. Accordingly, this final rule is a substantive
rule which relieves a restriction that is exempt from
section 553(d) of the APA.
351 12 U.S.C. 5512(b)(2)(A).
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of a regulation to consumers and
covered persons, including the potential
reduction of access by consumers to
consumer financial products or services,
the impact on depository institutions
and credit unions with $10 billion or
less in total assets as described in
section 1026 of the Dodd-Frank Act, and
the impact on consumers in rural areas.
In advance of issuing this rule, the
Bureau has consulted with the
prudential regulators and the FTC,
including consultation regarding
consistency with any prudential,
market, or systemic objectives
administered by such agencies.
1. The Need for Federal Regulatory
Action
As explained above, the Bureau now
believes that, in light of the 2017 Final
Rule’s dramatic market impacts as
detailed in the section 1022(b)(2)
analysis accompanying the 2017 Final
Rule, its evidence is insufficient to
support the findings that are necessary
to conclude that the identified practices
were unfair and abusive. The Bureau
also now believes that the finding of an
unfair and abusive practice as identified
in § 1041.4 of the 2017 Final Rule rested
on applications of section 1031(c) and
(d) of the Dodd-Frank Act that the
Bureau should no longer use given the
identification of better interpretations of
these statutory provisions. The Bureau
therefore is revoking the Mandatory
Underwriting Provisions of the 2017
Final Rule because it believes the facts
and the law do not adequately support
the conclusion that the identified
practice meets the standard for
unfairness or abusiveness under section
1031(c) and (d) of the Dodd-Frank
Act.352
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2. Data and Evidence
In this section 1022(b)(2) analysis, the
Bureau endeavors to consider
comprehensively the economic benefits
and costs that are likely to result from
revoking the Mandatory Underwriting
Provisions of the 2017 Final Rule,
possibly including some indirect effects.
Since the issuance of the 2017 Final
Rule, the body of evidence bearing on
benefits and costs has only slightly
expanded. As such, with the exception
of the new studies discussed below and
in the proposal for this final rule,353 the
Bureau has considered the same
352 The 2017 Final Rule stated that the existence
of a market failure supported the need for Federal
regulatory action. As the Bureau now believes that
there is not a need for the Federal regulatory action
described in the 2017 Final Rule, it is not necessary
for the Bureau here in the section 1022(b)(2)
analysis to identify or address a market failure.
353 84 FR 4252, 4291–94.
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information as it considered in the
section 1022(b)(2) analysis of the 2017
Final Rule, although as discussed in
parts V and VI of this final rule, the
Bureau has determined that the key
evidence is insufficient to support
finding an unfair and abusive act or
practice as well as warranting regulatory
intervention.354 The new research that
has become available after the drafting
of the 2017 Final Rule has relatively
little impact on the Bureau’s analysis
compared to the evidence cited in the
2017 Final Rule, as the implications of
this new evidence for total surplus and
consumer welfare are less clear or
probative than previously considered
evidence.
The Bureau invited submission of
additional data and studies that could
supplement those relied on in the 2017
Final Rule’s analysis which form the
predicate for the estimates here as well
as comments on the analyses of benefits
and costs contained in the 2017 Final
Rule and relied on here. While
commenters did note some new studies
that they believe are relevant to this
final rule, the Bureau still lacks
representative data that could be used to
analyze all effects of this final rule.
Absent these data, portions of the
analysis rely, at least in part, on
qualitative evidence provided to the
Bureau in previous comments,
responses to RFIs, and academic papers;
general economic principles; and the
Bureau’s experience and expertise in
consumer financial markets. As such,
many of the benefits, costs, and impacts
of this final rule are presented in general
terms or ranges (as they were in the
section 1022(b)(2) analysis of the 2017
Final Rule), rather than as point
estimates. Additional details underlying
this analysis can be found in the 2017
Final Rule and the 2019 NPRM.
3. Major Provisions and Coverage of the
Rule
In this analysis, the Bureau focuses on
the benefits, costs, and impacts of the
three major elements of the final rule:
(1) The amendment of the 2017 Final
Rule to eliminate the requirement that
lenders reasonably determine
borrowers’ ability to repay covered
short-term and longer-term balloonpayment loans according to their terms
(along with the principal step-down
exemption allowing for a principal stepdown approach to issuing a limited
number of short-term loans); (2) the
amendment of the 2017 Final Rule to
eliminate the recordkeeping
354 The same evidence may be evaluated
differently for purposes of legal and economic
analyses.
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requirements associated with (1); and
(3) the amendment of the 2017 Final
Rule to eliminate requirements
concerning lenders furnishing
information to registered information
systems as well as associated
requirements.
As discussed in the 2017 Final Rule,
there are two major classes of short-term
lenders that would be affected by the
Mandatory Underwriting Provisions:
Payday/unsecured short-term lenders,
both storefront and online, and shortterm vehicle title lenders.355 Any
depository institution offering a deposit
advance product would also be likely to
be affected by the 2017 Final Rule’s
provisions.356 Similarly, any depository
institution that might have considered
offering a deposit advance product
would likely be affected by the 2017
Final Rule’s provisions.357
In addition to short-term lenders,
lenders making longer-term balloonpayment loans (either vehicle title or
unsecured) are also covered by the 2017
Final Rule’s requirements concerning
underwriting and RISes. It follows that
the elimination of the mandatory
underwriting and RIS requirements for
lenders of each of these types have
similar effects as to those for short-term
lenders.
The amendment of the 2017 Final
Rule to eliminate its mandatory
underwriting and RIS requirements
carries implications relating to
recordkeeping requirements that apply
to any lender making covered short-term
or longer-term balloon-payment loans.
The elimination of the RIS provisions
relates to the application process and
operational requirements for entities
who otherwise would have sought to
become RISes.358
4. Description of the Baseline
The major impact of this final rule
would be to eliminate the Federal
regulations requiring underwriting of
covered short-term and longer-term
355 82
FR 54472, 54814.
id.
357 Id. at 54815. Notably, a May 23, 2018 OCC
bulletin encourages banks to offer responsible shortterm, small-dollar installment loans, which would
likely compete with the loans covered by this final
rule. Bulletin, Office of the Comptroller of the
Currency, Core Lending Principles for Short-Term,
Small-Dollar Installment Lending (OCC Bulletin
2018–14, May 23, 2018), https://www.occ.treas.gov/
news-issuances/bulletins/2018/bulletin-201814.html. See also 83 FR 58566, 58567 (Nov. 20,
2018). Given these changes, it is likely that these
firms will more seriously consider offering these
products under this rule.
358 In this part, the Bureau’s references to RISes
generally include firms in any stage of becoming an
RIS, whether they would have been preliminarily
approved, provisionally registered, or would have
completed the process at the time this rule will go
into effect.
356 See
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balloon-payment loans. No lenders are
required to comply with the 2017 Final
Rule until the compliance date (which
currently is November 19, 2020) and
until the court in litigation challenging
the 2017 Final Rule lifts its stay of the
compliance date. Accordingly, since the
Bureau is finalizing this Rule before
lenders have to comply with the
Mandatory Underwriting Provisions in
the 2017 Final Rule, no lenders have
had to comply with them. As a practical
matter, imposing regulatory
requirements and eliminating them
before covered entities have had to
actually comply with them means there
is little real-world effect on stakeholders
from the combined effect of the
imposition and the elimination of the
requirements, that is, the combined
effect is returning to the status quo prior
to the Bureau issuing the 2017 Final
Rule.359
Nevertheless, the Bureau is
considering the Bureau’s two regulatory
actions (i.e., issuing the 2017 Final Rule
and eliminating the Mandatory
Underwriting Provisions of the 2017
Final Rule prior to its compliance date)
separately for section 1022(b)(2)
analysis purposes. The effects of these
provisions were evaluated in a section
1022(b)(2) analysis when the Bureau
issued the 2017 Final Rule. The
elimination of these same provisions is
evaluated in this section 1022(b)(2)
analysis.
The Bureau takes the 2017 Final Rule
as the baseline, and considers economic
attributes of the relevant markets as the
Bureau projected them to be under the
2017 Final Rule and the existing legal
and regulatory structures (i.e., those that
have been adopted or enacted, even if
compliance is not yet required)
applicable to providers.360 This
approach assumes that any actions
already undertaken and those that will
be necessary to take in anticipation of
the compliance date would also be
reversed following elimination of the
provisions.361
359 For this section 1022(b)(2) analysis, only the
costs of eliminating the requirements are relevant,
but the Bureau notes that lenders are under no
obligation to reverse any changes made to their
processes and procedures to comply with the 2017
Final Rule, and so any lender that would incur
costs to do so could simply not reverse the
modifications to avoid incurring them.
Additionally, the Bureau does not have any
evidence that any lenders making covered loans
made any such modifications to fully comply with
the 2017 Final Rule.
360 The Bureau has discretion in each rulemaking
to choose the relevant provisions to discuss and to
choose the most appropriate baseline for that
particular rulemaking in its analysis under section
1022(b)(2)(A) of the Dodd-Frank Act.
361 The Bureau also notes that compliance
readiness is ongoing, and lenders may or may not
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The Bureau has considered the same
information as it considered in the
section 1022(b)(2) analysis of the 2017
Final Rule and has chosen not to revisit
the specific methodologies in that
analysis given the lack of new evidence
that would suggest a change to that
analysis. As such, the expected impacts
articulated in those analyses are
assumed to be features of the baseline
here.
The baseline specifically recognizes
regulatory differences across States and
consumers in the data simulations
discussed below as detailed in the
proposal.362 In general, the Bureau
believes that the State laws have become
more restrictive over the past seven
years, so that in this respect the
simulations here are more likely to
overstate than understate the effects of
the final rule.363
5. Major Impacts of the Rule
The primary impact of this final rule
relative to the baseline in which
compliance with the Mandatory
Underwriting Provisions of the 2017
Final Rule becomes mandatory will be
a substantial increase in the volume of
short-term payday and vehicle title
loans (measured in both number and
total dollar value), and a corresponding
increase in the revenues lenders realize
from these loans. The simulations set
forth in the section 1022(b)(2) analysis
accompanying the 2017 Final Rule
based on the Bureau’s data indicate that
relative to the chosen baseline payday
loan volumes will increase by 104
percent to 108 percent, with an increase
in revenue for payday lenders between
204 percent and 213 percent.364
Simulations of the impact on short-term
vehicle title lending predict an increase
continue to incur costs in anticipation of needing
to comply unless and until uncertainty around the
Mandatory Underwriting Provisions is resolved.
362 84 FR 4252, 4823.
363 Another possible change that could affect the
baseline is the June 2018 Community Financial
Services of America (a trade association
representing payday and small-dollar lenders)
revision of its best practices to add that its members
should, before extending credit, ‘‘undertake a
reasonable, good-faith effort to determine a
customer’s creditworthiness and ability to repay the
loan.’’ This practice applies to other small-dollar
loans the member makes. See Cmty. Fin. Servs. of
Am., Best Practices for the Small-Dollar Loan
Industry, https://www.cfsaa.com/files/files/CFSABestPractices.pdf (last visited Apr. 28, 2020).
364 These calculations are based on the same
simulations the Bureau described in the 2017 Final
Rule. The Bureau ran a number of simulations
based on different market structures that may occur
as a result of the Rule. The estimates cited here
come from the specifications where lenders would
make loans under both the mandatory underwriting
and principal step-down approaches. See the 2017
Final Rule for descriptions of all the simulations
conducted by the Bureau, and their results. 82 FR
54472, 54824.
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44433
in loan volumes of 809 percent to 1,329
percent relative to the chosen baseline,
with an approximately equivalent
increase in revenues.
The Bureau expects, again relative to
the chosen baseline, that these increases
will result in an increase in the number
of storefronts relative to the market
projected to exist under the 2017 Final
Rule based on the changes in storefronts
in States which adopted restrictive
regulations.365 This might in turn
improve physical access to credit for
consumers, especially for consumers in
rural areas. Additionally, the increase in
storefronts is likely to impact small
lenders and lenders in rural areas more
than larger lenders and those in areas of
greater population density. However,
the practical improvements in consumer
physical access to payday loans are not
likely to be as substantial as the increase
in storefronts may imply, as explained
in the 2017 Final Rule.366 The Bureau
also anticipates that online options
would be available to the vast majority
of current payday borrowers, including
those in rural areas.367 Therefore, the
improved physical access to payday
storefronts will likely have the largest
impact on a small set of rural consumers
who would have needed to travel
substantially longer to reach a
storefront, and who lack access to
online payday loans (or strongly prefer
loans initiated at a storefront to those
initiated online).
Increased revenues (more precisely,
increased profits) relative to the chosen
baseline are expected to lead many
current firms that would have exited the
market under the Rule to remain in the
market. Additionally, many of the
restrictions imposed by the 2017 Final
Rule could have been voluntarily
adopted by lenders absent the 2017
Final Rule, but the Bureau has no
evidence that they were. That lenders
did not voluntarily adopt these
provisions implies the 2017 Final Rule’s
impacts are welfare-decreasing for
lenders. Reversing these restrictions
should therefore be welfare-enhancing
for lenders.
As for the overall effects on
consumers, as the Bureau noted in the
2017 Final Rule, the evidence on the
impacts of the availability of payday
365 Supplemental
Findings, chapter 3 part B.
States with substantial regulatory changes
that led to substantial decreases in payday
storefronts, over 90 percent of borrowers had to
travel an additional five miles or less. 82 FR 54472,
54842.
367 This geographic impact on borrowers was
discussed specifically in the 2017 Final Rule’s
section on Reduced Geographic Availability of
Covered Short-Term Loans in part VII.F.2.b.v which
relies heavily on chapter 3 of the Bureau’s
Supplemental Findings. 82 FR 54472, 54842.
366 In
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loans on consumer welfare varies.368
The Bureau stated that ‘‘access to
payday loans may well be beneficial for
those borrowers with discrete, shortterm needs, but only if they are able to
successfully avoid long sequences of
loans.’’ 369 Given the available evidence,
the Bureau concluded that the overall
impacts of the decreased loan volumes
resulting from the 2017 Final Rule’s
Mandatory Underwriting Provisions on
consumers would be positive,370 and it
follows that the inverse effects would
ensue, relative to the chosen baseline,
from eliminating the requirements in
the 2017 Final Rule.
The Bureau has also considered new
and additional evidence that was not
available at the time of the 2017 Final
Rule. There are few such studies that
deal with the pecuniary effects of
payday loans on consumers, and none
that specifically deal with the effects of
the loans that would be eliminated by
the 2017 Final Rule (e.g., those beyond
the fourth loan in a sequence or the
seventh non-underwritten loan in a
year). As a result, the new studies do
not affect the Bureau’s analysis as set
forth above.
Relative to the considerations above,
the remaining benefits and costs of this
final rule—again relative to the baseline
in which compliance with the 2017
Final Rule will become mandatory—are
much smaller in their magnitudes and
economic importance. Most of these
impacts manifest as reductions in
administrative, compliance, or time
costs that compliance with the 2017
Final Rule would entail; or as potential
costs from revoking aspects of the 2017
Final Rule that could have decreased
fraud or increased transparency. The
Bureau expects most of these impacts to
be fairly small on a per loan/consumer/
lender basis. These impacts include,
among other things, those applicable to
the RISes under the 2017 Final Rule;
those associated with reduced
furnishing requirements on lenders and
consumers (e.g., avoiding the costs to
establish connection with RISes, forgone
benefits from reduced fraud); those
associated with making an ability-torepay determination for loans that
require one (e.g., avoiding the cost to
obtain all necessary consumer reports,
forgoing the benefit of decreased
defaults); those associated with avoiding
the 2017 Final Rule’s record retention
obligations that are specific to the
Mandatory Underwriting Provisions;
those associated with eliminating the
need for disclosures regarding principal
368 See,
e.g., id. at 54818, 54842–46.
at 54846.
370 Id. at 54835, 54842.
369 Id.
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step-down loans; and the additional
impacts associated with increased loan
volumes (e.g., changes in defaults or
account closures, non-pecuniary
changes to consumer welfare). Each of
these benefits and costs, broken down
by type of market participant, was
discussed in detail in the proposal for
this rule and the Bureau received no
new evidence to change that analysis.371
B. Potential Benefits and Costs of the
Final Rule to Consumers and Covered
Persons—Provisions Relating
Specifically to Ability-To-Repay
Determinations for Covered Short-Term
and Longer-Term Balloon-Payment
Loans
Eliminating the Mandatory
Underwriting Provisions, and the
associated restrictions on reborrowing,
is likely to have a substantial impact on
the markets for these products relative
to the markets that would exist under
the Mandatory Underwriting Provisions
in the 2017 Final Rule. In order to
present a clear analysis of the benefits
and costs of this final rule, this section
first describes the benefits and costs of
this final rule to covered persons
relative to the baseline if compliance
with the Mandatory Underwriting
Provisions in the 2017 Final Rule were
required and then discusses the
implications of this compliance for the
markets for these products.372 The
benefits and costs to consumers are then
described.
1. Benefits and Costs to Covered Persons
As this final rule removes restrictions
on the operational requirements for
lenders, allowing them to not incur the
costs associated with complying with
the Mandatory Underwriting Provisions
in the 2017 Final Rule, this section
discusses the overall benefits and costs
to lenders associated with not having to
comply with the Mandatory
Underwriting Provisions in the 2017
Final Rule rather than having to do so.
FR 4252, 4286–95.
range of credit options available to
borrowers with short-term credit needs is likely to
continue to evolve, and if the 2017 Final Rule were
to become effective it would affect that evolution
along with other factors, such as changes to State
laws and regulations, technological changes, and
general economic trends. The Bureau is not in a
position to estimate the specific impact the 2017
Final Rule would have on the offering of substitute
products. Therefore the Bureau does not attempt to
assess here any strategic de-evolution of the market
that will result if compliance with the 2017 Final
Rule becomes mandatory. Likewise, the Bureau
stated that the potential evolution of lender
offerings that may arise in response to the 2017
Final Rule was beyond the scope of the section
1022(b)(2) analysis in the 2017 Final Rule. See 82
FR 54472, 54818, 54835.
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372 The
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a. Elimination of the Operational
Requirements Associated With
Mandatory Underwriting and Principal
Step-Down Approach
Under this amendment to the 2017
Final Rule, lenders will not need to
consult their own records and the
records of their affiliates to determine
whether the borrower has taken out any
prior covered short-term or longer-term
balloon-payment loans that were still
outstanding or were repaid within the
prior 30 days. Lenders will not need to
maintain the ability-to-repay-related
records required under the 2017 Final
Rule’s Mandatory Underwriting
Provisions. Lenders will not need to
obtain a consumer report from an RIS (if
available) in order to obtain information
about the consumer’s borrowing history
across lenders. Lenders also will no
longer be required to furnish
information regarding covered shortterm and longer-term balloon-payment
loans they originate to all RISes.
Lenders will also be freed from the
obligation imposed by the 2017 Final
Rule to obtain and verify information
about the amount of an applicant’s
income (unless not reasonably available)
and major financial obligations.
The amendment to the 2017 Final
Rule’s elimination of each of these
operational requirements reduces costs
that lenders would have incurred under
the 2017 Final Rule for loan
applications (not just for loans that are
originated). Additionally, under the
amendment, lenders will not be
required to develop or adhere to
procedures to comply with each of these
operational requirements and train their
staff in them. The Bureau believes that
many lenders use automated systems
when originating loans, and would
modify those systems, or purchase
upgrades to those systems, to address
many of the operational requirements
associated with the Mandatory
Underwriting Provisions of the 2017
Final Rule. As further discussed in the
2019 NPRM’s proposal to amend the
Mandatory Underwriting Provisions in
the 2017 Final Rule, reversing the
obligation to incur operational costs
should be of relatively minimal benefit
to lenders. Reversing the obligation in
fact could result in small costs for any
lenders who changed their processes
and procedures in anticipation of
having to comply with the Rule;
however, lenders are under no
obligation to reverse these
modifications, and so any lender that
would incur costs to do so could simply
not reverse the modifications to avoid
incurring them. Additionally, most
lenders making covered loans
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apparently have not changed their
processes and procedures to fully
comply with the Mandatory
Underwriting Provisions in the 2017
Final Rule.
Each of the costs lenders would not
incur as a result of amending the 2017
Final Rule to eliminate its Mandatory
Underwriting Provisions is discussed in
the 2017 Final Rule 1022(b)(2) analysis
at part X.F.
b. Effect on Loan Volumes and Revenue
From Eliminating Underwriting
Requirements and Restrictions on
Certain Reborrowing
In order to simulate the effects of the
2017 Final Rule on lender revenue, it
was necessary to impose an analytic
structure and make certain assumptions
about the impacts of the Rule and apply
them to the data. The results of the
simulations are reviewed here; the
structure, assumptions, and data used
by the Bureau were described in detail
in the 2017 Final Rule.373 None of the
underlying data, assumptions, or
structures have changed in the Bureau’s
analysis of the impacts of this rule. As
such, the description in the 2017 Final
Rule also describes the simulations used
here.374
The Bureau’s simulations suggest that
storefront payday loan volumes will
increase between 104 percent and 108
percent under this final rule relative to
the 2017 Final Rule baseline. The
Bureau estimates that revenues of
storefront payday lenders will be
between 204 percent and 213 percent
higher if they do not have to comply
with the requirements in the 2017 Final
Rule.375 For vehicle title lending, the
simulated impacts are larger. The
Bureau’s simulations suggest that
relative to the 2017 Final Rule baseline
vehicle title loan volumes will increase
373 82
FR 54472, 54824.
numbers cited here are simply the reverse
of the numbers cited in the 2017 Final Rule as being
the most likely. There, the Bureau estimated a
decrease in loan volumes of 51 to 52 percent and
a decrease in revenues of 67 percent to 68 percent
for payday loans, and a decrease in both loan
volumes and revenues of 89 to 93 percent for
vehicle title loans. Id. at 54827, 54834. Taking the
decreased values as the baseline and reintroducing
the reduced loan volumes and revenues yields the
numbers cited here.
375 The loan volume and revenue estimates differ
for payday loans as the 2017 Final Rule imposed
limits on the sizes of loans issued under the
principal step-down approach, as well as limits on
the sizes of reborrowed loans. In the 2017 Final
Rule, the Bureau estimated that approximately 40
percent of the reduction in revenues resulted from
limits on loan sizes, while the remaining 60 percent
was the result of decreased loan volumes. Id. at
54827. The increases in revenues presented here are
estimated to stem from the same sources, in the
same proportions (i.e., approximately 40 percent
from larger loans, and approximately 60 percent
from additional loans).
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374 The
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under the final rule by between 809
percent and 1,329 percent, with a
corresponding increase in revenues for
vehicle title lenders.376 Using CFSI’s
most recent estimated revenues for
vehicle title lenders, this would mean
the elimination of the Mandatory
Underwriting Provisions of the 2017
Final Rule will translate into an increase
in annual revenues for these lenders of
approximately $3.9 billion to $4.1
billion.377
A notable impact of this increase in
loan volumes and revenues is that many
storefronts will likely exist under this
final rule that would not if they had to
comply with the Mandatory
Underwriting Provisions of the 2017
Final Rule. A pattern of contractions in
storefronts has played out in States that
have imposed laws or regulations that
resulted in similar reductions in volume
as those projected under the 2017 Final
Rule. To the extent that lenders cannot
replace reductions in revenue by
adapting their products and practices, it
follows that such a contraction—or, in
the case of vehicle title, an
elimination—would be a likely (perhaps
inevitable) response to complying with
the Mandatory Underwriting Provisions
of the 2017 Final Rule. It likewise
follows that, under this amendment to
the 2017 Final Rule to eliminate its
Mandatory Underwriting Provisions,
there will be a corresponding increase
in the number of storefronts relative to
the number of them that would exist if
they had to comply with the Mandatory
Underwriting Provisions in the 2017
Final Rule.
The Bureau notes that in recent years
there has been a gradual shift in the
market towards longer-term loans where
permitted by State law. The Bureau does
not have sufficient data to assess
whether that trend has accelerated since
the issuance of the 2017 Final Rule in
anticipation of the compliance date.378
376 As vehicle title loans are ineligible for the
principal step-down approach under the 2017 Final
Rule, there was no binding limit on the size of these
loans. This resulted in a larger decrease in volumes
for vehicle title loans relative to payday (as loans
could only be issued under the mandatory
underwriting approach) but ensured the
corresponding decrease in revenues was more
similar to the decrease in loan volumes (since all
issued loans were unrestricted in their amounts
relative to the Rule’s baseline). The increases cited
here follow a similar pattern, for similar reasons.
377 Based on pre-2017 Final Rule estimated
revenues for vehicle title lenders of approximately
$4.4 billion, reported in Eric Wilson & Eva
Wolkowitz, 2017 Financially Underserved Market
Size Study, at 46 (Ctr. for Fin. Servs. Innovation
(Dec. 2017)), https://s3.amazonaws.com/cfsiinnovation-files-2018/wp-content/uploads/2017/04/
27001546/2017-Market-Size-Report_FINAL_4.pdf,
with medium confidence.
378 Since the issuance of the 2017 Final Rule,
Florida has amended its laws to open the door to
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This trend was considered in the 2017
Final Rule as well.379 To the extent
these lenders have already made these
adaptations, and would not shift their
business practices back following
adoption of this amendment to the 2017
Final Rule to eliminate its Mandatory
Underwriting Provisions, the loan
volume and revenue estimates above
may be somewhat overstated.
Several industry commenters stated in
response to the 2019 NPRM that either
all lenders would close unless the
Mandatory Underwriting Provisions
were eliminated or that these particular
lenders would not offer any products
covered by the 2017 Final Rule. They
further argued that, as a result, the
estimates based on the simulations
understate the true change in lending.
The Bureau does not agree that all
payday lenders would close if the
Bureau did not amend the 2017 Final
Rule to eliminate its Mandatory
Underwriting Provisions. While many
storefronts would close without this
intervention and some lenders may stop
offering covered products or continuing
to operate, evidence from States that
have implemented restrictions on
lending suggest that the industry would
not disappear entirely under the 2017
Final Rule baseline and commenters did
not offer any specific evidence to the
contrary. As a result, the Bureau does
not believe the estimated benefits to
payday lenders are larger than stated in
the 2019 NPRM.
One credit reporting company
suggested in response to the 2019 NPRM
that lenders are increasingly
underwriting covered loans and
reporting these loans to an information
system thereby negating any need for
the Bureau to mandate lenders do so.
While the Bureau does not have and did
not receive data to verify whether
lenders have moved toward increased
underwriting and reporting of loans, the
Bureau did offer the possibility that
some lenders may have already made
changes in response to the Mandatory
Underwriting Provisions of the 2017
Final Rule. As a result, amending the
2017 Final Rule to eliminate its
Mandatory Underwriting Provisions
longer-term loans at interest rates above the
standard usury limit. See Fla. Stat. Ann. § 560.404.
On the other hand, a voter referendum in Colorado
has resulted in a law, effective February 1, 2019,
that capped interest rates on certain longer-term
loans. See Colo. Legislative Council Staff, Initiative
#126 Initial Fiscal Impact Statement, https://
www.sos.state.co.us/pubs/elections/Initiatives/
titleBoard/filings/2017-2018/126FiscalImpact.pdf;
see also Colo. Sec’y of State, Official Certified
Result—State Offices & Questions, https://
results.enr.clarityelections.com/CO/91808/Web02state.220747/#/c/C_2 (Proposition 111).
379 82 FR 54472, 54835.
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might increase costs for these lenders if
they chose to undo those changes, but
they would not be required to do so. To
the extent that any lenders have
increased their underwriting of covered
loans for reasons unrelated to the 2017
Final Rule, some of the effects of this
amendment to the 2017 Final Rule to
eliminate its Mandatory Underwriting
Provisions would be overstated.
One advocacy group argued the
Bureau should net out from the benefits
from amending the 2017 Final Rule to
eliminate its Mandatory Underwriting
Provisions the transfers between
consumers and lenders which would
reduce the benefit to lenders in the
analysis. The Bureau does not net out
transfers between different groups in its
analyses and instead delineates costs
and benefits for covered persons and
consumers separately. It is not doublecounting to describe increased revenues
as a benefit to lenders and increased
fees as a cost to consumers.380
The Bureau’s simulations (discussed
above) suggest that the 2017 Final Rule’s
requirements (again including the
principal step-down exemption) would
have prevented between 5.9 and 6.2
percent of payday borrowers from
initiating a sequence of loans that they
would have initiated absent the Rule.381
That is, since most consumers take out
six or fewer loans each year, and are not
engaged in long sequences of borrowing,
the 2017 Final Rule as a whole would
not have limited their borrowing.
However, under this final rule,
consumers will be able to extend their
sequences beyond three loans and will
not be required to repay one-third of the
loan each time they reborrow. As a
result, many loans will be taken out
beyond the sequence limitations
imposed by the 2017 Final Rule (e.g.,
fourth and subsequent loans within 30
days of the prior loan); these loans
account for the vast majority of the
additional volume in the Bureau’s
simulations.
Additionally, borrowers will not need to
obtain and provide to the lender certain
documentation required under the
Mandatory Underwriting Provisions of
the 2017 Final Rule; amending the 2017
Final Rule to eliminate these Mandatory
Underwriting Provisions will minimize
the complexity of the process, and
obviate the need for repeat trips to the
lender if the borrower did not bring all
the required documents initially,
thereby making the payday loan process
more convenient for consumers seeking
loans that would otherwise have been
subject to the Mandatory Underwriting
Provisions.
Industry commenters stated in
comments submitted in response to the
2019 NPRM that eliminating the
Mandatory Underwriting Provisions of
the 2017 Final Rule would save
consumers both time and money as they
would not pursue marginally faster, but
more expensive options. The Bureau
agrees consumers would save time and
effort as a result of this final rule.
2. Benefits and Costs to Consumers
Elimination of Operational
Requirements
The Bureau is amending the 2017
Final Rule to eliminate its Mandatory
Underwriting Provisions, which
removes the operational requirements
associated with underwriting loans
originated under the Mandatory
Underwriting Provisions, and the
various recordkeeping procedures
associated with the principal step-down
approach. As such, under the
amendment consumers should obtain
funds faster than under the 2017 Final
Rule. Consumers obtaining loans that
would have been subject to the 2017
Final Rule’s Mandatory Underwriting
Provisions will experience the most
significant gains from the amendment of
the 2017 Final Rule to eliminate its
Mandatory Underwriting Provisions.
Estimates of the time required to
manually process an application suggest
that eliminating the Mandatory
Underwriting Provisions will make the
borrowing process 15 to 45 minutes
faster, a consideration many of these
consumers may find important given
than convenience is an important
product feature on which payday
lenders compete for customers.382
Improved Access to Initial Loans
Because the Bureau’s amendment of
the 2017 Final Rule to eliminate its
Mandatory Underwriting Provisions
would remove the restrictions on
obtaining loans, consumers will have
increased access to loans. Initial covered
short-term loans—i.e., those taken out
by borrowers who have not recently had
a covered short-term loan—are
presumably taken out because of a need
for credit that is not the result of prior
borrowing of covered short-term loans.
Consumers newly able to access these
loans may experience a variety of
benefits as detailed below.
Based on the simulations discussed in
the 2017 Final Rule, the Bureau
estimates that amending the 2017 Final
Rule to eliminate its Mandatory
Underwriting Provisions would result in
lenders making about 5 percent more
initial payday loans (i.e., those that are
not part of an existing sequence) due to
the elimination of the annual loan
limits, and roughly 6 percent more
borrowers will be able to initiate a new
sequence of loans that they could not
start under the 2017 Final Rule. That is,
amending the 2017 Final Rule to
eliminate its Mandatory Underwriting
Provisions would result in lenders being
able to make 5 percent more payday
loans to satisfy a likely new need for
credit (based on the removal of the
annual limits on borrowing) and 6
percent of payday borrowers will have
access to new sequences of loans.
Vehicle title borrowers are likely to
a. Benefits to Consumers and Access to
Credit
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Borrowers would likely have
experienced reduced access to new
loans—i.e., loans that are not part of an
existing loan sequence—from the
restrictions and operational
requirements of the Mandatory
Underwriting Provisions of the 2017
Final Rule. Some borrowers also would
have been prevented from rolling loans
over or reborrowing shortly after
repaying a prior loan under the 2017
Final Rule. Some borrowers might still
have been able to borrow, but for
smaller amounts or with different loan
structures, and might have found this
less preferable to them than the terms
they would have received absent the
2017 Final Rule. This amendment to
eliminate the 2017 Final Rule’s
Mandatory Underwriting Provisions
reverses each of the effects that would
otherwise result from the 2017 Final
Rule, decreasing the time and effort
consumers would need to expend to
obtain a covered short-term or longerterm balloon-payment loan, and
improving their access to credit, which
may carry pecuniary and non-pecuniary
benefits.
380 Given that the Bureau counts fees consumers
pay as a cost to consumers, subtracting out those
fees from lenders’ revenues in its consideration of
benefits to covered persons would double-count
those fees. Likewise, subtracting fees from lenders’
revenues and not including them as costs to
consumers would obfuscate the effect on
consumers. To clearly identify the costs and
benefits for each group, the Bureau considers them
separately.
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381 See id. at 54599–601. The simulation did not
attempt to estimate which type(s) of consumers
would be prevented from initiating a sequence of
loans under the 2017 Final Rule or which type(s)
of consumer would be able to obtain loans under
the principal step-down exemption.
382 The Bureau noted in the 2017 Final Rule that
it anticipated that most lenders would use
automation to make the ability-to-repay
determination, which would take substantially less
time to process. See 82 FR 54472, 54631, 54632
n.767. To the extent that lenders would have used
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substantially smaller.
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realize greater increases in access to
loans relative to payday borrowers since
a greater share of vehicle title borrowers
were expected to lose access under the
2017 Final Rule. As discussed in the
section 1022(b)(2) analysis for the 2017
Final Rule, this difference in the change
in access was in part because the 2017
Final Rule’s principal step-down
approach did not provide for vehicle
title loans and borrowers may not have
been able to substitute to payday loans
for several reasons.383
Consumers who would be able to
obtain a new loan because of the
elimination of the Mandatory
Underwriting Provisions in the 2017
Final Rule will not be subject to some
of the costs of those provisions,
including not being forced to forgo
certain purchases, incur high costs from
delayed payment of existing obligations,
or incur high costs and other negative
impacts by simply defaulting on bills;
nor will they face the need to borrow
from sources that may be more
expensive or otherwise less desirable
than payday or vehicle title loans. These
borrowers may avoid overdrafting their
checking accounts, which may be more
expensive than taking out a payday or
single-payment vehicle title loan.
Similarly, they may avoid ‘‘borrowing’’
by paying a bill late, which can lead to
late fees (which may or may not be more
expensive than a payday or vehicle title
loan) or other negative consequences
like the loss of utility service. The
section 1022(b)(2) analysis in the 2019
NPRM discussed survey evidence which
provides some information about what
borrowers are likely to do if they do not
have access to these loans.384
Industry commenters stated in
comments in response to the 2019
NPRM that there are no good
alternatives for some payday loan
borrowers, often stating the alternatives
are expensive (overdraft, non-sufficient
funds (NSF), pawn). Some further stated
that an ability-to-repay requirement
would limit access for those who most
need payday loans, such as those with
no short-term income, those with high
income volatility, and gig economy
workers. The Bureau discussed these
alternatives in the 2017 Final Rule
taking their relative costs into account
there and in the analysis for this
amendment to the 2017 Final Rule to
eliminate its Mandatory Underwriting
Provisions.385
Several consumer groups and State
attorneys general stated in comments in
response to the 2019 NPRM that the
383 82
FR 54472, 54840–41.
FR 4252, 4289.
385 82 FR 54472, 54842–46.
384 84
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increase in credit access is smaller than
stated in the 2019 NPRM because
consumers increasingly have access to
other alternatives such as installment
loans which they willingly take up.
These groups cited the experiences of
consumers in several States such as
Texas. Many of these commenters stated
these alternatives were better for
consumers than payday or title loans
and supported this by noting that other
products can help to build credit for
borrowers or are used to finish repaying
payday loans. Consumer groups also
commented that the Bureau overstated
costs in the 2017 Final Rule to be
conservative (by not accounting for
product changes when considering
access to credit) and since this analysis
reverses those effects, benefits to
consumers were overstated in the 2019
NPRM. As stated in this analysis and
that of the 2017 Final Rule, the Bureau
does not consider changes in lenders’
product offerings (including newly
offering installment loans) in response
to the 2017 Final Rule or more
generally. The Bureau noted in the
proposal that changes in industry
structure likely cause the Bureau’s
estimates of increased revenues and
benefits of access to be upper bounds as
some lenders were already shifting to
installment loans in some areas prior to
this amendment to the 2017 Final Rule
to eliminate its Mandatory Underwriting
Provisions.
Elimination of Limits on Loan Size
The 2017 Final Rule placed limits on
the size of loans lenders may issue via
the principal step-down approach,
which, as discussed above, is one of the
requirements for the principal stepdown exemption from the Mandatory
Underwriting Provisions for covered
short-term loans. Eliminating the
Mandatory Underwriting Provisions
from the 2017 Final Rule will allow
borrowers (specifically, borrowers who
cannot satisfy the Mandatory
Underwriting Provisions for covered
short-term loans and thus who can only
borrow under the principal step-down
approach) to take out larger initial loans
(where allowed by State law), and
reborrow these loans in their full
amount. In the simulation that the 2017
Final Rule stated best approximates the
market as it would exist under the 2017
Final Rule,386 around 40 percent of the
386 In the 2017 Final Rule, the Bureau describes
the results from simulations under three sets of
assumptions. This rule presents results from the
simulation approach preferred by the Bureau in the
2017 Final Rule as the one most likely to reflect the
effects of the Rule, wherein borrowers are assumed
to: Take principal step-down loans initially, apply
for loans subject to an ability-to-repay
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increase in payday loan revenues
described in part VIII.B.1.c above will
be the result of eliminating the $500 cap
on initial loans and step-down
requirements on loans issued via the
principal step-down approach.
Some commenters stated in response
to the 2019 NPRM that because loan size
caps are a price ceiling, they reduce the
supply of loans so that eliminating the
Mandatory Underwriting Provisions
would increase access to more than 1
million consumers. The Bureau agrees
that price ceilings generally reduce
supply in competitive markets, but
notes that a cap on the loan amount (as
opposed to a cap on the interest rate) is
not a price ceiling.387 Further, it is not
clear that borrowers who would
otherwise choose a loan amount above
the cap would not still use a payday
loan in the presence of a cap and
instead borrow a smaller amount.
Meanwhile, other comments stated that
loan size caps cause consumers to take
more loans than they otherwise would,
either simultaneously or sequentially,
and that loan prices do not always rise
to State caps. The Bureau notes
consumers may take a greater number of
loans as a result of a cap on loan sizes,
at least in States without a statemandated tracking database, but the
Bureau does not have evidence that this
necessarily occurs. Additionally, recent
research discussed below provides
additional evidence that lenders do
charge the prevailing cap in each
State.388
Elimination of Limits on Reborrowing
For storefront payday borrowers, most
of the increase in the availability of
credit as a result of amending the 2017
Final Rule to eliminate its Mandatory
Underwriting Provisions will be due to
borrowers who have recently taken out
loans being able to roll over their loans
or borrow again within a shorter period
of time as compared to the baseline of
the 2017 Final Rule. This is because the
Mandatory Underwriting Provisions
(including the principal step-down
provision) in the 2017 Final Rule
impose limits on the frequency, timing,
and amount of reborrowing and
eliminating the Mandatory
determination only after exhausting the principal
step-down loans, and be approved for each loan
under the mandatory underwriting approach with
a probability informed by industry estimates.
387 As discussed below, new research also
provides evidence that a price cap on the interest
rate of payday loans does not necessarily reduce the
supply of loans. See Amir Fekrazad, Impacts of
Interest Rate Caps on the Payday Loan Market:
Evidence from Rhode Island, J. Banking & Fin.
(2020).
388 Id.
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Underwriting Provisions lifts these
limitations.
The lessened constraints on
reborrowing will additionally benefit
consumers who wish to reborrow loans
that would have been made via the
principal step-down approach under the
2017 Final Rule but are unable to
decrease the principal of their loans.
This improved access to credit could
result in numerous benefits for
consumers, including avoiding
delinquencies on the loan and the
potential NSF fees associated with such
delinquencies, or avoiding the negative
consequences of being compelled to
make unaffordable amortizing payments
on the loan. However, the Bureau’s
simulations suggest that the majority of
the increased access to credit as a result
of elimination of the Mandatory
Underwriting Provisions will result
from lifting of the reborrowing
restrictions, rather than removing of the
initial loan size cap and the forced stepdown features of loans made via the
principal step-down approach.
The Bureau does not believe
eliminating the Mandatory
Underwriting Provisions in the 2017
Final Rule will lead to a substantial
decrease in instances of borrowers
defaulting on payday loans. The Bureau
believes the 2017 Final Rule’s principal
step-down provisions would likely
encourage many consumers to reduce
their debt over subsequent loans rather
than to default, and eliminating this
provision will reverse this effect. It is
necessarily true, however, that some
borrowers may avoid a default that
would have occurred under the 2017
Final Rule because they are able to
reborrow the full amount of the initial
loan with the elimination of the
Mandatory Underwriting Provisions in
the Rule.
Increased Geographic Availability of
Covered Short-Term Loans
Consumers will also have somewhat
greater physical access to payday
storefront locations with the elimination
of the Mandatory Underwriting
Provisions in the 2017 Final Rule. Using
the loan volume impacts previously
calculated above for storefront lenders,
the Bureau forecasts that a large number
of storefronts will remain open with the
elimination of the Mandatory
Underwriting Provisions that would
have closed had the lenders been
required to comply with these
Provisions. However, that consumers’
geographic access to stores will not be
substantially increased in most areas as
a result of eliminating the Mandatory
Underwriting Provisions in the 2017
Final Rule. As discussed in the 2017
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Final Rule, evidence from States that
have enacted laws or regulations that
led to a substantial decrease in the
number of stores suggest that there is
usually a store that remains open near
one that closes.389 Consequently, the
Bureau believes that the increase in the
number of storefront locations will not
substantially increase access for most
consumers and the Bureau received no
evidence to the contrary. The Bureau
noted, however, that for consumers
seeking single-payment vehicle title
loans, the benefits would be far larger as
the 2017 Final Rule’s estimated impacts
would lead to an 89 to 93 percent
reduction in revenue which could affect
the viability of the industry.390
Several industry commenters and
think tank groups stated in comments in
response to the 2019 NPRM that
competition would increase with the
elimination of the Mandatory
Underwriting Provisions in the 2017
Final Rule, which, in turn, would lower
costs or provide other benefits to
consumers. By contrast, a consumer
group stated there is no evidence of
effects on non-price competition in this
market and noted that the same lender
typically offers the same product at
different rates in different States based
on the regulatory caps they face. In the
2019 NPRM, the Bureau discussed
benefits to consumers from increased
competition via additional storefront
locations and shorter wait times.
However, based on pricing differences
across different State regulatory regimes
and over time and the lack of evidence
offered by commenters to the contrary,
the Bureau concludes that this increased
competition is unlikely to decrease
prices for consumers, as discussed in
the 2017 Final Rule’s 1022(b)
analysis.391 Some industry commenters
stated that innovation by banks and
lenders would be higher if the Bureau
eliminated the Mandatory Underwriting
Provisions of the 2017 Final Rule, and
this innovation would further increase
access and other benefits for consumers.
The Bureau agrees that some lenders
that would have ceased operations if the
Bureau had not eliminated the
Mandatory Underwriting Provisions, as
suggested by some industry commenters
in response to the 2016 NPRM. Such
lenders may make changes to their
product offerings or procedures and
such changes may increase access for
389 82 FR 54472, 54487. There may also be
benefits to consumers from other ‘‘convenience
factors’’ associated with increased competition.
However, the Bureau lacks data or evidence that
would allow for a conclusion that such benefits
would result from this rule.
390 See id. at 54817, 54834–35.
391 See id. at 54834. See also Fekrazad, supra.
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consumers, though the Bureau has no
evidence that these lenders will do so.
b. Costs to Consumers
Relative to the 2017 Final Rule
baseline, the available evidence suggests
that amending the 2017 Final Rule to
eliminate its Mandatory Underwriting
Provisions would impose potential costs
on consumers by increasing the risks of:
experiencing costs associated with
extended sequences of payday loans and
single-payment vehicle title loans;
experiencing the effects (pecuniary and
non-pecuniary) of delinquency and
default on these loans; defaulting on
other major financial obligations; and/or
being unable to cover basic living
expenses in order to pay off covered
short-term and longer-term balloonpayment loans.392 These costs are
detailed below as well as in the section
1022(b)(2) analysis in the 2019
NPRM.393 The Bureau received no new
evidence that changed this analysis.
Extended Loan Sequences
Eliminating the 2017 Final Rule’s
limitations on making loans to
borrowers who have recently had
relevant covered short-term and longerterm balloon-payment loans will enable
borrowers to continue to borrow in
these longer sequences of loans. Studies
have suggested that potential
consequences from such reborrowing
include increases in the delays in
payments on other financial obligations,
involuntary checking account closures,
NSF and overdraft fees, financial
instability, stress and related health
measures, and decreases in
consumption.394 (The elimination of the
step-down structure imposed by the
2017 Final Rule’s Mandatory
Underwriting Provisions may have
similar effects; however, the Bureau is
not aware of any studies that address
this possibility.)
The Bureau’s synopsis of the available
evidence is that access to payday loans
may well be beneficial for those
borrowers with discrete, short-term
392 As mentioned previously, the effects
associated with longer-term balloon-payment loans
are likely to be small relative to the effects
associated with payday and vehicle title loans. This
is because longer-term balloon-payment loans are
uncommon in the baseline against which costs are
measured.
393 84 FR 4252, 4290–92.
394 The studies describing these results are
discussed in the section 1022(b)(2) analysis of the
2017 Final Rule (82 FR 54472, 54842–46) and
below. As described therein, some of these studies
differentiate between shorter and longer loan
sequences. The majority of studies, however, rely
on access to loans as their source of variation, and
cannot make such distinctions. Similarly, few of
these studies distinguish between the effects of loan
amount independent of sequence length.
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needs, but only if they are able to
successfully avoid unanticipated long
sequences of loans. As the Bureau
concluded in the 2017 Final Rule, the
available evidence, primarily the data
from the Mann study, suggests that,
while many consumers accurately
predict their borrowing sequence length,
consumers who end up engaging in long
sequences of reborrowing generally do
not anticipate those outcomes ex
ante 395 and that the 2017 Final Rule, on
average (and taking into account
potential alternatives to which
consumers might turn if long sequences
were proscribed), is welfare enhancing
for such consumers.396 Moreover, new
research discussed further below that
has become available since the 2017
Final Rule provides some additional
support for this conclusion.397
The increase in access to credit due to
the elimination of the Mandatory
Underwriting Provisions in the 2017
Final Rule is concentrated in long
durations of indebtedness. The evidence
concerning the welfare impacts on
consumers who take out loans in these
long sequences is limited, but suggests
the welfare impacts are negative on
average, meaning that the estimated
effect on average consumer surplus from
these extended loan sequences would be
negative relative to the chosen baseline.
Several consumer groups stated in
their comments in response to the 2019
NPRM that there is evidence outside of
the data the Bureau cited from the Mann
study showing that many consumers are
not informed about the full costs of
extended loan sequences and that access
to extended loan sequences is not a
benefit, but a cost to consumers.
Another group similarly stated that the
lack of effect of new disclosures in one
State (Texas) does not mean consumers
are well-informed about payday loans.
Many industry commenters stated there
is no empirical evidence that consumers
are not well-informed, and several of
these commenters cited the Mann study
data as evidence that most borrowers are
aware of the consequences of payday
loans. Other industry commenters
criticized the Mann study data as
unrepresentative or limited and argued
it could not be used to show that
395 See id. at 54568–70, 54816–17 (discussing the
Bureau’s analysis of certain data from the Mann
study including statistical evidence showing, in
Professor Mann’s words, ‘‘that there is no
significant relationship between the predicted
number of days and the days to clearance’’); see also
Email from Ronald Mann, Professor, Columbia Law
School to Jialian Wang and Jesse Leary, Bureau of
Consumer Fin. Prot. (Sept. 24, 2013) (on file).
396 For a discussion of alternative sources of
credit, see 82 FR 54472, 54609–11, 54841.
397 Carvalho et al., NBER Working Paper No.
26328, supra.
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consumers are not well informed about
payday loan borrowing. The Bureau
notes that the evidence cited by
commenters had been considered by the
Bureau in developing the proposal, and
no new data or evidence was offered to
support a change in how the costs to
consumers of extended loan sequences
is characterized. The Bureau therefore
has not changed its interpretation of the
evidence as to the effect of eliminating
the Mandatory Underwriting Provisions
in the 2017 Final Rule for consumers in
extended loan sequences.
Increased Defaults and Delinquencies
Default rates on payday loans prior to
the 2017 Final Rule were fairly low
when calculated on a per loan basis (2
percent in the data the Bureau
analyzed).398 A potentially more
meaningful measure of the frequency
with which consumers experience
default is therefore the share of loan
sequences that end in default—
including single-loan sequences where
the consumer immediately defaults and
multi-loan sequences which end in
default after one or more instances of
reborrowing. The Bureau’s data show
that, using a 30-day sequence definition
(i.e., a loan taken within 30 days of
paying off a prior loan is considered
part of a sequence of borrowing), 20
percent of loan sequences ended in
default prior to the 2017 Final Rule.
Other researchers have found similarly
high levels of default. A study of payday
borrowers in Texas found that 4.7
percent of loans were charged off, but 30
percent of borrowers had a loan charged
off in their first year of borrowing.399 It
is reasonable to assume a return to these
market conditions under this final rule.
As previously discussed, the Bureau
believes that, with the elimination of the
Mandatory Underwriting Provision,
some borrowers who would be able to
reborrow the full amount of the initial
loan may avoid a default that would
have occurred if lenders had to comply
with the Mandatory Underwriting
Provisions. However, the Bureau
believes that some borrowers taking out
payday loans may experience additional
defaults under this final rule than they
would under the 2017 Final Rule. If
eliminating the Mandatory
Underwriting Provisions in the 2017
Final Rule were to increase defaults on
398 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 is later.
399 See Paige Marta Skiba & Jeremy Tobacman,
Payday Loans, Uncertainty, and Discounting:
Explaining Patterns of Borrowing, Repayment, and
Default (Vand. Law Sch. L. & Econ. Working Paper
No. 08–33 (2008)). Note that it may not be the case
that all defaulted loans were charged off.
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net, this will represent a potential cost
to consumers.400 However, the Bureau
does not know the prevalence of the
possible increased defaults nor can it
provide an estimate of the total potential
cost per default to consumers.401
In addition to default costs resulting
from lenders’ access to consumers’
checking accounts, as noted in the 2017
Final Rule, borrowers who default may
be subject to collection efforts which
can take aggressive forms, including
repeated phone calls, in-person visits to
the consumer’s home or workplace, and
calls or visits to consumers’ friends or
relatives.402
Additionally, both the loss of the
option value of future borrowing and
non-pecuniary costs of failing to pay
may add to the consumer’s perception
of the cost of default. The option value
refers to the opportunity to borrow again
in the future, at least from the specific
lender, which is decreased after a
default. This results in additional costs
to the consumer in terms of decreased
access to credit, or additional search
beyond their preferred lender, that may,
or may not, be accurately understood by
the consumer at the time of initial
borrowing. Default may also impose
non-pecuniary costs, such as the loss of
access to the borrower’s preferred
lender. In the 2019 NPRM, the Bureau
sought additional information on the
expected change in the prevalence of
default and the costs associated
therewith but did not receive any
comments addressing this.
For borrowers who will take out
short-term vehicle title loans under this
final rule, the impacts will be greater.
The range of potential ancillary impacts
on a borrower from losing a vehicle to
repossession depends on the
transportation needs of the borrower’s
household and the available
transportation alternatives. The Bureau
received no new information in
response to the 2019 NPRM on the
prevalence and costs of the possible
ancillary effects of repossession.
Similarly, to the extent eliminating
the Mandatory Underwriting Provisions
will increase the number of payday and
vehicle title loans and length of loan
sequences relative to the 2017 Final
Rule, doing so likely will increase the
400 For a more detailed discussion of the costs of
defaults and delinquencies, as well as the reasoning
behind their likely increased prevalence under this
final rule, see 82 FR 54472, 54838.
401 See Skiba & Tobacman, supra, for a structural
model examining reborrowing behavior including
potential default costs.
402 For purposes of the section 1022(b)(2)
analysis, the Bureau considers any consequences
that consumers perceive as harmful to be a cost to
consumers, regardless of whether collection efforts
violate applicable law. 82 FR 54472, 54574.
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frequency of delinquencies and lead
consumers to incur costs associated
with those delinquencies.403 In response
to the 2019 NPRM, the Bureau did not
receive additional information on the
total potential cost of any increased
delinquencies.
One consumer group stated the
Bureau understated the consequences of
default (bank account closure, negative
credit reporting, inability to open a new
account, and vehicle repossession). The
Bureau discussed these costs to
consumers in its analysis and in
reference to the 2017 Final Rule, while
noting that it did not have data or know
of any research that would allow it to
quantify these effects for this
analysis.404 One think tank stated that
the Bureau misstated some costs in this
analysis and claimed that the
repossession rates cited by the Bureau
are too high. The Bureau disagrees with
the argument that the repossession rates
cited from prior Bureau work are
incorrect. The only evidence the
commenter cited regarding this claim
uses a more restricted time frame for
analysis, which is the likely source of
the discrepancy.
c. New Evidence on the Benefits and
Costs to Consumers of Access to Payday
and Other Covered Short-Term and
Longer-Term Balloon-Payment Loans
There have been several studies made
available since the 2017 Final Rule that
address the welfare effects of payday
loans. The 2019 NPRM discussed
several such studies.405 Three further
studies which became available since
the proposal are discussed below. As
noted earlier, and as discussed in the
2019 NPRM, the evidence in these
studies does not alter the Bureau’s
views based on earlier evidence;
however, it is important to include these
in the discussion of the evidence that
bears on the benefits and costs. The
Bureau sought comment on any
additional relevant research,
information, or data that has arisen
since the 2017 Final Rule was
published.406
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Studies of the Direct Effects of Payday
Loans and Small Dollar Loan
Regulations
Fekrazad (2020) evaluates changes in
the payday market in Rhode Island
following a decrease in the State’s
403 84
FR 4252, 4292.
at 4290–92.
405 Id. at 4292–94.
406 The Bureau received comments discussing inprogress, potentially relevant research, but these
projects had only preliminary results, none of
which had direct implications for the costs and
benefits discussed in this analysis.
404 Id.
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interest rate cap from 15 to 10
percent.407 The author finds payday
loan use increased as measured by the
number of borrowers, number of loans,
average loan amounts, and loan
sequence lengths. While there was no
change in the loan default rate, he also
finds an increase in loan sequence
defaults. Under some assumptions, the
author also computes the welfare gain
for consumers in Rhode Island due to
this change and notes it is an upper
bound to the extent that the some of the
increase in borrowing may be driven by
overborrowing due to present bias. The
author also finds no change in the
number of storefronts or lenders in
Rhode Island after the decrease and
argues this suggests lenders had market
power prior to the change. The Bureau
notes the consistency of the alignment
between the charged and state-allowed
maximum for interest rates and lack of
change in lenders supports the
argument that changes in physical
access as a result of this final rule are
unlikely to change prices consumers
face for these loans.
Studies Describing the Circumstances
and Decision-making of Consumers
A recent study of consumers in
Iceland shows that payday users are
especially financially constrained when
they take out a payday loan, though a
quarter of borrowers have access to a
few hundred dollars of cheaper
credit.408 They also assess the decisionmaking ability of consumers by
characterizing how consistent their
choices on incentivized survey
questions are with utility maximization.
They show that more than half of
payday loan dollars go to borrowers
who are in the bottom quintile of the
decision-making ability distribution.
Consumers with lower decision-making
ability are also much more likely to
make ‘‘financial mistakes’’ such as
incurring NSF fees, but the study does
not directly evaluate these consumers’
decisions regarding the use of payday
loans. Finally, the authors offer
evidence that their Icelandic data align
well with survey data from the U.S. to
suggest that their results hold for U.S.
consumers, as well.
The Allcott study surveyed borrowers
at a lender in Indiana to evaluate their
borrowing expectations and attitudes
toward restrictions on payday lending.
After exiting a payday storefront,
borrowers were asked survey questions
about their expected probability of
borrowing another loan within the next
407 Fekrazad,
408 Carvalho
supra.
et al., NBER Working Paper No.
26328, supra.
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eight weeks. On average, borrowers
predicted they had a 70 percent chance
of reborrowing, not far from the actual
74 percent reborrowing rate for the
sample, but those who used payday
loans less frequently in the six months
prior to the survey were much more
likely to underestimate their likelihood
of reborrowing.
Most surveyed borrowers said they
would ‘‘very much’’ like to give
themselves extra motivation to avoid
payday loan debt and a supermajority
(about 90 percent) would at least
somewhat like to give themselves extra
motivation. Consistent with this
response, borrowers were also willing to
pay a large premium for an incentive to
avoid reborrowing. Finally, the authors
use the survey responses as inputs to a
model to estimate borrower awareness
of present bias and consumer welfare
responses to potential policy
interventions. They find borrowers in
their sample do put more weight on
near-term payoffs, but that they are also
aware of this. They use simulations to
predict the effect of different restrictions
on payday lending, finding that
consumer welfare decreases under full
payday loan bans or under caps on loan
sizes, but consumer welfare slightly
increases in many scenarios under a
three-loan rollover restriction.
The Bureau notes that this study uses
a subsample of survey respondents
meeting a set of pre-registered
restrictions.409 While these conditions
are mostly standard, and in most cases
necessary for the main analysis in the
study, at least some of the omitted
borrowers would likely be classified as
low decision-making ability types as in
the Carvalho study.
Summary of Research Findings on the
Welfare Effects of Consumers of Payday
Loan Use
The Bureau believes the new research
described here and in the proposal for
this final rule supplements, and does
not contradict, the research described in
the 2017 Final Rule so the analysis
presented here and in the 2019 NPRM,
which is based on the assumptions
detailed in the 2017 Final Rule, is
unchanged.
409 The resulting analysis subsample is 62 percent
of the borrowers who completed the survey and
could be matched to administrative data. The
Allcott study does not provide information on how
the omitted borrowers compare to the study’s
analysis sample, so the extent to which the study’s
results hold for the broader payday borrower
population cannot be determined.
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C. Potential Benefits and Costs of the
Final Rule to Consumers and Covered
Persons—Recordkeeping Requirements
The 2017 Final Rule requires lenders
to maintain sufficient records to
demonstrate compliance with the Rule.
Those requirements include, among
other records to be kept, loan records;
materials collected during the process of
originating loans, including the
information used to determine whether
a borrower had the ability to repay the
loan, if applicable; records of reporting
loan information to RISes, as required;
and records of attempts to withdraw
payments from borrowers’ accounts, and
the outcomes of those attempts. The
Bureau’s amending the 2017 Final Rule
to eliminate the Mandatory
Underwriting Provisions will eliminate
the recordkeeping requirements set forth
in the 2017 Final Rule that are not
related to payment withdrawal attempts,
and therefore lenders will benefit from
not having to bear these costs.
1. Benefits and Costs to Covered Persons
The Bureau estimated in the 2017
Final Rule that the costs associated with
electronic storage of records was small.
As such, the Bureau estimates the
benefits from avoiding these costs with
the elimination of the Mandatory
Underwriting Provisions to be small as
well, as detailed in the 2019 NPRM.410
Lenders will also avoid the need to
develop procedures and train staff to
retain records in the absence of the
Mandatory Underwriting Provisions;
these benefits are included in earlier
estimates of the benefits of no longer
needing to develop procedures, upgrade
systems, and train staff.
2. Benefits and Costs to Consumers
Consumers will be minimally affected
by the elimination of the recordkeeping
requirements in the Mandatory
Underwriting Provisions.
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D. Potential Benefits and Costs of the
Final Rule to Consumers and Covered
Persons—Requirements Related to
Information Furnishing and Registered
Information Systems
As discussed above, the 2017 Final
Rule requires lenders to report covered
short-term and longer-term balloonpayment loans to every RIS. This
requirement will be eliminated as part
of the elimination of the Mandatory
Underwriting Provisions, as will the
potential benefits and costs from the
existence of, and reporting to, every RIS.
410 84
1. Benefits and Costs to Covered Persons
Eliminating the Mandatory
Underwriting Provisions of the 2017
Final Rule will eliminate the
requirement on lenders to furnish
information regarding covered shortterm and longer-term balloon-payment
loans to every RIS and to obtain a
consumer report from at least one RIS
before originating such loans. This, in
turn, will eliminate the benefits,
described in the 2017 Final Rule, that
are afforded to firms that apply to
become RISes.
Eliminating the Mandatory
Underwriting Provisions of the 2017
Final Rule will also eliminate the
benefits to lenders from access to RISes.
Most of these benefits would result from
decreased fraud and increased
transparency. These benefits include,
inter alia, easier identification of
borrowers with past defaults on payday
loans issued by other lenders, avoiding
issuing loans to borrowers who
currently have outstanding loans from
other lenders, etc. This represents a cost
to lenders from eliminating the
Mandatory Underwriting Provisions of
the 2017 Final Rule.
2. Benefits and Costs to Consumers
The elimination of the RIS-related
requirements will have minimal impact
on consumers. The largest benefit for
consumers from the RIS-related
provisions, as noted in the 2017 Final
Rule, was compliance by lenders with
the Rule’s Mandatory Underwriting
Provisions. This benefit is moot, given
the elimination of the Rule’s Mandatory
Underwriting Provisions. The remaining
benefits and costs from eliminating the
Mandatory Underwriting Provisions are
small.
E. Other Unquantified Benefits and
Costs
Some of these impacts noted above
associated with eliminating the
Mandatory Underwriting Provisions in
the 2017 Final Rule are difficult if not
impossible to quantify, because their
magnitudes or values are unknown or
unknowable as described in the 2019
NPRM.411 Additionally, there are other,
less direct effects of this final rule that
are also left unquantified. These impacts
include (but are not limited to): intrinsic
utility (‘‘warm glow’’) from access to
loans that are not available under the
2017 Final Rule; innovative regulatory
approaches by States that would have
been discouraged by the 2017 Final
Rule; public and private health costs
that may (or may not) result from
payday loan use; suicide-related costs
FR 4252, 4294.
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411 Id.
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that may (or may not) result from
increased access to loans; changes to the
profitability and industry structure in
response to the 2017 Final Rule (e.g.,
industry consolidation that may create
scale efficiencies, movement to
installment product offerings) that will
not occur under this final rule; concerns
about regulatory uncertainty and/or
inconsistent regulatory regimes across
markets; benefits or costs to outside
parties associated with the change in
access to payday loans (e.g., revenues of
providers of payday substitutes like
pawnshops, overdraft fees paid by
consumers and received by financial
institutions, the cost of late fees and
unpaid bills, etc.); indirect costs arising
from increased repossessions of vehicles
in response to non-payment of title
loans; non-pecuniary effects associated
with financial stress that may be
alleviated or exacerbated by increased
access to/use of payday loans; and any
impacts on lenders of fraud and opacity
related to a lack of industry-wide RISes
(e.g., borrowers circumventing lender
policies against taking multiple
concurrent payday loans, lenders having
more difficulty identifying chronic
defaulters, etc.). In the 2019 NPRM, the
Bureau asked for comments providing
credible quantitative estimates of the
impacts discussed above in this
paragraph, but commenters did not
provide such estimates or data from
which the Bureau could calculate such
estimates.
Consumer groups stated that the costs
to consumers from eliminating the
Mandatory Underwriting Provisions
will be higher than stated due to health
effects of payday loan use. The Bureau
noted these potential health effects in
the discussion of costs to consumers
above in the discussion of other
unquantified benefits and costs. Further,
much of the same literature noted by
commenters was cited in the discussion
of new research in the 2019 NPRM.412
These costs are already considered in
this analysis, though the Bureau notes
that much of the research on the
relationship between payday loan use
and health outcomes show correlations
and not causal links. Some consumer
groups also stated there would
additional costs due to decreased
financial stability for low income
families and reduced economic activity.
In the 2019 NPRM, the Bureau also
noted many indirect costs of payday
loans in its discussion of unquantified
benefits and costs.
412 Id.
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F. Potential Impact on Depository
Creditors With $10 Billion or Less in
Total Assets
The Bureau believes that depository
institutions and credit unions with less
than $10 billion in assets are minimally
constrained by the 2017 Final Rule’s
Mandatory Underwriting Provisions. To
the limited extent depository
institutions and credit unions did make
loans in this market, many of those
loans were conditionally exempted from
the 2017 Final Rule under § 1041.3(e) or
(f) as alternative or accommodation
loans. As such, this final rule will have
minimal impact on these institutions.
However, it is possible that the
removal of the 2017 Final Rule’s
restrictions will allow depository
institutions and credit unions with less
than $10 billion in assets to develop
products that are not viable under the
2017 Final Rule (subject to applicable
Federal and State laws and under the
supervision of their prudential
regulators).413 To the extent these
products are developed and successfully
marketed, they will represent a benefit
for these institutions from the
elimination of the Mandatory
Underwriting Provisions in the 2017
Final Rule.
Some industry commenters stated that
innovation by banks and lenders would
be higher in the absence of the
Mandatory Underwriting Provisions of
the 2017 Final Rule. The Bureau
discussed the potential benefits to small
depository institutions and credit
unions from increased flexibility to
develop new products in the absence of
the Mandatory Underwriting Provisions.
Meanwhile, a few credit union
commenters stated that eliminating the
Mandatory Underwriting Provisions
will increase relative costs for small
credit unions and banks that this final
rule does not cover, because they will
have to continue to use tougher
underwriting standards that covered
lenders will no longer be required to
use. Credit unions also stated they
would face additional costs of
competing with covered lenders since
the presentation of and lack of
underwriting for these covered loans
makes their characteristics less
413 As discussed previously, this may be even
more likely than it would have been at the time the
2017 Final Rule was drafted. The OCC not only
rescinded guidance on deposit advance products
but has also encouraged banks to explore additional
small-dollar installment lending products.
Additionally, the FDIC is seeking comment on
small-dollar products that its banks could offer.
These factors might allow for additional lending if
not for the 2017 Final Rule (e.g., some additional
product offerings may result from this final rule that
would have been inviable under the 2017 Final
Rule).
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transparent, making it less likely
consumers will realize that installment
loans offered by other lenders (such as
credit unions) are potential substitutes.
They also stated costs would increase
for them due to account closures
resulting from their members’ use of
covered loans. The Bureau agrees that
lenders that offer competing products
not covered by this final rule will face
increased competition as a result of the
changes made by amending the 2017
Final Rule to eliminate its Mandatory
Underwriting Provisions. The Bureau
also noted there would be changes in
benefits and costs to outside parties due
to changes in access to payday loans,
specifically noting both changes in
revenues for competing products and
costs related to fees. The Bureau does
not, however, have evidence to suggest
this will have differential costs to
smaller institutions.
G. Potential Impact on Consumers in
Rural Areas
With the elimination of the
Mandatory Underwriting Provisions,
consumers in rural areas will have a
greater increase in the availability of
covered short-term and longer-term
balloon-payment loans originated
through storefronts relative to
consumers living in non-rural areas. As
described above, the Bureau estimates
that removing the restrictions in the
2017 Final Rule on making these loans
will likely lead to a substantial increase
in the markets for storefront payday
loans and storefront single-payment
vehicle title loans.414 While many
borrowers who live outside of
Metropolitan Statistical Areas do travel
somewhat far to take out a payday loan,
many do not. As such, the expected
increase in brick-and-mortar stores that
would result from eliminating the
Mandatory Underwriting Provisions
should improve access to storefront
payday loans for those borrowers
unwilling or unable to travel greater
distances for these loans. While rural
borrowers for whom visiting a storefront
payday lender is impracticable under
the 2017 Final Rule retain the option to
seek covered short-term or longer-term
balloon-payment loans from online
lenders, restrictions imposed by State
and local law may not allow this in
some jurisdictions. Additionally, not all
of these would-be borrowers necessarily
have access to the internet, a necessity
in order to originate online loans.415 For
FR 54472, 54853.
considering this in the 2017 Final Rule, the
Bureau noted that ‘‘rural populations are less likely
to have access to high-speed broadband compared
to the overall population,’’ but that ‘‘the bandwidth
and speed required to access an online payday
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415 In
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those consumers who are unable or
unwilling to seek loans from an online
lender, amending the 2017 Final Rule to
eliminate its Mandatory Underwriting
Provisions will provide more, and
potentially more desirable, borrowing
options.
The Bureau expects that the relative
impacts on rural and non-rural
consumers of vehicle title loans will be
similar to what would occur in the
payday market. That is, rural consumers
will be likely to experience a greater
increase in the physical availability of
single-payment vehicle title loans made
through storefronts than borrowers
living in non-rural areas.
Finally, the Bureau notes that it
received a number of comments on the
2016 NPRM indicating that some online
payday lenders operate in rural areas
and comprise large shares of their local
economies. Given that eliminating the
Mandatory Underwriting Provisions in
the 2017 Final Rule will allow these
lenders to avoid decreases in loan
volume and revenues, it is likely to
substantially and positively affect some
rural lenders, thereby benefiting their
local economies.
Given the available evidence, the
Bureau believes that, other than the
relatively greater increase in the
physical availability of covered shortterm loans made through storefronts,
consumers living in rural areas will not
experience substantially different effects
of this final rule than other
consumers.416
Some industry commenters stated that
the increase in access for rural
consumers would be larger than the
Bureau stated in the 2019 NPRM since
rural borrowers have fewer alternatives
and higher income volatility. Consumer
groups similarly stated that rural
borrowers have fewer alternatives due to
less access to depository institutions
and therefore these borrowers are more
susceptible to payday lenders and
suggested increased access was not a
benefit. Another group stated vehicle
access is especially important for rural
lender is minimal,’’ and that ‘‘most potential
borrowers in rural communities will likely be able
to access the internet by some means (e.g., dial up,
or access at the public library or school).’’ 82 FR
54472, 54853. However, there are likely to be at
least some rural borrowers that were displaced from
the market by the 2017 Final Rule.
416 In the 2017 Final Rule, the Bureau noted the
potential for small effects on a few local labor
markets in which online lenders comprise a
significant share of employment. Id. Corresponding
effects may result from this final rule as well.
However, the specifics of these impacts would
depend on the competitive characteristics of these
labor markets (both as they currently exist and in
the counterfactual) that are not easily discernable or
generalizable and are of a second-order concern
relative to the more direct impacts noted above.
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consumers and suggested increased
access to title loans was not a benefit for
these consumers due to the risk of
repossession. To the extent that rural
payday and title borrowers have higher
income volatility than other consumers,
they may have fewer alternatives to
these products. However, the Bureau
does not have data on the income
volatility of payday and title borrowers
generally or by geography that it could
use to evaluate this claim.
XI. Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act
(RFA) 417 as amended by the Small
Business Regulatory Enforcement
Fairness Act of 1996 418 requires each
agency to consider the potential impact
of its regulations on small entities,
including small businesses, small
governmental units, and small not-forprofit organizations.419 The RFA defines
a ‘‘small business’’ as a business that
meets the size standard developed by
the SBA pursuant to the Small Business
Act.420
The RFA generally requires an agency
to conduct an initial regulatory
flexibility analysis (IRFA) and a final
regulatory flexibility analysis (FRFA) of
any rule subject to notice-and-comment
rulemaking requirements, unless the
agency certifies that the rule will not
have a significant economic impact on
a substantial number of small
entities.421 The Bureau also is subject to
certain additional procedures under the
RFA involving the convening of a panel
to consult with small business
representatives prior to proposing a rule
for which an IRFA is required.422
As discussed above, this final rule
will revoke the Mandatory Underwriting
Provisions of the 2017 Final Rule. The
section 1022(b)(2) analysis above
describes how this final rule will reduce
the costs and burdens on covered
persons, including small entities,
relative to a baseline where compliance
417 Public
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418 Public
Law 96–354, 94 Stat. 1164 (1980).
Law 104–21, sec. 241, 110 Stat. 847,
864 (1996).
419 5 U.S.C. 601 through 612. The term ‘‘ ‘small
organization’ means any not-for-profit enterprise
which is independently owned and operated and is
not dominant in its field, unless an agency
establishes [an alternative definition under notice
and comment].’’ 5 U.S.C. 601(4). The term ‘‘‘small
governmental jurisdiction’ means governments of
cities, counties, towns, townships, villages, school
districts, or special districts, with a population of
less than fifty thousand, unless an agency
establishes [an alternative definition after notice
and comment].’’ 5 U.S.C. 601(5).
420 5 U.S.C. 601(3). The Bureau may establish an
alternative definition after consulting with the SBA
and providing an opportunity for public comment.
Id.
421 5 U.S.C. 601 through 612.
422 5 U.S.C. 609.
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with the 2017 Final Rule becomes
mandatory. Additionally, the 2017 Final
Rule’s FRFA contains a discussion of
the specific costs and burdens imposed
by the 2017 Final Rule on small entities,
including those imposed by the
Mandatory Underwriting Provisions that
this final rule will reverse.423 In
addition to the removal of costs and
burdens, all operations under current
law, as well as those that would be
adopted if compliance with the
Mandatory Underwriting Provisions
becomes mandatory, will remain
available to small entities under this
final rule. Thus, a small entity that is in
compliance with the law will not need
to take any additional action to remain
in compliance. Based on these
considerations, this final rule will not
have a significant economic impact on
any small entities.
In the 2019 NPRM, the Bureau’s
Director certified that the 2019 NPRM
would not have a significant economic
impact on a substantial number of small
entities. Thus, neither an IRFA nor a
small business review panel was
required for the 2019 NPRM. The
Bureau requested comments on its
analysis and any relevant data.
Some consumer group commenters
asserted that the benefits to lenders from
the revocation of the Mandatory
Underwriting Provisions mean that this
rule has a significant economic impact.
The Bureau does not agree that the
benefits to small entities of this rule are
capable of qualifying as a ‘‘significant
economic impact’’ on a substantial
number of small entities such that an
IRFA and FRFA are required under the
RFA.424 That specific phrase is used
several times in the RFA, and under
accepted principles of statutory
interpretation there is a presumption
that a specific phrase bears the same
meaning throughout a statutory text.
Other uses of the phrase make clear that
it refers to adverse effects on small
entities, not benefits. For example, an
IRFA must discuss alternatives
considered by the agency that
‘‘minimize any significant economic
impact’’ on small entities, and a FRFA
must discuss steps taken by the agency
to ‘‘minimize the significant economic
impact’’ on small entities.425 Congress
could not have intended through the
RFA to minimize benefits to small
entities, and accordingly the Bureau
does not believe that the benefits of this
rule qualify as a significant economic
FR 54472, 54853.
U.S.C. 605(b).
425 5 U.S.C. 603(c), 604(a)(6). See also 5 U.S.C.
610(a) (periodic review of rules); Public Law 96–
354, sec. 2(a)(7), 94 Stat. 1164 (congressional
findings).
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424 5
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impact. Further reinforcing this
conclusion, the other required elements
of an IRFA and FRFA generally focus on
adverse effects on small entities, and
none specifically focuses on benefits to
small entities.426 Thus, performing an
IRFA or FRFA for a rule as a result of
its benefits to small entities and not
based on significant adverse effects on
them would serve little purpose.
Several commenters that offer
competing products not covered by the
2017 Final Rule argued this final rule
will raise costs for them by increasing
competition via reduced transparency
for payday lenders. They further
claimed that small banks and credit
unions will experience increased costs
due to closed deposit accounts. The
Bureau believes that small entities not
offering products directly covered by
the 2017 Final Rule are outside of the
scope of the RFA analysis for this final
rule.
A few groups also offered comments
related to RISes and the RFA analysis.
Specifically, some consumer groups
stated that payday lenders will face
increased costs due to fraud in the
absence of RISes. The Bureau agrees that
there will be increased risk of costs due
to fraud under this final rule due to the
absence of the RIS requirement for all
lenders, including small lenders.
However, the Bureau does not believe
this increased cost will be significant.
Some of these consumer groups also
argued that any small RISes will be
negatively affected by the proposal
because lenders would no longer be
required to use their services. It is true
that RISes, if any had come into
existence, would have experienced
significantly less business as a result of
this final rule relative to the baseline of
the 2017 Final Rule since lenders will
no longer be required to report to or use
these RISes. However, the Bureau
believes that it is unlikely any small
RISes would have existed under the
2017 Final Rule as the scale involved in
efficiently collecting, maintaining, and
sharing data would not be conducive to
a small business as seen in the market
with other credit reporting systems.
Finally, several industry commenters
and State legislators supported the
Bureau’s proposed rule stating that the
2017 Final Rule would have resulted in
the closure of many small businesses
due to revenue decreases or increased
costs related to training or the use of
RISes. The Bureau agrees that small
lenders will experience a reduction in
costs and training related to the use of
RISes which may avoid the closure of
some small lenders. The Bureau
426 See
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generally agrees with these comments,
but because these costs to small entities
are either not significant or do not apply
to persons covered by the 2017 Final
Rule, the Bureau’s certification still
holds.
Accordingly, the Director of the
Bureau hereby certifies that this final
rule will not have a significant
economic impact on a substantial
number of small entities. Thus, a FRFA
is not required for this final rule.
XII. Paperwork Reduction Act
Under the Paperwork Reduction Act
of 1995 (PRA),427 Federal agencies are
generally required to seek Office of
Management and Budget (OMB)
approval for information collection
requirements prior to implementation.
Under the PRA, the Bureau may not
conduct or sponsor and,
notwithstanding any other provision of
law, a person is not required to respond
to, an information collection, unless the
information collection displays a valid
control number assigned by OMB. This
final rule revokes the mandatory
underwriting requirements of 12 CFR
part 1041; thereby removing the
information collection requirements
previously contained in §§ 1041.5,
1041.6, 1041.10, and 1041.11. The
Bureau is continuing to seek OMB
approval for the information collection
requirements remaining in 12 CFR part
1041 concerning the Payment
Provisions as contained in §§ 1041.8,
1041.9, and 1041.12. As noted in the
2019 NPRM, the collections of
information related to the 2017 Final
Rule (concerning both the Mandatory
Underwriting Provisions and the
Payment Provisions) were submitted to
OMB in 2017 in accordance with the
PRA and assigned OMB Control Number
3170–0065 for tracking purposes. That
control number is not active because
OMB has not acted on those information
collection requests. The Bureau has
submitted a revised information
collection request seeking a new OMB
control number for the provisions of 12
CFR part 1041 not affected by this final
rule for OMB review under PRA section
3507(d). This submission to OMB was
made under OMB Control Number
3170–0071, which OMB assigned for
tracking purposes at the 2019 NPRM
stage of this rulemaking. The Bureau
will publish a separate Federal Register
notice once OMB concludes its review
of this request.
When the 2019 NPRM was published,
the Bureau invited comment on: (a)
Whether the collection of information is
necessary for the proper performance of
427 44
U.S.C. 3501 et seq.
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the functions of the Bureau, including
whether the information will have
practical utility; (b) the accuracy of the
Bureau’s estimate of the burden of the
collection of information, including the
validity of the methods and the
assumptions used; (c) ways to enhance
the quality, utility, and clarity of the
information to be collected; and (d)
ways to minimize the burden of the
collection of information on
respondents, including through the use
of automated collection techniques or
other forms of information technology.
The Bureau did not receive comments
concerning these specific topics.
The Bureau did receive two other
comments that addressed PRA matters
other than the four topics on which the
Bureau requested comment. First,
consumer groups stated it was improper
for the Bureau to request comments on
the PRA information collection request
with respect to the Payment Provisions
since the proposal did not address
payments. The Bureau agrees with this
comment.
In the second comment made by these
groups, they stated that there is implied
OMB approval for the Payment
Provisions data collections for the 2017
Final Rule. Because the Payment
Provisions are outside the scope of this
rulemaking, the extent to which the
Bureau can infer OMB approval by
OMB’s inaction on the information
collection requirements in the 2017
Final Rule is an issue that is beyond the
scope of this rulemaking.428
XIII. Congressional Review Act
Pursuant to the Congressional Review
Act,429 the Bureau will submit a report
containing this rule and other required
information to the U.S. Senate, the U.S.
House of Representatives, and the
Comptroller General of the United
States at least 60 days prior to the rule’s
published effective date. The Office of
Information and Regulatory Affairs has
428 The comments are correct that there is a
provision in the OMB regulations pertaining to
information collection requests for an agency to
request that OMB issue a control number if OMB
has not acted on an information collection request
within the time limits that are established in the
OMB regulations. The PRA does not, however,
provide for an ‘‘inferred OMB approval.’’ Rather,
the PRA generally provides that if OMB does not
act on an information collection request within 60
days, an agency may request that OMB ‘‘assign an
OMB control number.’’ 5 CFR 1320.11(i). However,
the duration for the period during which the Bureau
may collect information is within OMB’s discretion,
and in the end, the Bureau did not need to invoke
this provision of the OMB regulations. The Bureau
will work with OMB when the information
collections for the Payment Provisions become
operative in order to ensure compliance with the
PRA.
429 15 U.S.C. 801 et seq.
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designated this rule as a ‘‘major rule’’ as
defined by 5 U.S.C. 804(2).
XIV. Signing Authority
The Director of the Bureau, having
reviewed and approved this document,
is delegating the authority to
electronically sign this document to
Grace Feola, a Bureau Federal Register
Liaison, for purposes of publication in
the Federal Register.
List of Subjects in 12 CFR Part 1041
Banks, Banking, Consumer protection,
Credit, Credit unions, National banks,
Reporting and recordkeeping
requirements, Savings associations,
Trade practices.
Authority and Issuance
For the reasons set forth above, the
Bureau amends 12 CFR part 1041 as set
forth below:
PART 1041—PAYDAY, VEHICLE TITLE,
AND CERTAIN HIGH–COST
INSTALLMENT LOANS
1. The authority citation for part 1041
continues to read as follows:
■
Authority: 12 U.S.C. 5511, 5512, 5514(b),
5531(b), (c), and (d), 5532.
Subpart A General
§ 1041.1
[Amended]
2. Amend § 1041.1 by removing the
last sentence of paragraph (b).
■
§ 1041.2
[Amended]
3. Amend § 1041.2 by removing and
reserving paragraphs (a)(14) and (19).
■
Subpart B—[Removed and Reserved]
4. Remove and reserve subpart B,
consisting of §§ 1041.4 through 1041.6.
■ 5. Revise the heading for subpart D to
read as follows:
■
Subpart D—Recordkeeping, AntiEvasion, Severability, and Dates
§§ 1041.10 and 1041.11
Reserved]
[Removed and
6. Remove and reserve §§ 1041.10 and
1041.11.
■ 7. Amend § 1041.12 by revising
paragraph (b)(1) and removing and
reserving paragraphs (b)(2) and (3) to
read as follows:
■
§ 1041.12 Compliance program and record
retention.
*
*
*
*
*
(b) * * *
(1) Retention of loan agreement for
covered loans. To comply with the
requirements in this paragraph (b), a
lender must retain or be able to
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reproduce an image of the loan
agreement for each covered loan that the
lender originates.
*
*
*
*
*
§ 1041.15
[Amended]
8. Amend § 1041.15 by removing
paragraph (d).
■
Appendix A to Part 1041 [Amended]
9. In appendix A to part 1041, remove
and reserve Model Forms A–1 and A–
2.
■ 10. In supplement I to part 1041:
■ a. Under Section 1041.2—Definitions,
revise 2(a)(5) Consummation and
remove 2(a)(19) Vehicle Security.
■ b. Under Section 1041.3—Scope of
Coverage; Exclusions; Exemptions,
revise 3(e)(2) Borrowing History
Condition and 3(e)(3) Income
Documentation Condition.
■ c. Remove Section 1041.4—
Identification of Unfair and Abusive
Practice, Section 1041.5—Ability-toRepay Determination Required, Section
1041.6—Conditional Exemption for
Certain Covered Short-Term Loans,
Section 1041.10—Furnishing
Information to Registered Information
Systems, and Section 1041.11—
Registered Information Systems.
■ d. In Section 1041.12—Compliance
Program and Record Retention:
■ i. Revise 12(a) Compliance Program
and 12(b) Record Retention.
■ ii. Remove 12(b)(1) Retention of Loan
Agreement and Documentation
Obtained in Connection With
Originating a Covered Short-Term or
Covered Longer-Term Balloon-Payment
Loan, 12(b)(2) Electronic Records in
Tabular Format Regarding Origination
Calculations and Determinations for a
Covered Short-Term or Longer-Term
Balloon-Payment Loan Under § 1041.5,
12(b)(3) Electronic Records in Tabular
Format Regarding Type, Terms, and
Performance of Covered Short-Term or
Covered Longer-Term Balloon-Payment
Loans, and Paragraph 12(b)(3)(iv).
■ iii. Revise 12(b)(5) Electronic Records
in Tabular Format Regarding Payment
Practices for Covered Loans.
The revisions read as follows:
■
Supplement I to Part 1041—Official
Interpretations
Section 1041.2—Definitions
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*
*
*
*
*
2(a)(5) Consummation
1. New loan. When a contractual
obligation on the consumer’s part is
created is a matter to be determined
under applicable law. A contractual
commitment agreement, for example,
that under applicable law binds the
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consumer to the loan terms would be
consummation. Consummation,
however, does not occur merely because
the consumer has made some financial
investment in the transaction (for
example, by paying a non-refundable
fee) unless applicable law holds
otherwise.
*
*
*
*
*
Section 1041.3—Scope of Coverage;
Exclusions; Exemptions
*
*
*
*
*
3(e) Alternative Loans
*
*
*
*
*
3(e)(2) Borrowing History Condition
1. Relevant records. A lender may
make an alternative covered loan under
§ 1041.3(e) only if the lender determines
from its records that the consumer’s
borrowing history on alternative
covered loans made under § 1041.3(e)
meets the criteria set forth in
§ 1041.3(e)(2). The lender is not
required to obtain information about a
consumer’s borrowing history from
other persons, such as by obtaining a
consumer report.
2. Determining 180-day period. For
purposes of counting the number of
loans made under § 1041.3(e)(2), the
180-day period begins on the date that
is 180 days prior to the consummation
date of the loan to be made under
§ 1041.3(e) and ends on the
consummation date of such loan.
3. Total number of loans made under
§ 1041.3(e)(2). Section 1041.3(e)(2)
excludes loans from the conditional
exemption in § 1041.3(e) if the loan
would result in the consumer being
indebted on more than three
outstanding loans made under
§ 1041.3(e) from the lender in any
consecutive 180-day period. See
§ 1041.2(a)(17) for the definition of
outstanding loan. Under § 1041.3(e)(2),
the lender is required to determine from
its records the consumer’s borrowing
history on alternative covered loans
made under § 1041.3(e) by the lender.
The lender must use this information
about borrowing history to determine
whether the loan would result in the
consumer being indebted on more than
three outstanding loans made under
§ 1041.3(e) from the lender in a
consecutive 180-day period, determined
in the manner described in comment
3(e)(2)–2. Section 1041.3(e) does not
prevent lenders from making a covered
loan subject to the requirements of this
part.
4. Example. For example, assume that
a lender seeks to make an alternative
loan under § 1041.3(e) to a consumer
and the loan does not qualify for the
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44445
safe harbor under § 1041.3(e)(4). The
lender checks its own records and
determines that during the 180 days
preceding the consummation date of the
prospective loan, the consumer was
indebted on two outstanding loans
made under § 1041.3(e) from the lender.
The loan, if made, would be the third
loan made under § 1041.3(e) on which
the consumer would be indebted during
the 180-day period and, therefore,
would be exempt from this part under
§ 1041.3(e). If, however, the lender
determined that the consumer was
indebted on three outstanding loans
under § 1041.3(e) from the lender during
the 180 days preceding the
consummation date of the prospective
loan, the condition in § 1041.3(e)(2)
would not be satisfied and the loan
would not be an alternative loan subject
to the exemption under § 1041.3(e) but
would instead be a covered loan subject
to the requirements of this part.
3(e)(3) Income Documentation
Condition
1. General. Section 1041.3(e)(3)
requires lenders to maintain policies
and procedures for documenting proof
of recurring income and to comply with
those policies and procedures when
making alternative loans under
§ 1041.3(e). For the purposes of
§ 1041.3(e)(3), lenders may establish any
procedure for documenting recurring
income that satisfies the lender’s own
underwriting obligations. For example,
lenders may choose to use the
procedure contained in the National
Credit Union Administration’s guidance
at 12 CFR 701.21(c)(7)(iii) on Payday
Alternative Loan programs
recommending that Federal credit
unions document consumer income by
obtaining two recent paycheck stubs.
*
*
*
*
*
Section 1041.12—Compliance Program
and Record Retention
12(a) Compliance Program
1. General. Section 1041.12(a)
requires a lender making a covered loan
to develop and follow written policies
and procedures that are reasonably
designed to ensure compliance with the
applicable requirements in this part.
These written policies and procedures
must provide guidance to a lender’s
employees on how to comply with the
requirements in this part. In particular,
under § 1041.12(a), a lender must
develop and follow detailed written
policies and procedures reasonably
designed to achieve compliance, as
applicable, with the payments
requirements in §§ 1041.8 and 1041.9.
The provisions and commentary in each
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section listed above provide guidance
on what specific directions and other
information a lender must include in its
written policies and procedures.
12(b) Record Retention
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1. General. Section 1041.12(b)
requires a lender to retain various
categories of documentation and
information concerning payment
practices in connection with covered
loans. The items listed are nonexhaustive as to the records that may
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need to be retained as evidence of
compliance with this part.
*
*
*
*
*
12(b)(5) Electronic Records in Tabular
Format Regarding Payment Practices for
Covered Loans
1. Electronic records in tabular
format. Section 1041.12(b)(5) requires a
lender to retain records regarding
payment practices in electronic, tabular
format. Tabular format means a format
in which the individual data elements
comprising the record can be
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transmitted, analyzed, and processed by
a computer program, such as a widely
used spreadsheet or database program.
Data formats for image reproductions,
such as PDF, and document formats
used by word processing programs are
not tabular formats.
*
*
*
*
*
Dated: July 7, 2020.
Grace Feola,
Federal Register Liaison, Bureau of Consumer
Financial Protection.
[FR Doc. 2020–14935 Filed 7–21–20; 8:45 am]
BILLING CODE 4810–AM–P
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Agencies
[Federal Register Volume 85, Number 141 (Wednesday, July 22, 2020)]
[Rules and Regulations]
[Pages 44382-44446]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14935]
[[Page 44381]]
Vol. 85
Wednesday,
No. 141
July 22, 2020
Part II
Bureau of Consumer Financial Protection
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12 CFR Part 1041
Payday, Vehicle Title, and Certain High-Cost Installment Loans; Final
Rule
Federal Register / Vol. 85, No. 141 / Wednesday, July 22, 2020 /
Rules and Regulations
[[Page 44382]]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Part 1041
[Docket No. CFPB-2019-0006]
RIN 3170-AA80
Payday, Vehicle Title, and Certain High-Cost Installment Loans
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is
issuing this final rule to amend its regulations governing payday,
vehicle title, and certain high-cost installment loans. Specifically,
the Bureau is revoking provisions of those regulations that: Provide
that it is an unfair and abusive practice for a lender to make a
covered short-term or longer-term balloon-payment loan, including
payday and vehicle title loans, without reasonably determining that
consumers have the ability to repay those loans according to their
terms; prescribe mandatory underwriting requirements for making the
ability-to-repay determination; exempt certain loans from the mandatory
underwriting requirements; and establish related definitions,
reporting, recordkeeping, and compliance date requirements. The Bureau
is making these amendments to the regulations based on its re-
evaluation of the legal and evidentiary bases for these provisions.
DATES: This rule is effective October 20, 2020.
FOR FURTHER INFORMATION CONTACT: Joseph Baressi, Lawrence Lee, or Adam
Mayle, Senior Counsels, Office of Regulations, at 202-435-7700. If you
require this document in an alternative electronic format, please
contact [email protected].
SUPPLEMENTARY INFORMATION:
Summary of the Rule
On November 17, 2017, the Bureau published a final rule (2017 Final
Rule or Rule \1\) establishing consumer protection regulations for
payday loans, vehicle title loans, and certain high-cost installment
loans, relying on authorities under title X of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (Dodd-Frank Act or Act).\2\
The 2017 Final Rule addressed two discrete topics. First, the Rule
contained a set of provisions with respect to the underwriting of
covered short-term and longer-term balloon-payment loans, including
payday and vehicle title loans, and related recordkeeping and reporting
requirements.\3\ These provisions are referred to herein as the
``Mandatory Underwriting Provisions'' of the 2017 Final Rule. Second,
the Rule contained a set of provisions, applicable to the same set of
loans and also to certain high-cost installment loans,\4\ establishing
certain requirements and limitations with respect to attempts to
withdraw payments on the loans from consumers' checking or other
accounts.\5\ These provisions are referred to herein as the ``Payment
Provisions'' of the 2017 Final Rule.
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\1\ 82 FR 54472 (Nov. 17, 2017) (codified at 12 CFR part 1041).
\2\ Public Law 111-203, 124 Stat. 1376 (2010).
\3\ 12 CFR 1041.4 through 1041.6, 1041.10, 1041.11, and portions
of Sec. 1041.12.
\4\ The 2017 Final Rule refers to all three of these categories
of loans together as covered loans. 12 CFR 1041.3(b).
\5\ 12 CFR 1041.7 through 1041.9, and portions of Sec. 1041.12.
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The Rule became effective on January 16, 2018, although most
provisions (12 CFR 1041.2 through 1041.10, 1041.12, and 1041.13) had a
compliance date of August 19, 2019.\6\ On January 16, 2018, the Bureau
issued a statement announcing its intention to engage in rulemaking to
reconsider the 2017 Final Rule.\7\ A legal challenge to the Rule was
filed on April 9, 2018, and is pending in the United States District
Court for the Western District of Texas.\8\ On October 26, 2018, the
Bureau issued a statement announcing it expected to issue notices of
proposed rulemaking to reconsider certain provisions of the 2017 Final
Rule and to address the Rule's compliance date.\9\
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\6\ 82 FR 54472, 54814.
\7\ See Bureau of Consumer Fin. Prot., Statement on Payday Rule
(Jan. 16, 2018), https://www.consumerfinance.gov/about-us/newsroom/cfpb-statement-payday-rule/.
\8\ Cmty. Fin. Servs. Ass'n of Am. v. Consumer Fin. Prot.
Bureau, No. 1:18-cv-295 (W.D. Tex. filed Apr. 9, 2018). On November
6, 2018, the court issued an order staying the August 19, 2019
compliance date of the Rule pending further order of the court. See
id., ECF No. 53. The litigation is currently stayed. See id., ECF
No. 66 (Dec. 6, 2019).
\9\ See Bureau of Consumer Fin. Prot., Public Statement
Regarding Payday Rule Reconsideration and Delay of Compliance Date
(Oct. 26, 2018), https://www.consumerfinance.gov/about-us/newsroom/public-statement-regarding-payday-rule-reconsideration-and-delay-compliance-date/.
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On February 14, 2019, the Bureau published a notice of proposed
rulemaking (2019 NPRM) to revoke the Mandatory Underwriting Provisions
of the 2017 Final Rule.\10\ The 2019 NPRM did not propose to amend the
``Payment Provisions'' of the 2017 Final Rule.
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\10\ Payday, Vehicle Title, and Certain High-Cost Installment
Loans, 84 FR 4252 (proposed Feb. 14, 2019). On the same day, the
Bureau published a notice of proposed rulemaking to delay the
compliance date for the Mandatory Underwriting Provisions of the
2017 Final Rule. See Payday, Vehicle Title, and Certain High-Cost
Installment Loans; Delay of Compliance Date, 84 FR 4298 (proposed
Feb. 14, 2019). On June 17, 2019, the Bureau published a final rule
delaying the compliance date for the Mandatory Underwriting
Provisions. See 84 FR 27907 (June 17, 2019).
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The Bureau is finalizing the amendments to the regulations as
proposed in the 2019 NPRM. Specifically, the Bureau is revoking: (1)
The ``identification'' provision, which states that it is an unfair and
abusive practice for a lender to make covered short-term loans or
covered longer-term balloon-payment loans without reasonably
determining that consumers will have the ability to repay the loans
according to their terms; \11\ (2) the ``prevention'' provision, which
establishes specific underwriting requirements for these loans to
prevent the unfair and abusive practice; \12\ (3) the ``principal step-
down exemption'' provision for certain covered short-term loans; \13\
(4) the ``furnishing'' provisions, which require lenders making covered
short-term or longer-term balloon-payment loans to furnish certain
information regarding such loans to registered information systems
(RISes) and create a process for registering such information systems;
\14\ (5) those portions of the recordkeeping provisions related to the
mandatory underwriting requirements; \15\ and (6) the portion of the
compliance date provisions related to the mandatory underwriting
requirements.\16\ The Bureau also is revoking the Official
Interpretations relating to these provisions. The Bureau is making
these changes to the regulations based on a re-evaluation of the legal
and evidentiary bases for these provisions.
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\11\ 12 CFR 1041.4.
\12\ 12 CFR 1041.5.
\13\ 12 CFR 1041.6.
\14\ 12 CFR 1041.10 and 1041.11.
\15\ 12 CFR 1041.12(b)(1) through (3).
\16\ 12 CFR 1041.15(d).
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The Bureau revokes the 2017 Final Rule's determination that it is
an unfair practice for a lender to make covered short-term loans or
covered longer-term balloon-payment loans without reasonably
determining that consumers will have the ability to repay the loans
according to their terms. For the reasons discussed below, the Bureau
withdraws the Rule's determination that consumers cannot reasonably
avoid any substantial injury caused or likely to be caused by the
failure to consider a borrower's ability to repay.\17\ The Bureau also
determines that, even if the Bureau had not revoked its reasonable
avoidability finding, the countervailing benefits to
[[Page 44383]]
consumers and competition in the aggregate from the identified practice
would outweigh any relevant injury.\18\
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\17\ See 12 U.S.C. 5531(c)(1)(A).
\18\ See 12 U.S.C. 5531(c)(1)(B).
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Further, the Bureau revokes the 2017 Final Rule's determination
that the identified practice is abusive. The Bureau determines that a
lender's not considering a borrower's ability to repay does not take
unreasonable advantage of particular consumer vulnerabilities.\19\ The
Bureau also withdraws the Rule's determination that consumers do not
understand the materials risks, costs, or conditions of covered
loans,\20\ as well as its determination that consumers do not have the
ability to protect their interests in selecting or using covered
loans.\21\
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\19\ See 12 U.S.C. 5531(d)(2).
\20\ See 12 U.S.C. 5531(d)(2)(A).
\21\ See 12 U.S.C. 5531(d)(2)(B).
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II. Background
The Supplementary Information accompanying the 2017 Final Rule
contains a more comprehensive description of the payday and vehicle
title markets \22\ and of the consumers who use these products.\23\
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\22\ See 82 FR 54472, 54474-96.
\23\ Id. at 54555-60.
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A. The Market for Short-Term and Balloon-Payment Loans
Consumers living paycheck to paycheck and with little to no savings
often use credit as a means of coping with financial shortfalls.\24\
These shortfalls may be due to mismatched timing between income and
expenses, income volatility, unexpected expenses or income shocks, or
expenses that simply exceed income.\25\ According to a recent survey
conducted by the Board of Governors of the Federal Reserve System
(Board), one-quarter of adults are either just getting by or finding it
difficult to get by; a similar percentage skipped necessary medical
care in 2018 due to being unable to afford the cost. In addition,
nearly 40 percent of adults reported they would either be unable to
cover an emergency expense costing $400 or would have to sell something
or borrow money to cover it.\26\ Whatever the cause of these financial
shortfalls, consumers in these situations sometimes seek what may
broadly be termed a ``liquidity loan.''
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\24\ Id. at 54474.
\25\ Id. (citing Rob Levy & Joshua Sledge, A Complex Portrait:
An Examination of Small-Dollar Credit Consumers (Ctr. for Fin.
Servs. Innovation 2012), https://www.fdic.gov/news/conferences/consumersymposium/2012/A%20Complex%20Portrait.pdf).
\26\ Bd. of Governors of the Fed. Reserve Sys., Report on the
Economic Well-Being of U.S. Households in 2018, at 5, 23 (May 2019),
https://www.federalreserve.gov/publications/files/2018-report-economic-well-being-us-households-201905.pdf; and Bd. of Governors
of the Fed. Reserve Sys., Report on the Economic Well-Being of U.S.
Households in 2018, Appendix A: Survey Questionnaire, https://www.federalreserve.gov/publications/appendix-a-survey-questionnaire.htm. The 2016 survey relied upon in the 2017 Final
Rule found that 44 percent of adults could not cover an emergency
expense costing $400 or would cover it by selling something or
borrowing money. See 82 FR 54472, 54474 & n.9 (citing Bd. of
Governors of the Fed. Reserve Sys., Report on the Economic Well-
Being of U.S. Households in 2016, at 2, 8 (May 2017), https://www.federalreserve.gov/publications/files/2016-report-economic-well-being-us-households-201705.pdf).
---------------------------------------------------------------------------
The Mandatory Underwriting Provisions focus specifically on short-
term loans and a smaller market segment of longer-term balloon-payment
loans. The largest categories of short-term loans are ``payday loans,''
which are generally short-term loans 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.\27\
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\27\ 82 FR 54472, 54475.
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1. Payday Loans
Eighteen States and the District of Columbia prohibit payday
lending or impose interest rate caps that most payday lenders find too
low to enable them to make such loans profitably.\28\ The remaining 32
States have either created a carve-out from their general usury caps
for payday loans or do not regulate loan interest rates.\29\ Several
States that previously authorized payday lending have, over the past
several years, changed their laws to restrict payday lending.\30\ The
States that do permit payday lending have enacted a wide variety of
regulations on payday lending practices--including limits on price, or
loan term, all of which reflect the judgments of the various
States.\31\ While a few States have enacted general requirements that
payday lenders consider a borrower's ability to repay or set loan-to-
income percentages,\32\ no State has adopted
[[Page 44384]]
mandatory underwriting requirements for payday loans that are similar
to those in the 2017 Final Rule.
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\28\ These jurisdictions are Arizona, Arkansas, Colorado,
Connecticut, Georgia, Maryland, Massachusetts, Montana, New
Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio,
Pennsylvania, South Dakota, Vermont, West Virginia, and Washington,
DC Ariz. Rev. Stat. section 6-632; Ark. Const. art. XIX, sec. 13;
see Colo. Legislative Council Staff, Initiative #126 Initial Fiscal
Impact Statement, https://www.sos.state.co.us/pubs/elections/Initiatives/titleBoard/filings/2017-2018/126FiscalImpact.pdf; see
also Colo. Sec'y of State, Official Certified Results--State Offices
& Questions, https://results.enr.clarityelections.com/CO/91808/Web02-state.220747/#/c/C_2 (Proposition 111); Conn. Gen. Stat. 36a-
558(d); Ga. Code Ann. 16-17-8; Md. Code Ann. Com. Law 12-
306(a)(2)(i); 209 Mass. Regs. Code tit. 209, 26.01; Mont. Code Ann.
31-1-722(2); N.H. Rev. Stat. 399-A:13(XX); N.J. Stat. Ann. 2C:21-19;
2017 N.M. Laws ch. 110 (H.B. 347); N.Y. Penal Law 190.40; N.C. Gen.
Stat. 53-281; Ohio Rev. Code Ann. 1321.35 to 1321.48; 7 Pa. Cons.
Stat. Ann. 6201 to 6219; S.D. Codified Laws 54-4-44, as amended by
Initiated Measure 21 2 (Nov. 8, 2016); Vt. Stat. Ann. tit. 9, 41a;
W. Va. Code 32A-3-1(e), 46A-4-107 to 46A-4-113; District of Columbia
Laws 17-42 (Act 17-115) 2 (Nov. 24, 2007).
\29\ See, e.g., 82 FR 54472, 54477 & n.25. The 2017 Final Rule
cited New Mexico and Ohio as payday authorizing States. At the time
the rule was issued, New Mexico had enacted a law which had not yet
taken effect, prohibiting short-term payday lending. As of April 27,
2019, Ohio effectively prohibited short-term payday and bans vehicle
title lending. New Mexico and Ohio are no longer counted as payday
authorizing States. See Ohio House Bill 123, An Act to Modify the
Short-Term Loan Act, https://www.legislature.ohio.gov/legislation/legislation-summary?id=GA132-HB-123; https://www.com.ohio.gov/documents/fiin_HB123_Guidance.pdf. Oklahoma for purposes of this
rulemaking is counted as a payday-authorizing State, but SB 720
established August 1, 2020 as the date after which payday loans are
banned. Loans of $1,500 or less must have a minimum loan term of 60
days, be repaid in fully amortizing payments of substantially equal
amounts, and carry maximum fees of 17 percent per month plus
database verification fees, https://www.oklegislature.gov/BillInfo.aspx?Bill=sb720&Session=1800. After August 1, 2020,
references herein to Oklahoma law may not be applicable. In
addition, in 2021, Virginia will no longer be counted as a payday-
authorizing State when HB 789 takes effect. Among other things, the
bill sets a four month minimum loan term for ``short-term'' loans,
https://lis.virginia.gov/cgi-bin/legp604.exe?201+sum+HB789&201+sum+HB789.
\30\ See, e.g., 82 FR 54472, 54485-86. In addition to New Mexico
and Ohio, voters in Colorado approved a ballot initiative on
November 6, 2018, to cap annual percentage rates (APRs) on payday
loans at 36 percent. This initiative took effect February 1, 2019,
shortly before the release of the 2019 NPRM. Colorado is counted
here as a State that prohibits short-term payday lending. See Colo.
Legislative Council Staff, Initiative #126 Initial Fiscal Impact
Statement, https://www.sos.state.co.us/pubs/elections/Initiatives/titleBoard/filings/2017-2018/126FiscalImpact.pdf; see also Colo.
Sec'y of State, Official Certified Results--State Offices &
Questions, https://results.enr.clarityelections.com/CO/91808/Web02-state.220747/#/c/C_2 (Proposition 111). Until the ballot initiative,
Colorado law required that payday loans have a six-month minimum
loan term. Colo. Rev. Stat. 5-3.1-103. There was no prohibition on
lenders making a single-installment loan due in six months, but all
payday lenders reported that they offered only installment loans. 4
Colo. Code Regs. 902-1, Rule 17(B) (2010); State of Colorado, Dep't
of Law, 2016 Deferred Deposit/Payday Lenders Annual Report, question
10, https://coag.gov/office-sections/consumer-protection/consumer-credit-unit/uniform-consumer-credit-code/general-information/. As
described in note 29 above, Oklahoma will, as of August 1, 2020,
prohibit payday lending. In addition, as of January 1, 2020,
California caps rates on installment loans of $2,500 to $10,000 at
36 percent plus the Federal Funds Rate, https://dbo.ca.gov/2019/12/11/new-requirements-for-cfl-licensees/. California caps rates on
smaller installment loans up to $2,500 at 30 percent APR, depending
on the loan amount, and also caps payday loan fees as noted above.
See Cal. Fin. Code section 9:22303.
\31\ See 84 FR 4252, 4254.
\32\ See 82 FR 54472, 54480-81, 54491. Community Financial
Services of America, a trade association representing payday and
small-dollar lenders, includes among its best practices that its
members should, before extending credit, ``undertake a reasonable,
good-faith effort to determine a customer's creditworthiness and
ability to repay the loan.'' See Cmty. Fin. Servs. of Am., Best
Practices for the Small-Dollar Loan Industry, https://www.cfsaa.com/files/files/CFSA-BestPractices.pdf (last visited Apr. 28, 2020).
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The primary channel through which consumers obtain payday loans, as
measured by total dollar volume, is through State-licensed storefront
locations, although the share of online loan volume has grown while
storefront loan volume has continued to decline. There were an
estimated 13,700 storefronts in 2018, down from the industry's peak of
over 24,000 stores in 2007.\33\ The decline was due to several factors
including industry consolidation, changes in State laws, increased
consumer demand for alternative products such as installment loans, and
a shift to greater online lending.\34\
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\33\ See John Hecht, State of the Industry: Innovating and
Adapting Amongst a Complex Backdrop (Mar. 2019) (Jefferies LLC,
slide presentation) (on file) (Hecht 2019). In the 2017 Final Rule,
the Bureau cited the same analyst's estimate of 16,480 payday
storefronts in 2015. See 82 FR 54472, 54480 & n.53.
\34\ Hecht 2019.
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From 2009 to 2014, storefront payday lending generated
approximately $30 billion in new loans per year; by 2018 the volume had
declined to $15 billion,\35\ although these numbers may include
products other than single-payment loans. Combined storefront and
online payday loan volume was $30.5 billion in 2017 and $29.2 billion
in 2018,\36\ down from a peak of about $50 billion in 2007.\37\ The
online payday loan industry generates about 50 percent of total payday
loan revenue.\38\ In 2018, storefront industry revenue (fees paid on
payday loans) was $2.1 billion.\39\ Combined storefront and online
payday revenue was estimated at $4.8 billion in 2017 and $4.6 billion
in 2018,\40\ down from a peak of over $9 billion in 2012.\41\ Reports
from several States and publicly traded companies offering payday loans
show a shift from payday loans to small-dollar installment loans and
other credit products. For example, California and Texas payday loan
volume decreased approximately 35 percent from 2015 to 2018; there was
a corresponding increase in installment loan volume (of amounts at or
below $2,500) of approximately 35 percent over the same period.\42\ Two
publicly traded companies offering payday loans reported a significant
decrease in the percent of revenue contributed by single-payment or
short-term credit products and simultaneous substantial increases in
percent of revenue contributed by other credit products.\43\
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\35\ See id.
\36\ See id.
\37\ John Hecht, The State of Short-Term Credit Amid Ambiguity,
Evolution and Innovation (2016) (Jefferies LLC, slide presentation)
(on file) (Hecht 2016).
\38\ See 82 FR 54472, 54487; Hecht 2016.
\39\ See Hecht 2019.
\40\ See id.
\41\ Hecht 2016.
\42\ Calculations were based on total reported volume of single
payment transactions and installment transactions for amounts less
than $2,500. See California Dep't of Bus. Oversight, California
Department of Business Oversight Annual Report and Industry Survey:
Operation of Payday Lenders Licensed Under the California Deferred
Deposit Transaction Law for 2015 through 2018, https://dbo.ca.gov/payday-lenders-publications/ and Texas Office of Consumer Credit
Comm'r, Credit Access Business Annual Data Report for 2015 through
2018, https://occc.texas.gov/publications/activity-reports.
\43\ At Enova International, a publicly traded online lender,
revenue from installment, line of credit, and receivables purchase
agreement (small business) products rose from 2 percent to 89
percent from 2009 to 2019, while short-term loan revenue fell from
98 percent to 11 percent. Similarly, at CURO, revenue from
installment and open-end line-of-credit products rose from 19
percent to 78 percent from 2010 to 2019. See Enova Int'l, Investor
Presentation: November 2019, at 9 (Nov. 2019), https://ir.enova.com/download/Enova+Investor+Presentation+%2811-6-2019%29+-+FINAL.pdf and
CURO Group, November 2019: Stephens Investment Conference, at 7
(Nov. 13, 2019), https://ir.curo.com/~/media/Files/C/Curo-IR/
reports-and-presentations/stephens-conference-november-2019.pdf.
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When the 2019 NPRM was issued, there were at least 12 payday
lenders with approximately 200 or more storefront locations,\44\ and,
despite the storefront decline, these lenders continue to have
significant market share.\45\ The Bureau estimated in 2017 that over
2,400 storefront payday lenders are small businesses as defined by the
Small Business Administration (SBA); \46\ the number of storefront
payday lenders classified as small businesses has likely declined to
some extent, continuing the trend noted over the last several
years.\47\
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\44\ 84 FR 4252, 4255.
\45\ See Hecht 2019.
\46\ 82 FR 54472, 54479 & n.52.
\47\ See id. at 54480 & n.53.
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Estimates of the number of consumers who use payday loans annually
range from 2.2 million households \48\ to 12 million individuals.\49\
Given the number of storefronts and the average number of customers per
storefront plus the presence of the large online market for payday
loans, the actual number of borrowers appears closer to the higher end
of the estimates.\50\
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\48\ See Fed. Deposit Ins. Corp., 2017 FDIC National Survey of
Unbanked and Underbanked Households, at 41 (Oct. 2018), https://www.fdic.gov/householdsurvey/2017/2017report.pdf (FDIC 2017 Survey).
This is a reduction from the 2015 numbers of 2.5 million households
cited in the 2017 Final Rule; see 82 FR 54472, 54479 & n.42 (citing
Fed. Deposit Ins. Corp., 2015 FDIC National Survey of Unbanked and
Underbanked Households, at 2, 34 (Oct. 20, 2016), https://www.fdic.gov/householdsurvey/2015/2015report.pdf). The FDIC used the
United States Census Bureau's definition of ``household'' in the
Current Population Survey. See FDIC 2017 Survey at 73; https://www.census.gov/programs-surveys/cps/technical-documentation/subject-definitions.html#household.
\49\ 82 FR 54472, 54479 & n.44 (citing Pew Charitable Trusts,
Payday Lending in America: Who Borrows, Where They Borrow, and Why,
at 4 (July 2012), https://www.pewtrusts.org/~/media/legacy/
uploadedfiles/pcs_assets/2012/pewpaydaylendingreportpdf.pdf.).
\50\ Community Financial Services of America, a trade
association representing payday and small-dollar lenders, states
that approximately 12 million Americans use small-dollar loans each
year. See https://www.cfsaa.com/ (last visited Apr. 28, 2020). The
2017 Final Rule pointed to one study estimating, based on
administrate State data from three States, that the average payday
store served around 500 customers per year. 82 FR 54472, 54480 &
n.59 (citing Pew Charitable Trusts, Payday Lending in America:
Policy Solutions, at 18 (Report 3, 2013), https://www.pewtrusts.org/-/media/legacy/uploadedfiles/pcs_assets/2013/pewpaydaypolicysolutionsoct2013pdf.pdf).
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A small percentage of the up to 12 million consumers who take out
payday loans each year complain to the Bureau about them. In 2016, for
example, the Bureau handled approximately 4,400 complaints in which
consumers reported ``payday loan'' as the complaint product.\51\ The
Bureau received approximately 2,900 payday loan complaints in 2017,
approximately 2,300 in 2018, and approximately 2,100 in 2019.\52\
Consumers have complained most frequently about unexpected fees
[[Page 44385]]
or interest associated with payday loans and in the last two years
frequently selected the category ``struggling to pay your loan.'' \53\
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\51\ Bureau of Consumer Fin. Prot., Consumer Response Annual
Report, Jan. 1-Dec. 31, 2016, at 33 (Mar. 2017), https://www.consumerfinance.gov/documents/3368/201703_cfpb_Consumer-Response-Annual-Report-2016.pdf.
\52\ Bureau of Consumer Fin. Prot., Consumer Response Annual
Report, Jan. 1-Dec. 31, 2017, at 34 (Mar. 2018), https://www.consumerfinance.gov/documents/6406/cfpb_consumer-response-annual-report_2017.pdf; Bureau of Consumer Fin. Prot., Consumer
Response Annual Report, Jan. 1-Dec. 31, 2018, at 62 (Mar. 2019),
https://files.consumerfinance.gov/f/documents/cfpb_consumer-response-annual-report_2018.pdf; Bureau of Consumer Fin. Prot.,
Consumer Response Annual Report, Jan. 1-Dec. 31, 2019, at 62 (Mar.
2020), https://files.consumerfinance.gov/f/documents/cfpb_consumer-response-annual-report_2019.pdf. To provide a sense of the number of
complaints for payday loans relative to the number of complaints for
other product categories, in 2019, approximately 0.6 percent of all
consumer complaints the Bureau received were about payday loans, and
0.2 percent were about vehicle title loans. Bureau of Consumer Fin.
Prot., Consumer Response Annual Report, Jan. 1-Dec. 31, 2019, at 9
(Mar. 2020), https://files.consumerfinance.gov/f/documents/cfpb_consumer-response-annual-report_2019.pdf. There is some overlap
across product categories, for example, a consumer complaining about
the conduct of a debt collector seeking to recover on a payday loan
would be in the debt collection product category rather than the
payday loan product category.
\53\ Bureau of Consumer Fin. Prot., Consumer Response Annual
Report, Jan. 1-Dec. 31, 2018, at 64 (Mar. 2019), https://files.consumerfinance.gov/f/documents/cfpb_consumer-response-annual-report_2018.pdf; Bureau of Consumer Fin. Prot., Consumer Response
Annual Report, Jan. 1-Dec. 31, 2019, at 64 (Mar. 2020), https://files.consumerfinance.gov/f/documents/cfpb_consumer-response-annual-report_2019.pdf.
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2. Single-Payment Vehicle Title Loans
The second major category of loans covered by the Mandatory
Underwriting Provisions is single-payment vehicle title loans. As with
payday loans, the States have taken different regulatory approaches
with respect to single-payment vehicle title loans. Sixteen States
permit single-payment vehicle title lending at rates that vehicle title
lenders will offer under their business models.\54\ Another six States
permit only title installment loans but those loans are not affected by
the Mandatory Underwriting Provisions.\55\ Three States (Arizona,
Georgia, and New Hampshire) permit single-payment vehicle title loans
but prohibit or substantially restrict payday loans.\56\ Although a few
States have enacted general requirements that single-payment vehicle
title lenders consider a borrower's ability to repay or set loan-to-
income percentages,\57\ no State has adopted mandatory underwriting
requirements for single-payment vehicle title loans that are similar to
those in the 2017 Final Rule.
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\54\ Alabama, Mississippi, New Hampshire, Oregon, and Tennessee
authorize single-payment title lending and Arizona, Delaware,
Georgia, Idaho, Louisiana, Minnesota, Missouri, Nevada, Texas, Utah,
and Wisconsin authorize both single-payment or installment title
lending. See Pew Charitable Trusts, Auto Title Loans--Market
Practices and Borrowers' Experiences (2015), https://
www.pewtrusts.org/~/media/assets/2015/03/autotitleloansreport.pdf
(updated to reflect State law changes since 2015) (Pew Auto Title
Loans). As noted in the 2017 Final Rule, New Mexico enacted a law in
2017, effective January 1, 2018, that prohibits single-payment
vehicle title loans and allows only installment title lending. See
82 FR 54472, 54490. As of April 27, 2019, Ohio prohibits lenders
from making loans of $5,000 or less secured by a vehicle title or
any other collateral. See https://www.com.ohio.gov/documents/fiin_HB123_Guidance.pdf; see also Ohio House Bill 123, An Act to
Modify the Short-Term Loan Act, https://www.legislature.ohio.gov/legislation/legislation-summary?id=GA132-HB-123.
\55\ See 82 FR 54472, 54490. See also Pew Auto Title Loans
(updated to reflect State law changes since 2015 by adding New
Mexico).
\56\ Id.
\57\ See 82 FR 54472, 54491.
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Information about the vehicle title market is more limited than
that available for the storefront payday industry.\58\ According to a
2015 report, there were approximately 8,000 title loan storefront
locations in the United States, about half of which also offered payday
loans.\59\ Of the locations that predominantly offered vehicle title
loans in 2017, three privately held firms dominated the market and
together accounted for approximately 2,500 stores in over 20
States.\60\ In addition to the large title lenders, in 2017 there were
about 800 vehicle title lenders that were small businesses as defined
by the SBA.\61\
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\58\ Id.
\59\ See id. at 54491 & n.197 (citing Pew Charitable Trusts,
Auto Title Loans--Market practices and borrowers' experiences, at 1
(2015), https://www.pewtrusts.org/~/media/assets/2015/03/
autotitleloansreport.pdf.
\60\ 82 FR 54472, 54492; see also https://www.midwesttitleloans.net/SiteMap, https://www.northamericantitleloans.net/SiteMap (last visited Apr. 28,
2020). Store counts for these three firms may include States with
stores that offer installment vehicle title loans.
\61\ 82 FR 54472, 54492 & n.200 (explaining that State reports
have been supplemented with estimates from Center for Responsible
Lending, revenue information from public filings, and from non-
public sources). See Jean Ann Fox et al., Driven to Disaster: Car-
Title Lending and Its Impact on Consumers, at 7 (Consumer Fed'n of
Am. & Ctr. for Responsible Lending (2013), https://www.responsiblelending.org/other-consumer-loans/car-title-loans/research-analysis/CRL-Car-Title-Report-FINAL.pdf.).
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Estimates of the number of consumers who use vehicle title loans
annually have ranged from 1.8 million households to 2 million adults,
although these estimates do not necessarily differentiate between users
of single-payment and installment vehicle title loans.\62\ The
demographic profiles of vehicle title borrowers appear to be comparable
to the demographics of payday borrowers, which is to say that they tend
to be lower and moderate income.\63\
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\62\ FDIC 2017 Survey at 41. The number of households using
vehicle title loans in the 2017 FDIC survey rose from the 1.7
million households reported in the 2015 survey cited in the 2017
Final Rule. The individual user estimate is from a 2015 report. See
Pew Auto Title Loans at 33; 82 FR 54472, 54491 & n.195.
\63\ FDIC 2017 Survey (calculations made using custom data
tool).
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As with payday loans, a small percentage of the estimated two
million consumers who take out vehicle title loans each year file
complaints with the Bureau. In 2019, the Bureau received approximately
530 complaints involving vehicle title loans, down 7 percent from
2018.\64\ In 2019, consumers most frequently complained about
unexpected fees or interest and struggling to pay their vehicle title
loans.\65\ Vehicle title loan complaints made up 0.2 percent of all
consumer complaints the Bureau received in 2019.\66\
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\64\ Bureau of Consumer Fin. Prot., Consumer Response Annual
Report, Jan. 1-Dec. 31, 2019, at 67 (Mar. 2020), https://files.consumerfinance.gov/f/documents/cfpb_consumer-response-annual-report_2019.pdf. The vehicle title category may include complaints
about both single payment and installment vehicle title loans. In
addition, there is some overlap across product categories; a
consumer complaining about debt collection on a vehicle title loan
would be in the debt collection product category rather than the
vehicle title loan product category.
\65\ Id. at 69.
\66\ Id. at 9.
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3. Longer-Term Balloon-Payment Loans
The third category of loans covered by the Mandatory Underwriting
Provisions is longer-term balloon-payment loans which generally involve
a series of small, often interest-only, payments followed by a single
larger lump sum payment.\67\ There does not appear to be a large market
for such loans. However, in the preamble to the 2017 Final Rule, the
Bureau expressed the concern that the market for these longer-term
balloon-payment loans, with structures similar to payday loans that
pose similar risks to consumers, might grow if only covered short-term
loans were regulated under the 2017 Final Rule.\68\ Because the market
was relatively small, the Bureau supplemented its analysis of these
loans by using relevant information on related types of covered longer-
term loans, such as hybrid payday loans, payday installment loans, and
vehicle title installment loans.\69\ The profile of borrowers in the
market for longer-term balloon-payment loans is similar to those
seeking covered short-term and vehicle title loans--they also generally
have low average incomes, poor credit histories, and recent credit-
seeking activity.\70\
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\67\ 82 FR 54472, 54475. For examples of longer-term balloon-
payment loans, see id. at 54486 & n.143, 54490 & n.179.
\68\ Id. at 54472, 54527-28.
\69\ Id. at 54580.
\70\ Id. at 54581.
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4. Short-Term Lending by Depository Institutions
Since the issuance of the 2017 Final Rule, prudential regulators
have released additional regulations and guidance on small-dollar
lending by depository institutions. On October 5, 2017, the Office of
the Comptroller of the Currency (OCC) rescinded its November 2013
``Guidance on Supervisory Concerns and Expectations Regarding Deposit
Advance Products.'' \71\ From its market monitoring activities, the
Bureau is aware that at least one large bank has
[[Page 44386]]
reopened its deposit advance products to new customers. On May 23,
2018, the OCC issued a bulletin encouraging banks ``to offer
responsible short-term, small-dollar installment loans, typically two
to 12 months in duration with equal amortizing payments, to help meet
the credit needs of consumers.'' \72\ From its market monitoring
activities, the Bureau is aware that since the release of the OCC's
bulletin, at least one large bank is offering a short-term, small-
dollar installment lending product. On November 14, 2018, the Federal
Deposit Insurance Corporation (FDIC) issued a request for information
on small-dollar lending ``to encourage FDIC-supervised institutions to
offer small-dollar credit products that are responsive to customers'
needs and that are underwritten and structured prudently and
responsibly.'' \73\
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\71\ OCC News Release 2017-118, Acting Comptroller of the
Currency Rescinds Deposit Advance Product Guidance (Oct. 5, 2017),
https://www.occ.treas.gov/news-issuances/news-releases/2017/nr-occ-2017-118.html.
\72\ OCC Bulletin 2018-14, Installment Lending: Core Lending
Principles for Short-Term, Small-Dollar Installment Lending (May 23,
2018), https://www.occ.gov/news-issuances/bulletins/2018/bulletin-2018-14.html.
\73\ Fed. Deposit Ins. Corp., Financial Institution Letters:
Request for Information on Small-Dollar Lending (Nov. 14, 2018),
https://www.fdic.gov/news/news/financial/2018/fil18071.html.
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In addition, on October 1, 2019 the National Credit Union
Administration (NCUA) published a rule expanding its original Payday
Alternative Loan (PAL) program with a new program referred to as ``PALs
II'' ``to encourage responsible lending [by Federal credit unions] that
allows consumers to address immediate needs while working towards
fuller financial inclusion.'' \74\ The PALs II rule, effective December
2, 2019, authorizes Federal credit unions to offer small-dollar loans
with larger loan amounts and longer loan terms than were available
under the original PALs rule, removes the membership tenure
requirement, and limits Federal credit unions to one type of PALs loan
at a time. The other requirements of the original PAL rule apply to
PALs II.\75\
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\74\ 84 FR 51942 (Oct. 1, 2019); Nat'l Credit Union Admin.,
Press Release, Payday Alternative Loan Rule Will Create More
Alternatives for Borrowers (Sept. 2019), https://www.ncua.gov/newsroom/press-release/2019/payday-alternative-loan-rule-will-create-more-alternatives-borrowers.
\75\ 84 FR 51942, 51950-52.
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The 2017 Final Rule establishes a safe harbor under the conditional
exemption for alternative loans for Federal credit unions' original
PALs loans.\76\ The conditional exemption is, by its terms, limited to
original PALs loans. If Federal credit unions structure PALs II to be
substantially repaid within 45 days, PALs II could be covered loans
under the 2017 Final Rule. However, Federal credit unions are unlikely
to structure PALs II loans to be repaid within 45 days as PALs II are
generally designed for larger loan amounts of up to $2,000 and must
fully amortize over the life of the loan.\77\ Consequently, it is
highly unlikely that PALs II meet the definition of covered short-term
loans under the 2017 Final Rule or are subject to its Mandatory
Underwriting Provisions. In addition, the Payment Provisions of the
2017 Final Rule do not apply to PALs II with loan terms longer than 45
days due to the NCUA's 28 percent interest rate limitation on PALs II
loans.\78\
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\76\ See 12 CFR 1041.3(e)(4), 84 FR 51942, 54873-74.
\77\ See 12 CFR 701.21(c)(7)(iv)(A)(1) and (5). PALs II may also
meet the 2017 Final Rule's conditional exemption for accommodation
loans in 12 CFR 1041.3(f).
\78\ See 12 CFR 1041.2(a)(7) and 1041.3(b)(2). The NCUA also
authorizes an application fee of up to $20 on both types of PALs. 12
CFR 701.21(c)(7)(iii)(A) and (c)(7)(iv)(A). Under the Truth in
Lending Act, an application fee charged to all applicants, whether
or not credit is extended, is exempt from the finance charge and APR
calculation. 12 CFR 1026.4(c)(1). If in the future the NCUA
increases the permitted PALs II rate above 36 percent APR,
potentially bringing PALs II within the scope of the Payment
Provisions, PALs II may qualify for other exemptions. See 12 CFR
1041.3(f) (conditional exemption for accommodation loans) and
1041.8(a)(1)(ii) (conditional exclusion for certain transfers by
account-holding institutions).
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The Bureau is of course aware of the COVID-19 pandemic and its
economic effects. On March 26, 2020, in response to the pandemic, the
Bureau and four other Federal regulators issued a joint statement
encouraging banks, savings associations, and credit unions to offer
responsible small-dollar loans including closed-end installment loans,
open-end lines of credit, and appropriately structured single-payment
loans.\79\ The statement also recognized that in ordinary circumstances
small-dollar loans may be beneficial to consumers to address unexpected
expenses or temporary income shortfalls.\80\ The joint statement's
analysis of responsible small-dollar lending is distinct from the
analysis in this rulemaking and the determinations herein with respect
to the 2017 Final Rule. The Bureau's analysis or determinations in this
final rule do not rely in any way on either the occurrence of the
pandemic or its economic effects.
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\79\ Bd. of Governors of the Fed. Reserve Sys., Bureau of
Consumer Fin. Prot., Fed. Deposit Ins. Corp., Nat'l Credit Union
Admin., Office of the Comptroller of the Currency, Joint Statement
Encouraging Responsible Small-Dollar Lending in Response to COVID-19
(Joint Statement), https://files.consumerfinance.gov/f/documents/cfpb_interagency-statement_small-dollar-lending-covid-19_2020-03.pdf. The agencies also stated that the loans should be consistent
with safety and soundness, treat consumers fairly, and comply with
applicable statutes and regulations, including consumer protection
laws.
\80\ Id.
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On May 20, 2020, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the National Credit
Union Administration, and the Office of the Comptroller of the Currency
issued joint small-dollar loan lending principles for purposes of their
oversight of banks, savings associations, and credit unions under their
authorities. The analysis of those agencies is distinct from the
Bureau's analysis in this final rule under its statutory
authorities.\81\
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\81\ Bd. of Governors of the Fed. Reserve Sys., Fed. Deposit
Ins. Corp., Nat'l Credit Union Admin., Office of the Comptroller of
the Currency, Federal agencies share principles for offering
Responsible Small-Dollar Loans (May 2020), https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200520a.htm.
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On May 22, 2020, the Bureau issued a No-Action Letter (NAL)
template to the Bank Policy Institute under its innovation policies
that insured depository institutions may use to apply for a NAL
covering their small-dollar credit products. The template is intended
to further competition in the small-dollar lending space and facilitate
robust competition that fosters access to credit.\82\
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\82\ Bureau of Consumer Fin. Prot., CFPB Takes Action to Help
Struggling Homeowners Seeking Mitigation Efforts; Consumers Seeking
Small-Dollar Loans (May 2020), https://www.consumerfinance.gov/about-us/newsroom/cfpb-helps-struggling-homeowners-seeking-mitigation-efforts-consumers-seeking-small-dollar-loans/.
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B. The Mandatory Underwriting Provisions of the 2017 Final Rule
Section 1041.4 contains an identification provision which provides
that it is an unfair and abusive practice for a lender to make covered
short-term loans or covered longer-term balloon-payment loans without
reasonably determining that consumers have the ability to repay the
loans according to their terms. The preamble to the 2017 Final Rule
sets out the legal reasoning and factual analysis in support of the
unfairness and abusiveness findings to Sec. 1041.4.\83\
---------------------------------------------------------------------------
\83\ 82 FR 54472, 54553-624.
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Section 1041.5 contains a detailed and extensive set of
underwriting requirements adopted to prevent the unfair and abusive
practice. Specifically, Sec. 1041.5(c)(2) requires lenders making
covered short-term or longer-term balloon-payment loans to obtain a
written statement from the consumer with respect to the consumer's net
income and major financial obligations; obtain verification evidence of
the consumer's income, if reasonably available, and major financial
obligations; obtain a report from a national consumer reporting
[[Page 44387]]
agency and a report from a registered information system with respect
to the consumer; and review its own records and the records of its
affiliates for evidence of the consumer's required payments under any
debt obligations. Using these inputs, the lender is generally required
pursuant to Sec. 1041.5(b) and (c)(1) to make a reasonable projection
of the consumer's net income and payments for major financial
obligations over the ensuing 30 days; calculate either the consumer's
debt-to-income ratio or the consumer's residual income; estimate the
consumer's basic living expenses; and determine based upon the debt-to-
income or residual income calculations whether the consumer will be
able to make the payments for his or her payment obligations and the
payments under the covered loan and still meet the consumer's basic
living expenses during the term of the loan and for a period of 30 days
thereafter.\84\
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\84\ The Rule defines ``basic living expenses'' and ``major
financial obligations.'' 12 CFR 1041.5(a)(1) and (3).
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This determination is required each time a consumer returns to take
out a new loan, although pursuant to Sec. 1041.5(c)(2)(ii)(D) the
lender generally need not obtain a new national credit report if one
was obtained within the prior 90 days. If a consumer has obtained three
loans each within 30 days of the prior loan, pursuant to Sec.
1041.5(d)(2) the lender cannot make another covered short-term or
longer-term balloon-payment loan for a period of 30 days.
As also noted above, Sec. 1041.6 contains a principal step-down
exemption that allows lenders to make covered short-term loans without
an ability-to-repay determination under Sec. 1041.5. In order to
qualify for the principal step-down exemption pursuant to Sec.
1041.6(b)(1)(i), the principal cannot exceed $500 for the first in a
sequence of covered short-term loans, and pursuant to Sec.
1041.6(b)(3) the principal step-down exemption is not available for
vehicle title loans. A lender may not make more than three loans in
succession under this principal step-down exemption and the loans must
provide for a ``principal step-down'' over the sequence pursuant to
Sec. 1041.6(b)(1)(ii) and (iii) such that the second loan in a
sequence can be for only two-thirds of the amount of the initial loan
and the third loan in a sequence for one-third of the initial loan
amount.
Pursuant to Sec. 1041.6(c)(1), a lender cannot make a loan under
the principal step-down exemption to a consumer who has had an
outstanding covered short-term or longer-term balloon-payment loan in
the preceding 30 days. Pursuant to Sec. 1041.6(c)(3), the lender also
cannot make a loan that would result in the consumer having more than
six covered short-term loans outstanding during any consecutive 12-
month period or result in the consumer being in debt on any covered
short-term loans for longer than 90 days in any consecutive 12-month
period. To verify the consumer's eligibility, before making a
conditionally exempt covered short-term loan pursuant to Sec.
1041.6(a), the lender must review the consumer's borrowing history in
its own records and those of its affiliates and obtain a report from a
Bureau-registered information system to determine a potential loan's
compliance with Sec. 1041.6(b) and (c).
Lenders making covered short-term and longer-term balloon-payment
loans--including conditionally exempt covered short-term loans--
generally are required to furnish certain information on those loans to
every registered information system that has been registered with the
Bureau for 180 days or more. Pursuant to Sec. 1041.10(c)(1), certain
information must be furnished no later than the date on which the loan
is consummated or as close in time as feasible thereafter; pursuant to
Sec. 1041.10(c)(2), updates to such information must be furnished
within a reasonable period after the event that requires the update.
In adopting the Mandatory Underwriting Provisions in 2017, the
Bureau considered and rejected a number of alternatives, including
requiring disclosures, adopting a payment-to-income ratio requirement,
adopting one of the various State law approaches to regulating short-
term loans (such as rollover caps, less detailed ability-to-repay
frameworks, complete bans on short-term lending products), and other
suggestions from commenters. A comprehensive description of the
Bureau's consideration and treatment of these alternatives is set forth
in the 2017 Final Rule.\85\
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\85\ See 82 FR 54472, 54636-40.
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III. Outreach
In developing the 2019 NPRM, the Bureau took into account the input
it received from stakeholders through its efforts to monitor and
support industry implementation of the 2017 Final Rule, as well as
comments received in response to other Bureau initiatives, such as a
series of requests for information (RFIs) the Bureau published in
2018.\86\ The Bureau also held a series of briefing calls with various
government, industry, and consumer group stakeholders on the 2019 NPRM.
---------------------------------------------------------------------------
\86\ See Bureau of Consumer Fin. Prot., Calls for Evidence,
https://www.consumerfinance.gov/policy-compliance/notice-opportunities-comment/archive-closed/call-for-evidence/ (lasted
visited Mar. 12, 2020).
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Interagency Consultation. As discussed in connection with section
1022(b)(2) of the Dodd-Frank Act below, the Bureau's outreach included
consultation with other Federal consumer protection and prudential
regulators, and their feedback has assisted the Bureau in preparing
this final rule.
Consultation with State and Local Officials. The Bureau's outreach
has included calls with State attorneys general, State financial
regulators, and organizations representing the officials charged with
enforcing applicable Federal, State, and local laws on small-dollar
loans.
Tribal Consultation. On December 19, 2018, the Bureau held a
consultation with representatives from a number of Indian tribes about
what it might address in its proposed rulemaking. Federally recognized
Indian tribes were invited to participate in this consultation. On
March 13, 2020, the Bureau held a consultation regarding the
finalization of the 2019 NPRM. Federally recognized Indian tribes were
invited to participate in this consultation.
Public Comments. The Bureau received approximately 197,000 comments
on the 2019 NPRM. All comments have been posted to the public docket
for this rulemaking.\87\ These comments included several hundred
detailed comments from consumer groups, trade associations, non-
depository lenders, banks, credit unions, research and advocacy
organizations, members of Congress, industry service providers, fintech
companies, Tribal leaders, faith leaders and coalitions of faith
leaders, and State and local government officials and agencies. The
Bureau allowed into the docket and considered comments received after
the comment period had closed.
---------------------------------------------------------------------------
\87\ https://www.regulations.gov/docket?D=CFPB-2019-0006.
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The Bureau did not tally precisely comments supporting or opposing
the 2019 NPRM. A minority of comments were hard to categorize as simply
in favor of or in opposition to reconsidering the 2017 Final Rule. As
with the 2017 Final Rule, it was possible to achieve a rough
approximation that broke down the
[[Page 44388]]
universe of comments in this manner. More than 150,000 commenters wrote
in favor of payday lending generally or in opposition to regulation
generally. Approximately 31,000 commenters wrote in opposition to
payday lending generally or in opposition to regulation generally.
Somewhat fewer comments either explicitly supported or opposed
generally the proposed revocation of the 2017 Final Rule or could be
fairly read to support or oppose the specific rule proposed in the 2019
NPRM. Of the individual comments that specifically addressed the 2019
NPRM, just over half (approximately 29,000 comments) more specifically
supported the 2019 NPRM and/or opposed the Mandatory Underwriting
Provisions of the 2017 Final Rule, while somewhat fewer (approximately
25,000 comments) more specifically opposed the 2019 NPRM and/or
supported the Mandatory Underwriting Provisions of the 2017 Final Rule.
A rough estimate of pro and con submissions by individuals may
provide insight as to public interest in a topic and to individual
consumer experiences. However, under both the Administrative Procedure
Act (APA) \88\ and the Dodd-Frank Act, the Bureau must base its
determinations in rulemaking on the facts and the law in the rulemaking
record as a whole.
---------------------------------------------------------------------------
\88\ 5 U.S.C. 551 et seq., 701 et seq.
---------------------------------------------------------------------------
A comment submitted by a consumer group observed that many of the
individual comments writing in favor of the 2019 NPRM used identical or
near-identical language and stories, and even repeated certain
typographical errors. The consumer group stated that such patterns
suggested that the comments were not submitted by actual consumers
sharing their real experiences. The comment did not provide support for
the suggested inference.
Ex parte communications. In addition to comments submitted to the
docket, the Bureau also considered input from 17 ex parte meetings and
telephone conferences. These communications were memorialized in the
form of summary memoranda and placed into the docket for this
rulemaking.\89\
---------------------------------------------------------------------------
\89\ The docket is available at https://www.regulations.gov/docket?D=CFPB-2019-0006.
---------------------------------------------------------------------------
Comments on the Payment Provisions. In the 2019 NPRM, the Bureau
did not propose to reconsider the Payment Provisions of the 2017 Final
Rule. The Payment Provisions are outside the scope of this final rule.
However, the Bureau has received a rulemaking petition to exempt debit
card payments from the Rule's Payment Provisions.
The Bureau also received requests related to various aspects of the
Payment Provisions or the Rule as a whole, including requests to exempt
certain types of lenders or loan products from the Rule's coverage and
to delay the compliance date for the Payment Provisions. The Bureau has
engaged with several stakeholders on their requests related to various
aspects of the Payment Provisions, including receiving questions
related to implementation as well as requests to exempt certain types
of lenders or loan products from the Rule's coverage. The Bureau,
concurrent with the release of this final rule, has issued compliance
aids, including FAQs and an updated Small Entity Compliance Guide, to
respond to certain queries and to support ongoing implementation
efforts. In addition, the Bureau has also issued a policy statement to
address concerns pertaining to the coverage of certain large loans. The
Bureau will monitor and assess the effects of the Payment Provisions
and determine whether further action is needed in light of what it
learns. In addition, the Bureau intends to use its market monitoring
authority to gather data on whether the requirement in the 2017 Final
Rule that lenders provide consumers with ``unusual withdrawal'' notices
before the lenders make certain withdrawal attempts are made affects
the number of unsuccessful withdrawals made from consumers' accounts.
IV. Legal Authority
The Bureau adopted the Mandatory Underwriting Provisions in
principal reliance on the Bureau's authority under section 1031(b) of
the Dodd-Frank Act.\90\ Section 1031(b) of the Dodd-Frank Act provides
that the Bureau ``may prescribe rules applicable to a covered person or
service provider identifying as unlawful unfair, deceptive, or abusive
acts or practices 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 section 1031 may include
requirements for the purpose of preventing such acts or practices.
---------------------------------------------------------------------------
\90\ 12 U.S.C. 5531(b).
---------------------------------------------------------------------------
Section 1031(c)(1) of the Dodd-Frank Act provides that the Bureau
shall have no authority under section 1031 to declare an act or
practice in connection with a transaction with a consumer for a
consumer financial product or service, or the offering of a consumer
financial product or service, to be unlawful on the grounds that such
act or practice is unfair, unless the Bureau has a reasonable basis to
conclude that the act or practice causes or is likely to cause
substantial injury to consumers which is not reasonably avoidable by
consumers, and that such substantial injury is not outweighed by
countervailing benefits to consumers or to competition.\91\ The
unfairness provisions of the Dodd-Frank Act are similar to the
unfairness provisions under the Federal Trade Commission Act (FTC Act),
and the meaning of the Bureau's authority under section 1031(b) is
informed by the FTC Act unfairness standard and Federal Trade
Commission (FTC or Commission) and other Federal agency
rulemakings.\92\ When applying section 1031(c) of the Dodd-Frank Act,
the Bureau also considers the FTC's ``Commission Statement of Policy on
Scope of Consumer Unfairness Jurisdiction'' (FTC Unfairness Policy
Statement), the principles of which Congress generally incorporated
into section 5 of the FTC Act.\93\
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\91\ 12 U.S.C. 5531(c)(1). Additionally, 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. 12 U.S.C. 5531(c)(2).
\92\ 82 FR 54472, 54520. See also 15 U.S.C. 41 et seq. 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).
\93\ See 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 (Dec. 17, 1980), reprinted in In re
Int'l Harvester Co., 104 F.T.C. 949, 1070-88 (1984); see also S.
Rep. No. 103-130, at 12-13 (1993) (legislative history to FTC Act
amendments indicating congressional intent to codify the principles
of the FTC Unfairness Policy Statement).
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Under section 1031(d) of the Dodd-Frank Act, the Bureau ``shall
have no authority . . . to declare an act or practice abusive in
connection with the provision of a consumer financial product or
service'' unless the act or practice meets at least one of several
enumerated conditions.\94\ Section 1031(d)(2) of the Dodd-Frank Act
provides, in pertinent part, that an act or practice is abusive when it
takes unreasonable advantage of: (1) A consumer's lack of understanding
of the
[[Page 44389]]
material risks, costs, or conditions of the product or service; or (2)
a consumer's inability to protect the interests of the consumer in
selecting or using a consumer financial product or service.
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\94\ 12 U.S.C. 5531(d).
---------------------------------------------------------------------------
In addition to section 1031 of the Dodd-Frank Act, the Bureau
relied on other legal authorities for certain aspects of the Mandatory
Underwriting Provisions.\95\ These include: The principal step-down
exemption for certain loans in Sec. 1041.6; two provisions (Sec. Sec.
1041.10 and 1041.11) that facilitate lenders' ability to obtain certain
information about consumers' borrowing history from information systems
that have registered with the Bureau; and certain recordkeeping
requirements in Sec. 1041.12.
---------------------------------------------------------------------------
\95\ See 82 FR 54472, 54522.
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In adopting each of these provisions, the Bureau relied on one or
more of the following authorities. Section 1022(b)(3)(A) of the Dodd-
Frank Act authorizes the Bureau, in a rulemaking, to conditionally or
unconditionally exempt any class of covered persons, service providers,
or consumer financial products or services from any rule issued under
title X, which includes a rule issued under section 1031, as the Bureau
determines is necessary or appropriate to carry out the purposes and
objectives of title X. In doing so, the Bureau must take into
consideration the factors set forth in section 1022(b)(3)(B) of the
Dodd-Frank Act.\96\ Section 1022(b)(3)(B) specifies three factors that
the Bureau shall, as appropriate, take into consideration in issuing
such an exemption.\97\ The Bureau also relied, in adopting certain
provisions, on its authority under section 1022(b)(1) of the Dodd-Frank
Act to prescribe rules as may be necessary or appropriate to enable the
Bureau to administer and carry out the purposes and objectives of the
Federal consumer financial laws.\98\ The term ``Federal consumer
financial law'' includes rules prescribed under title X of the Dodd-
Frank Act, including those prescribed under section 1031.\99\
Additionally, the Bureau relied, for certain provisions, on other
authorities, including those in sections 1021(c)(3), 1022(c)(7),
1024(b)(7), and 1032 of the Dodd-Frank Act.\100\
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\96\ 12 U.S.C. 5512(b)(3)(A).
\97\ 12 U.S.C. 5512(b)(3)(B).
\98\ 12 U.S.C. 5512(b)(1). The Bureau also interprets section
1022(b)(1) of the Dodd-Frank Act as authorizing it to revoke or
amend a previously issued rule if it determines such rule is not
necessary or appropriate to enable the Bureau to administer and
carry out the purposes and objectives of the Federal consumer
financial laws, including a rule issued to identify and prevent
unfair, deceptive, or abusive acts or practices.
\99\ 12 U.S.C. 5481(14).
\100\ See 82 FR 54472, 54522; see also 12 U.S.C. 5511(c)(3),
5512(c)(7), 5514(b)(7), 5522.
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The Bureau's decisions to use these authorities were premised on
its decision to use its authority under section 1031 of the Dodd-Frank
Act. In light of the Bureau's decision to revoke its use of section
1031 authority in the Mandatory Underwriting Provisions, the Bureau now
concludes that it must also revoke its uses of these other authorities
in the Mandatory Underwriting Provisions. The specific provisions of
the 2017 Final Rule that the Bureau is revoking are discussed further
in the section-by-section analysis in part VIII below.
V. Amendments to 12 CFR Part 1041 To Eliminate the Mandatory
Underwriting Provisions--Revoking the Identification of an Unfair
Practice
The Bureau has determined that the grounds provided in the 2017
Final Rule do not support its determination that the identified
practice is unfair, thereby eliminating the basis for the Mandatory
Underwriting Provisions to address that conduct.\101\
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\101\ The rulemaking addresses the legal and evidentiary bases
for particular rule provisions identified in this final rule. It
does not prevent the Bureau from exercising other tool choices, such
as appropriate exercise of supervision and enforcement tools,
consistent with the Dodd-Frank Act and other applicable laws and
regulations. It also does not prevent the Bureau from exercising its
judgment in light of factual, legal, and policy factors in
particular circumstances as to whether an act or practice causes or
is likely to cause substantial injury to consumers which is not
reasonably avoidable by consumers, and whether such substantial
injury is not outweighed by countervailing benefits to consumers or
to competition.
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This part explains the Bureau's reasons for determining that the
identified practice in the 2017 Final Rule is not unfair under section
1031 of the Dodd-Frank Act. Combined with the Bureau's determinations
concerning abusive practices set out in part VI below, the Mandatory
Underwriting Provisions are therefore not supported by an appropriate
legal or evidentiary basis.\102\
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\102\ The Bureau notes that, alongside covered short-term loans,
the 2017 Final Rule included covered longer-term balloon-payment
loans within the scope of the identified unfair and abusive
practice. The Bureau stated that it was concerned that the market
for covered longer-term balloon-payment loans, which is currently
quite small, could expand dramatically if lenders were to circumvent
the Mandatory Underwriting Provisions by making these loans without
assessing borrowers' ability to repay. 82 FR 54472, 54583-84. The
Bureau did not separately analyze the elements of unfairness and
abusiveness for covered longer-term balloon-payment loans. See id.
at 54583 n.626. Because the Bureau's identification in the 2017
Final Rule that the failure to determine ability to repay was unfair
for covered longer-term balloon-payment loans was predicated on its
identification that it was unfair to fail to determine ability to
repay for covered short-term loans, in the 2019 NPRM the Bureau
proposed that if the identification for covered short-term loans is
revoked then the identification for covered longer-term balloon-
payment loans also should be revoked. The Bureau received no
comments on this proposed treatment of covered longer-term balloon-
payment loans and so finalizes it as proposed.
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Part V.A reviews certain of the factual predicates and legal
conclusions underlying this use of authority. Part V.B sets forth the
Bureau's legal and factual bases, under section 1031(c) of the Dodd-
Frank Act, for withdrawing its previous finding that an injury
associated with the identified practice is not reasonably avoidable.
Part V.C analyzes the reasons why the Bureau has revalued the
countervailing benefits under the unfairness analysis and determined
that they were greater than the Bureau found in the 2017 Final Rule,
and that the benefits to consumers and competition in the aggregate
from the practice outweigh any such injury.
A. Overview of the Factual Predicates and Legal Conclusions Underlying
the Identification of an Unfair Practice in Sec. 1041.4
As noted above, section 1031(c)(1)(A) of the Dodd-Frank Act states
that the Bureau has no authority to declare an act or practice to be
unfair unless the Bureau has a reasonable basis to conclude that the
act or practice causes or is likely to cause substantial injury which
is not reasonably avoidable by consumers and that such substantial
injury is not outweighed by countervailing benefits to consumers or to
competition.\103\
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\103\ 12 U.S.C. 5531(c)(1).
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In the 2017 Final Rule, the Bureau found that the practice of
making covered short-term or longer-term balloon-payment loans to
consumers without reasonably determining if the consumers have the
ability to repay them according to their terms causes or is likely to
cause substantial injury to consumers. The Bureau reasoned that where
lenders were engaged in this identified practice and the consumer in
fact lacks the ability to repay, the consumer will face choices--
default, delinquency, and reborrowing, as well as the negative
collateral consequences of being forced to forgo major financial
obligations or basic living expenses to cover the unaffordable loan
payment--each of which the Bureau found in the 2017 Final Rule leads to
injury for many of these consumers and ``the sum of that injury is very
substantial.'' \104\
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\104\ 82 FR 54472, 54590-94.
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[[Page 44390]]
The Bureau in the 2017 Final Rule found that consumers could not
reasonably avoid this substantial injury. The Bureau stated that, under
section 1031(c)(1)(A) of the Dodd-Frank Act, an injury is reasonably
avoidable if consumers ``have reasons generally to anticipate the
likelihood and severity of the injury and the practical means to avoid
it.'' \105\ The Bureau added: ``[t]he heart of the matter here is
consumer perception of risk, and whether borrowers are in [a] position
to gauge the likelihood and severity of the risks they incur by taking
out covered short-term loans in the absence of any reasonable
assessment of their ability to repay those loans according to their
terms.'' \106\
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\105\ Id. at 54594.
\106\ Id. at 54597.
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In applying this standard, the 2017 Final Rule focused on
borrowers' ability to predict their individual outcomes prior to taking
out loans. The Bureau acknowledged that it ``is possible that many
borrowers accurately anticipate their debt duration.'' \107\ However,
the Bureau stated that its ``primary concern is for those longer-term
borrowers who find themselves in extended loan sequences'' and that for
those borrowers ``the picture is quite different, and their ability to
estimate accurately what will happen to them when they take out a
payday loan is quite limited.'' \108\ That led the Bureau to conclude
that ``many consumers do not understand or perceive the probability
that certain harms will occur'' \109\ and that therefore it would not
be reasonable to expect consumers to take steps to avoid injury.\110\
Note that, although the Bureau made these statements about consumers
who take out payday loans as part of an extended sequence, the
identified practice and the corresponding Mandatory Underwriting
Provisions to address that practice apply to all consumers who take out
all payday loans, including those that are not part of an extended
sequence.
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\107\ Id.
\108\ Id.
\109\ Id.
\110\ Id. at 54594.
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The 2017 Final Rule based that finding primarily on the Bureau's
interpretation of limited data from a study by Professor Mann of
Columbia Law School. The Mann study compared consumers' predictions
when taking out a payday loan about how long they would be in debt with
administrative data from lenders showing the actual duration consumers
were in debt.\111\ The Bureau did not base its central findings on the
conclusions in Professor Mann's study. Rather, the Bureau selected
limited data compiled in the course of that study, conducted its own
analysis of the data, and interpreted the results as ``provid[ing] the
most relevant data describing borrowers' expected durations of
indebtedness with payday loan products.'' \112\ The Bureau's
interpretation of limited data from the Mann study is discussed in part
V.B.1 below.\113\
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\111\ Ronald J. Mann, Assessing the Optimism of Payday Loan
Borrowers, 21 Supreme Court Econ. Rev. 105 (2013) (discussed at 82
FR 54472, 54568-70, 54592, 54597); see also 82 FR 54472, 54816-17,
54836-37 (section 1022(b)(2) analysis discussion of the Mann study).
\112\ 82 FR 54472, 54816.
\113\ The Bureau also referenced two academic studies, one of
which compared borrowers' belief about the average borrower with
data about the average outcome of borrowers and the other of which
compared borrowers' predictions of their own borrowing with average
outcomes of borrowers in another State. These studies found that
borrowers appear, on average, somewhat optimistic about the length
of their indebtedness. See id. at 54568, 54836. However, the Bureau
noted the weaknesses of these studies, id. at 54568, and, as
discussed, relied primarily on the Bureau's interpretation of
limited data from the Mann study.
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In further support of the finding in the 2017 Final Rule that some
consumers were not in a position to evaluate the likelihood and
severity of these risks and therefore it would not be reasonable to
expect consumers to take steps to avoid the injury, the Bureau in the
2017 Final Rule relied on other findings, including those related to
the marketing and servicing practices of providers of short-term
loans,\114\ and on the Bureau's own expertise and experience in
supervisory matters and enforcement actions concerning covered lenders
in the markets for covered short-term and longer-term balloon-payment
loans.\115\ These additional factors are discussed in detail in part
V.C.2 below.
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\114\ See, e.g., id. at 54616.
\115\ Id. at 54505-07.
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B. Reasonable Avoidability
1. Reasonable Avoidability--Legal Standard
The Bureau's Proposal
The Bureau determined in the 2017 Final Rule that making covered
short-term or longer-term balloon-payment loans without reasonably
assessing a borrower's ability to repay the loan according to its terms
is an unfair act or practice. In making this determination, the Bureau
concluded that this practice: (1) Caused or was likely to cause
substantial injury to consumers; (2) which is not reasonably avoidable
by consumers; and (3) that such injury was not outweighed by
countervailing benefits to consumers or competition.\116\
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\116\ Id. at 54588.
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In the 2017 Final Rule, the Bureau interpreted section
1031(c)(1)(A) of the Dodd-Frank Act to mean that for an injury to be
reasonably avoidable consumers must ``have reason generally to
anticipate the likelihood and severity of the injury and the practical
means to avoid it.'' \117\ The Bureau interpreted this standard as
requiring consumers to have a specific understanding of the magnitude
and severity of their personal risks such that they could accurately
predict how long they would be in debt after taking out a covered
short-term or longer-term balloon-payment loan.\118\ The Bureau stated
in the 2017 Final Rule that such borrowers ``typically understand that
they are incurring a debt which must be repaid within a prescribed
period of time and that, if they are unable to do so, they will either
have to make other arrangements or suffer adverse consequences.'' \119\
The Bureau also stated that its interpretation of limited data from the
Mann study indicated that most payday borrowers expected some repeated
sequences of loans.\120\ Nonetheless, the Bureau stated that ``[t]he
heart of the matter here is consumer perception of risk, and whether
borrowers are in [a] position to gauge the likelihood and severity of
the risks they incur by taking out covered short-term loans in the
absence of any reasonable assessment of their ability to repay those
loans according to their terms.'' \121\ Because it found that consumers
do not understand or perceive the probability that certain harms will
occur, including the substantial injury that can flow from default,
reborrowing, and the negative collateral consequences of making
unaffordable payments, the Bureau found that consumers could not
reasonably avoid the harm.\122\
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\117\ Id. at 54594.
\118\ Id. at 54594-96.
\119\ Id. at 54615.
\120\ Id. at 54569.
\121\ Id. at 54597.
\122\ Id. at 54594; see also id. at 54597.
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The Bureau in the 2019 NPRM expressed concern about the standard
that it applied in the 2017 Final Rule for reasonable avoidability
under section 1031(c)(1)(A) of the Dodd-Frank Act. The 2019 NPRM stated
that, in assessing whether consumers could reasonably avoid harm, the
Bureau in the 2017 Final Rule concluded that they could not without a
specific understanding of their individualized risk, as determined by
their ability to accurately predict how long they would be in debt
after taking out a covered short-term or longer-term balloon-payment
loan.\123\ In
[[Page 44391]]
reconsidering this interpretation of reasonable avoidability, the
Bureau preliminarily determined that consumers need not have a specific
understanding of their individualized likelihood and magnitude of harm
such that they could accurately predict how long they would be in debt
after taking out a covered short-term or longer-term balloon-payment
loan for the injury to be reasonably avoidable. The Bureau reasoned
that requiring consumers to know their individualized likelihood and
magnitude of risk of harm for that harm to be reasonably avoidable
would overstate consumer injury and effectively shift the burden to
lenders to make such determinations. This burden shifting would deter
lenders from offering products or product features, which would
suppress rather than facilitate consumer choice.
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\123\ Id. at 54597-98.
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The 2019 NPRM stated that the particular problem with the 2017
Final Rule is illustrated by how the Bureau responded to several
comments that urged the Bureau to mandate consumer disclosures instead
of imposing an ability-to-repay requirement. In rejecting that
suggestion, the Bureau stated that ``generalized or abstract
information'' about the attendant risks would ``not inform the consumer
of the risks of the particular loan in light of the consumer's
particular financial situation.'' \124\ Upon further consideration, in
the 2019 NPRM the Bureau preliminarily determined that there was a
better reasonable avoidability standard than the one set out in the
2017 Final Rule. The 2019 NPRM explained that FTC Act precedent informs
the Bureau's understanding of the unfairness standard under section
1031(c)(1)(A) of the Dodd-Frank Act. In analyzing unfairness under the
FTC Act, the FTC and courts have held that ``an injury is reasonably
avoidable if consumers have reason to anticipate the impending harm and
the means to avoid it,'' \125\ meaning that ``people know the physical
steps to take in order to prevent'' injury,\126\ but also ``understand
the necessity of actually taking those steps.'' \127\ The 2019 NPRM
noted that the Bureau in the 2017 Final Rule had not identified
relevant precedent suggesting that consumers must understand their own
specific individualized likelihood and magnitude of harm to reasonably
avoid injury.
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\124\ Id. at 54637 (emphasis added).
\125\ See Davis v. HSBC Bank Nev., 691 F.3d 1152, 1168 (9th Cir.
2012).
\126\ See Int'l Harvester, 104 F.T.C. at 1066.
\127\ Id.
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The Bureau also stated in the 2019 NPRM that its approach to
reasonable avoidability was consistent with trade regulation rules
promulgated by the FTC over several decades to address unfair or
deceptive practices that occur on industry-wide bases.\128\ To prevent
such conduct, the Bureau stated that the FTC has routinely established
disclosure requirements that mandate that businesses provide to
consumers general information about material terms, conditions, or
risks related to products or services.\129\ However, according to the
2019 NPRM, no FTC trade regulation rule based on unfairness has
required businesses to provide individualized forecasts or disclosures
of each customer's or prospective customer's own specific likelihood
and magnitude of potential harm.\130\
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\128\ Section 18 of the FTC Act provides that the FTC is
authorized to prescribe ``rules which define with specificity acts
or practices which are unfair or deceptive acts or practices in or
affecting commerce'' within the meaning of section 5 of the FTC Act.
15 U.S.C. 57a. The FTC's trade regulation rules are codified at 16
CFR part 400.
\129\ See, e.g., Use of Prenotification Negative Option Plans
Rule, 16 CFR 425.1(a)(1) (promotional material must clearly and
conspicuously disclose material terms); Funeral Industry Practices
Rule, 16 CFR 453.2(b) (requiring itemized price disclosures of
funeral goods and services and other non-consumer specific
disclosures); Credit Practices Rule, 16 CFR 444.3 (prohibiting
certain practices and requiring disclosures about cosigner
liability).
\130\ For example, the Credit Practices Rule requires that a
covered creditor to provide a ``Notice to Cosigner'' disclosure
prior to a cosigner becoming obligated on a loan. This notice
advises in a concise and general manner consumers who cosign
obligations about their potential liability. This notice is not
individually tailored and does not require a covered creditor to
disclose information about the severity or likelihood of risks
related to cosigner liability. See 16 CFR 444.3.
---------------------------------------------------------------------------
The Bureau stated in the 2019 NPRM its preliminary conclusion that
injury is reasonably avoidable if payday borrowers have an
understanding of the likelihood and magnitude of risks of harm
associated with payday loans sufficient for them to anticipate those
harms and understand the necessity of taking reasonable steps to
prevent resulting injury. Specifically, this means consumers need only
understand that a significant portion of payday borrowers experience
difficulty repaying and that if such borrowers do not make other
arrangements they may either end up in extended loan sequences,
default, or struggle to pay other bills after repaying their payday
loan. The Bureau preliminarily determined in the 2019 NPRM that this
approach, consistent with the FTC's longstanding approach on informed
consumer decision-making in its interpretation of the unfairness
standard, is the better interpretation of section 1031(c)(1)(A) as a
legal and policy matter. In the Bureau's preliminary judgment, this
approach appropriately emphasized prohibiting practices that prevent or
hinder informed consumer decision-making in the marketplace.\131\
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\131\ As the FTC stated in the FTC Unfairness Policy Statement:
``[W]e expect the marketplace to be self-correcting, and we rely on
consumer choice--the ability of individual consumers to make their
own private purchasing decisions without regulatory intervention--to
govern the market. We anticipate that consumers will survey the
available alternatives, choose those that are most desirable, and
avoid those that are inadequate or unsatisfactory.'' FTC Unfairness
Policy Statement, Int'l Harvester, 104 F.T.C. at 1074. See also
Orkin Exterminating Co. v. FTC, 849 F.2d 1354, 1365 (11th Cir. 1988)
(``The Commission's focus on a consumer's ability to reasonably
avoid injury `stems from the Commission's general reliance on free
and informed consumer choice as the best regulator of the
market.''') (quoting Am. Fin. Servs. Ass'n v. FTC, 767 F.2d 957, 976
(D.C. Cir. 1985) (AFSA)).
---------------------------------------------------------------------------
Applying an interpretation in the 2019 NPRM that was more
consistent with FTC precedent, the Bureau preliminarily concluded that,
assuming for purposes of argument that the identified practice causes
or is likely to cause substantial injury, consumers could reasonably
avoid that injury. As noted above, in the 2017 Final Rule, the Bureau
found that payday loan borrowers ``typically understand 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.'' \132\ The
2019 NPRM stated that consumers who have reborrowed in the past would
seem particularly likely to have an understanding that such reborrowing
is relatively common even if they cannot predict specifically how long
they will need to borrow. Further, the 2019 NPRM noted a Bureau
analysis of a study of State-mandated payday loan disclosures--which
inform consumers about repayment and reborrowing rates--in which the
majority of consumers in the study continued to take out payday loans
despite the disclosures.\133\ The 2019 NPRM stated that a plausible
explanation for the limited effect of disclosures on consumer behavior
in this study is that payday loan users were already aware that such
loans can result in extended loan sequences.
---------------------------------------------------------------------------
\132\ 82 FR 54472, 54615.
\133\ Id. at 54577-78; see Tex. Office of Consumer Credit
Comm'r, Credit Access Businesses, https://occc.texas.gov/industry/cab.
---------------------------------------------------------------------------
The 2019 NPRM stated that the Bureau in the 2017 Final Rule did not
offer evidence that would support the conclusion that consumers cannot
reasonably avoid substantial injury from
[[Page 44392]]
taking out payday loans applying a standard that focuses on
understanding that is sufficient to alert consumers of the need to take
steps to protect themselves from the harm from taking out such loans.
The Bureau also found in the 2017 Final Rule that consumers who would
not be offered a payday loan under either Sec. 1041.5 or Sec. 1041.6
would have alternatives to payday loans.\134\ Accordingly, the Bureau
preliminarily determined that there is not a sufficient evidentiary
basis on which to find that consumers cannot reasonably avoid
substantial injury caused or likely to be caused by lenders making
covered short-term and longer-term balloon-payment loans without
assessing borrowers' ability to repay.\135\
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\134\ 82 FR 54472, 54840-41.
\135\ Relatedly, the 2019 NPRM proposed to find that ``robust
and reliable'' evidence was necessary in order to support a
determination that consumers cannot reasonably avoid injury, in
light of the dramatic impacts of the Rule on the market; this
approach to requiring ``robust and reliable'' evidence is discussed
in part V.B.2 of this preamble.
---------------------------------------------------------------------------
The Bureau sought comments on reasonable avoidability, including
the Bureau's revised interpretation of reasonable avoidability under
section 1031(c)(1) of the Dodd-Frank Act. The Bureau requested comment
about the types or sources of information with respect to consumer
understanding about covered short-term and longer-term balloon-payment
loans that would be pertinent to a determination of whether consumers
can reasonably avoid the substantial injury caused or likely to be
caused by the identified practice.
Comments Received--Reasonable Avoidability Standard
Industry commenters and a group of 12 State attorneys general
stated that the 2019 NPRM's proposed application of reasonable
avoidability in unfairness was consistent with established principles
of consumer protection law. A group of 12 State attorneys general
stated that the Dodd-Frank Act requires the Bureau to look to the FTC
Act when interpreting its unfair, deceptive, or abusive act or practice
(UDAAP) authorities. A commenter asserted that understanding has been
long understood to mean a general awareness of possible outcomes, not
an understanding of one's individual likelihood of being exposed to
risks. Commenters stated that requiring covered lenders to assess
whether consumers can avoid harm by repaying a loan would shift the
risk calculus from consumers to lenders and deprive consumers of
choice.
Several commenters opined on the legal standards the Bureau should
use when assessing reasonable avoidability more broadly. Citing
Katharine Gibbs School (Inc.) v. FTC, a commenter stated that FTC
precedent does not support the use of unfairness authority to prescribe
core economic terms, such as imposing an ability-to-repay
requirement.\136\ Industry commenters and 12 State attorneys general
commented that the proper focus of reasonable avoidability is on free
and informed consumer choice. According to the commenters, unless a
lender's conduct interferes with free choice, such as through deception
or coercion, harm from a financial product is reasonably avoidable. In
other words, according to the commenters, if any of the reasons that
consumers could not avoid harm caused by a lender was not itself also
caused by the lender, the act or practice is not unfair.
---------------------------------------------------------------------------
\136\ 612 F.2d 658 (2d Cir. 1979).
---------------------------------------------------------------------------
Consumer groups and a group of 25 State attorneys general stated
that the 2019 NPRM's proposed standard was unreasonably restrictive and
misapplied lessons from FTC precedent. Some commenters stated that FTC
precedent indicates that consumers must understand their individualized
likelihood and magnitude of harm--a general understanding of risk is
insufficient. Citing International Harvester, a group of 25 State
attorneys general stated that for consumers to understand the necessity
of taking steps to avoid harm, they must understand the ``full
consequences'' that might follow from their decision to use covered
loans.\137\
---------------------------------------------------------------------------
\137\ Int'l Harvester, 104 F.T.C. at 1066.
---------------------------------------------------------------------------
Other commenters stated that the 2019 NPRM mischaracterized the
2017 Final Rule's standard for reasonable avoidability.\138\ According
to these commenters, the 2017 Final Rule did not state that consumers
had to have a specific understanding of their individualized risks for
a harm to be reasonably avoidable. Rather, a general awareness of the
specific risks of injury was sufficient. Thus, according to these
commenters, the 2019 NPRM's standard for reasonable avoidability is
essentially identical to the 2017 Final Rule's standard.
---------------------------------------------------------------------------
\138\ The 2019 NPRM stated that ``[i]n assessing whether
consumers could reasonably avoid harm, the Bureau in the 2017 Final
Rule concluded that they could not without a specific understanding
of their individualized risk, as determined by their ability to
accurately predict how long they would be in debt after taking out a
covered short-term or longer-term balloon-payment loan.'' 84 FR
4252, 4269.
---------------------------------------------------------------------------
At least one commenter stated that the 2019 NPRM's application of
reasonable avoidability is inconsistent with the Bureau's proposed
standard. The 2019 NPRM stated that for harm to be reasonably
avoidable, ``consumers need only to understand that a significant
portion of payday borrowers experience difficulty repaying and that if
such borrowers do not make other arrangements they either end up in
long loan sequences, default, or struggle to pay other bills after
repaying their payday loan.'' A commenter argued that this statement
appears to omit the ``likelihood and magnitude of risks of harm''
language in the standard and ignores whether consumers have the means
to avoid the harm.
Some commenters stated that in crafting the 2019 NPRM's proposed
standard, the Bureau misread portions of International Harvester. One
commenter stated that the specific disclosure that the 2019 NPRM cited
as making harm reasonably avoidable was criticized by the Commission
for failing to spell out the exact nature of the hazard at a level of
detail that would effectively motivate compliance.\139\
---------------------------------------------------------------------------
\139\ Int'l Harvester, 104 F.T.C. at 1054.
---------------------------------------------------------------------------
Comments Received--Consumer Understanding of the Risk of Harm
In applying the proposed standard and assessing whether injury is
reasonably avoidable, industry commenters and a group of 12 State
attorneys general stated that consumers have sufficient information to
understand the likelihood and magnitude of covered loan risk.
Commenters asserted that consumers rationally choose to use covered
loan products and a lack of understanding does not drive covered loan
use.
In support of the proposition that consumers have requisite
understanding about covered loan risk of harm, a non-profit research
and advocacy organization commenter stated that the 2017 Final Rule
recognized that consumers generally understand how covered loans
function and that non-payment has consequences.\140\ Twelve State
attorneys general agreed with the 2019 NPRM's interpretation of a
Bureau analysis of a study of State-mandated payday loan disclosures to
conclude that the disclosures' limited impact on reborrowing suggests
that consumers are already aware that such loans can result in extended
loan sequences.\141\ Another
[[Page 44393]]
commenter identified two studies--the Mann study and the Miller study
\142\--that the commenter stated demonstrate that consumers make
informed choices when using covered loans. Commenters also pointed to
the purportedly low frequency of consumer complaints about covered
loans to the Bureau, FTC, and State regulatory agencies as evidence
that consumers understand covered loan products and appreciate their
access and use.
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\140\ 82 FR 54472, 54615 (``[B]orrowers who take out a payday,
title, or other covered short term loan typically understand that
they are incurring a debt which must be repaid within a prescribed
period of time and that if they are unable to do so, they will
either have to make other arrangements or suffer adverse
consequences.'').
\141\ 84 FR 4252, 4271.
\142\ See Ronald J. Mann, Assessing the Optimism of Payday Loan
Borrowers, 21 Supreme Court Econ. Rev. 105 (2013) (60 percent of
borrowers can accurately predict how long they would take to repay
their loan); Thomas W. Miller, Jr., Differences in Consumer Credit
Choices Made by Banked and Unbanked Mississippians, 11 J.L. Econ. &
Pol'y 367 (2015) (60 percent of unbanked borrowers understand the
loans terms that they had taken out).
---------------------------------------------------------------------------
In contrast, consumer group commenters and 25 State attorneys
general disagreed with the 2019 NPRM's preliminary determination that
the 2017 Final Rule wrongly found that consumers do not understand the
likelihood and magnitude of risk of harm. A commenter stated that the
2017 Final Rule specifically found that consumers do not understand the
risks and costs of unaffordable loans made without assessing ability to
repay, including how long they would be in debt or the consequences of
extended reborrowing.\143\ Commenters stated that the 2019 NPRM did not
provide a reasoned explanation to disregard that finding. Further,
these commenters stated that the 2019 NPRM offered no evidence that
payday loan users understand the various harms that flow from extended
reborrowing, that a significant portion of payday borrowers experience
difficulty repaying and that if such borrowers do not make other
arrangements they either end up in long loan sequences, or that such
users even have a general awareness about the risks of covered loans.
---------------------------------------------------------------------------
\143\ In 2017, the Bureau found ``evidence showing that a
significant proportion of consumers do not understand the kinds of
harms that flow from unaffordable loans, including those imposed by
default, delinquency, re-borrowing, and the collateral consequences
of making unaffordable payments to attempt to avoid these other
injuries.'' 82 FR 54472, 54617.
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These commenters also objected to the Bureau's preliminary
determination in the 2019 NPRM that the record supports the finding
that consumers affirmatively understand the likelihood and magnitude of
risk of harm related to covered loans. Several commenters stated that
the Bureau's interpretation of a study of State-mandated payday loan
disclosures was not plausible and was speculative. An academic
commenter stated that this interpretation is contradicted by a study
that the Bureau had not previously considered that found a significant
proportion of payday loan users understand neither loan terms nor
costs.\144\ This commenter asserted that a more plausible
interpretation of the study is that the State-mandated disclosures are
simply ineffective. A commenter also objected to the 2019 NPRM's
suggestion that consumers can infer certain risks associated with
covered loans, either because of their limited options or the fact
payday loans are advertised as products designed to assist those in
financial distress. This commenter stated that this suggestion ignores
informational asymmetry between consumers and lenders regarding the
performance of credit products. Further, this commenter stated that any
mere inference that short-term loans are risky does not reveal
information about the likelihood and magnitude of that risk. A
commenter also questioned the 2019 NPRM's proposed presumption that
borrowers' prior experience with covered loans imparts sufficient
understanding about risk, noting that the Mann study found that heavy
users ``are least likely'' to predict how long they will be in loan
sequences.
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\144\ Nathalie Martin, 1,000% Interest--Good While Supplies
Last: A Study of Payday Loan Practices and Solutions, 52 Ariz. L.
Rev. 563 (2010) (Martin study), https://www.regulations.gov/contentStreamer?documentId=CFPB-2019-0006-27713&attachmentNumber=3&contentType=pdf (interviews with
approximately 130 payday loan users in Albuquerque found that 60
percent of consumers who had just taken out loans could not
accurately estimate their APR and 52 percent could not accurately
describe the dollar costs of their loans).
---------------------------------------------------------------------------
In arguing that harm is not reasonably avoidable, commenters noted
that the 2019 NPRM did not address seller behavior that can hinder
understanding and consumer choice. Such conduct cited by these
commenters includes deceptive advertising and marketing, providing
misleading or incomplete information, failing to comply with State
small-dollar lending laws, such as disclosures rules and rollover
limits, preventing borrowers from self-amortizing, and coercing or
steering borrowers into unaffordable reborrowing.
Several commenters stated that lack of understanding need not
always be present to establish that harm is not reasonably avoidable
and that the pervasiveness and widespread substantial injury is itself
significant evidence of unavoidable harm. At least one commenter
suggested that the fact that consumers experience payday lending
problems and continue using them is evidence that the harm is not
reasonably avoidable.
Several commenters also discussed how behavioral factors--such as
financial distress and optimism bias--impair understanding and skew
consumer perception of risk. A commenter noted that storefront loan
borrowers frequently have unrealistic expectations about their ability
to repay loans because they focus on short-term, emergency needs over
potentially devastating future long-term losses. Another commenter
stated that consumers cannot reasonably understand the dramatically
higher levels of risk involved with covered loans compared to
conventional credit, given the open-ended costs associated with long
loan sequences.
Comments Received--Means To Avoid Harm
With respect to whether consumers have the means to avoid harm,
consumer group commenters and 25 State attorneys general stated that
consumers have alternatives to payday loans. Alternatives identified by
these and other commenters include credit cards, non-recourse pawn
loans, payday loan alternatives (e.g., wage access products), fintech
offerings, borrowing from friends, family, and community organizations,
and cutting back on expenses.\145\ Commenters cited the millions of
consumers living in States where payday lending is banned or restricted
as evidence that consumers have alternatives to covered loans. In the
absence of payday loans, consumer group commenters and 25 State
attorneys general stated that consumers do not turn to illegal loans--a
point with which some industry commenters disagreed. At least one
commenter stated that access to more reliable and transparent credit
options--like low-cost personal loans, payday loan alternatives, and
safer products from mainstream financial institutions--exist for most
consumers and are consistently expanding. Another commenter stated that
banks and credit unions are well-positioned to responsibly issue small-
dollar loans if they are provided with proper guidelines.
---------------------------------------------------------------------------
\145\ See, e.g., Nat'l Consumer Law Ctr., After Payday Loans:
How do Consumers Fare When States Restrict High-Cost Loans? (Oct.
2018), https://www.nclc.org/images/pdf/high_cost_small_loans/payday_loans/ib_how-consumers-fare-restrict-high-cost-loans-oct2018.pdf; Southern Bancorp Community Partners, Into the Light: A
Survey of Arkansas Borrowers Seven Years after State Supreme Court
Bans Usurious Payday Lending Rates (Apr. 2016), https://southernpartners.org/pp/PP_V43_2016.pdf.
---------------------------------------------------------------------------
Notwithstanding a general consensus reflected in the comments that
payday loan alternatives exist, some commenters stated that consumers
lack
[[Page 44394]]
the means to avoid harm. Some consumer groups stated that the 2017
Final Rule had found limited alternatives and borrowers' perceptions of
their alternatives. At least one commenter stated that borrowers using
covered loans have limited options and limited time in which to assess
them and that most do not have access to other formal sources of credit
and informal sources of credit have high search costs. Other commenters
stated that even when alternatives do exist, consumers do not pursue
lower-cost credit because of the ubiquity and convenience of payday
lenders.
A consumer group and an academic commenter commented that the fact
that a consumer can avoid harm by not using covered loans is not
sufficient. Citing AFSA v. FTC, commenters stated that consumers can
generally decline a product or service, and ``if the mere existence of
that right'' were the end of the inquiry, then no practice would be
subject to unfairness regulation.\146\ As articulated by another
commenter, the ``just say no'' option does not constitute reasonable
avoidability.
---------------------------------------------------------------------------
\146\ See AFSA, 767 F.2d at 976-77 (holding that prohibited
contract provisions were unavoidable in part because of industry-
wide boilerplate that prevented consumers ``from making meaningful
efforts to search, compare, and bargain'').
---------------------------------------------------------------------------
Numerous commenters, including consumer groups, community financial
service institutions, and faith groups, stated that consumers cannot
avoid injury once they have taken out a covered loan and are unable to
repay. According to a consumer group and an academic commenter, once a
borrower takes out an initial unaffordable loan, the only options are
to choose between the harms associated with default, reborrowing, or
forgoing other major financial obligations or basic living expenses.
Final Rule
After reviewing the comments, the Bureau is finalizing its
interpretation of the standard for reasonable avoidability under
section 1031(c)(1)(A) of the Dodd-Frank Act as proposed, with some
clarification. Under this standard, the facts and the law in the record
do not support the 2017 Final Rule's conclusion that the assumed
substantial injury from making covered short-term or longer-term
balloon-payment loans without reasonably assessing a borrower's ability
to repay the loan according to its terms was not reasonably avoidable.
Final Rule--Reasonable Avoidability Standard
Pursuant to section 1031(c)(1)(A) of the Dodd-Frank Act, the Bureau
determines that injury from making covered short-term or longer-term
balloon-payment loans without reasonably assessing a borrower's ability
to repay the loan according to its terms is reasonably avoidable if
payday borrowers have an understanding of the likelihood and magnitude
of risks of harm associated with payday loans sufficient for them to
anticipate those harms and understand the necessity of taking
reasonable steps to prevent resulting injury. Specifically, this means
consumers need only understand that a significant portion of payday
borrowers experience difficulty repaying and that if such borrowers do
not make other reasonable arrangements they may either end up in
extended loan sequences, default, or struggle to pay other bills after
repaying their payday loan.
The interpretation of reasonable avoidability the Bureau is
finalizing closely tracks FTC precedent.\147\ The Bureau determines
that FTC precedent is not inconsistent with the use of unfairness
authority to prescribe what some commenters termed ``core economic
terms.'' For instance, in Katharine Gibbs, the court did not strike
down the FTC's tuition refund requirements based on the innate
character of the remedy. Instead, the court faulted the FTC for
attempting to create ``structural incentives for discriminate
enrollment'' to address problematic sales and enrollment practices
without finding that refund practices at issue were deceptive or
unfair.\148\ As the court noted, ``the Commission contented itself with
treating violations of its `requirements prescribed for the purpose of
preventing' unfair practices as themselves the unfair practices.''
\149\ Thus, the tuition refund requirement's flaw was not that it
prescribed core economic terms. Further, the Bureau is aware of other
examples of unfairness authority being used to establish substantive
requirements in consumer financial transactions.\150\ These examples
include a Federal banking agency imposing requirements requiring that
financial institutions make ability-to-repay determinations before
making subprime mortgage loans.\151\
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\147\ See Int'l Harvester, 104 F.T.C. at 1066 (for an injury to
be reasonably avoidable consumers must not only ``know the physical
steps to take in order to prevent it'' but also ``understand the
necessity of actually taking those steps.''); Davis, 691 F.3d at
1168 (``[A]n injury is reasonably avoidable if consumers have reason
to anticipate the impending harm and the means to avoid it.'')
(quoting Orkin, 849 F.2d at 1365-66).
\148\ Katharine Gibbs School, 612 F.2d at 662-63 (``Instead of
defining with specificity the advertising, sales, and enrollment
practices it deemed unfair and deceptive and setting forth
requirements for preventing them, the Commission decided to make it
financially unattractive for schools covered by the Rule to accept a
student who, for any reason whatever, was unlikely to finish the
course in which he or she had enrolled.'').
\149\ Id. at 662.
\150\ See Credit Card Rule, 74 FR 5498 (Jan. 29, 2009) (Board,
OTS, and NCUA concluded that it is an unfair act or practice to
treat a payment on a consumer credit card account as late unless the
consumer has been provided a reasonable amount of time to make that
payment); Credit Practices Rule, 49 FR 7740 (Mar. 1, 1984)
(prohibiting certain remedies that creditors frequently included in
credit contracts for use when consumers defaulted on the loans were
unfair, including confessions of judgments, irrevocable wage
assignments, security interests in household goods, waivers of
exemption, pyramiding of late charges, and cosigner liability).
\151\ Higher-Priced Mortgage Loan Rule, 73 FR 44522 (July 30,
2008) (Board considered the FTC Act's unfairness standard when
finding that extending credit without regard to borrowers' ability
to repay was an unfair practice). See also Credit Practices Rule, 49
FR 7740 (Mar. 1, 1984) (prohibiting certain remedies that creditors
frequently included in credit contracts for use when consumers
defaulted on the loans were unfair, including confessions of
judgments, irrevocable wage assignments, security interests in
household goods, waivers of exemption, pyramiding of late charges,
and cosigner liability).
---------------------------------------------------------------------------
The Bureau also determines that, contrary to the suggestion of some
comments, following the approach in International Harvester does not
require that consumers understand their individualized risk in order
for injury to be reasonably avoidable. As noted in that case,
reasonable avoidability depends on whether risks are ``adequately
disclosed.'' \152\ The Commission did not base its reasonable
avoidability determination on whether consumers knew the probability
that they would personally experience fuel geysering.\153\ Instead, the
Commission found the harm not reasonably avoidable because consumers
``did not realize that a fuel geyser was possible'' and might engage in
a dangerous practice (i.e., loosening the fuel cap on farm equipment)
``without consciousness of any particular risk.'' \154\ Thus, the
Bureau's current application of reasonable avoidability is consistent
with International Harvester as it requires consumers to be aware of
the particular risks associated with payday lending (such as extended
loan sequences, default, etc.) sufficient to
[[Page 44395]]
take steps to avoid or mitigate harm from those risks.
---------------------------------------------------------------------------
\152\ Int'l Harvester, 104 F.T.C. at 1066.
\153\ Id.
\154\ Id. (``Farmers may have known that loosening the fuel cap
was generally a poor practice, but they did not know from the
limited disclosures made, nor could they be expected to know from
prior experience, the full consequences that might follow from
it.'').
---------------------------------------------------------------------------
Moreover, aside from their criticisms of the Bureau's reading in
the 2019 NPRM of certain FTC precedents (which the Bureau does not
accept), commenters have not provided a compelling reason why the
Bureau should interpret the reasonable avoidability element of section
1031(c)(1)(A) of the Dodd-Frank Act to require payday borrowers to have
a specific understanding of their personal risks--such that they can
accurately predict how long they will be in debt after taking out a
covered short-term or longer-term balloon-payment loan. As the 2019
NPRM explained, the 2017 Final Rule's approach would mean that
consumers cannot reasonably avoid injury even if they understand that a
significant portion of payday borrowers experience difficulty repaying
and that if such borrowers do not take reasonable steps they may either
end up in extended loan sequences, default, or struggle to pay other
bills after repaying their payday loan. The ``focus on a consumer's
ability to reasonably avoid injury `stems from the Commission's general
reliance on free and informed consumer choice as the best regulator of
the market.' '' \155\ The Bureau is not persuaded that, if consumers
have that level of understanding, they should be viewed as unable to
take reasonable steps to avoid that harm. Accordingly, the Bureau does
not believe that it should rely upon a legal standard that would treat
such consumers as not knowing that they should consider taking steps to
reasonably avoid injury.
---------------------------------------------------------------------------
\155\ 84 FR 4252, 4271 n.242 (quoting Orkin Exterminating Co.,
849 F.2d at 1365 (quoting AFSA, 767 F.2d at 976)).
---------------------------------------------------------------------------
The Bureau also concludes, contrary to the suggestion of some
commenters, that the 2019 NPRM did not mischaracterize the 2017 Final
Rule's approach to reasonable avoidability. The Bureau acknowledges
that the 2017 Final Rule at times used language that was similar to the
2019 NPRM when summarizing the reasonable avoidability standard at a
high level of generality.\156\ However, as explained in the 2019 NPRM,
the 2017 Final Rule actually applied a different legal standard as it
relates to payday borrowers. The 2017 Final Rule principally relied on
the Bureau's interpretation of limited data from the Mann study
regarding borrowers' abilities to predict personal likelihood of
reborrowing in assessing whether consumers adequately understood the
likelihood and severity of harms. The 2017 Final Rule determined that
borrowers lacked requisite understanding because some borrowers were
unable to predict their individual likelihood of reborrowing.\157\ In
other words, the 2017 Final Rule used the Bureau's interpretation of
limited data from the Mann study about individual likelihood of
reborrowing as a proxy for understanding that is sufficient to alert
consumers of the need to take steps to protect themselves from
potential payday loan harm. Thus, notwithstanding the 2017 Final Rule's
use of some language similar to that used in the 2019 NPRM when
generally summarizing the reasonable avoidability standard, in
substance the 2017 Final Rule interpreted the standard to require all
consumers to have a specific understanding of individualized risk.
---------------------------------------------------------------------------
\156\ Compare 82 FR 54472, 54596 (``[U]nless consumers have
reason generally to anticipate the likelihood and severity of the
injury, and the practical means to avoid it, the injury is not
reasonably avoidable.''), with 84 FR 4252, 4270 (``[I]njury is
reasonably avoidable if payday borrowers have an understanding of
the likelihood and magnitude of risks of harm associated with payday
loans sufficient for them to anticipate those harms and understand
the necessity of taking reasonable steps to prevent resulting
injury.'').
\157\ See 82 FR 54472, 54597-98.
---------------------------------------------------------------------------
Moreover, contrary to the suggestions of some commenters, the 2019
NPRM did not omit the standard's requirement that consumers must
appreciate the ``likelihood and magnitude'' of risk. The 2019 NPRM
stated that the Bureau preliminarily concluded that injury is
reasonably avoidable if payday borrowers have an understanding of the
likelihood and magnitude of risks of harm associated with payday loans
sufficient for them to anticipate those harms and understand the
necessity of taking reasonable steps to prevent resulting injury.\158\
The 2019 NPRM elaborated that this requires that consumers understand
that a significant portion of payday borrowers experience difficulty
repaying and that if such borrowers do not make other arrangements they
either end up in extended loan sequences, default, or struggle to pay
other bills after repaying their payday loan.\159\ The Bureau notes
that if consumers understand that a significant portion of payday
borrowers experience adverse outcomes, they grasp the likelihood of
risk. If consumers understand the potential outcomes arising from
difficulty repaying, they appreciate the magnitude of those risks.
---------------------------------------------------------------------------
\158\ 84 FR 4252, 4270.
\159\ Id. (emphasis added).
---------------------------------------------------------------------------
However, the Bureau agrees with comments that consumers must not
only have a sufficient awareness of the risk of significant injury, but
they also must have reasonable steps they can take to avoid that
injury. The 2019 NPRM recognized that the means to avoid injury is a
necessary component of the reasonable avoidability standard.\160\ The
Bureau discusses its application to covered loans below.
---------------------------------------------------------------------------
\160\ See id. at 4269 (citing Davis, 691 F.3d at 1168).
---------------------------------------------------------------------------
The Bureau does not regard as significant the considerations of the
efficacy of disclosures discussed in International Harvester.\161\ What
is significant is that International Harvester stands for the
proposition that harm is reasonably avoidable if consumers have
requisite understanding of risks related to a product. The Bureau's
revised application of the reasonable avoidability standard is more
consistent with International Harvester as it incorporates criteria
that would indicate whether consumers have a requisite understanding.
---------------------------------------------------------------------------
\161\ See 104 F.T.C. at 1054. International Harvester is not
entirely clear on whether the disclosure in question was
efficacious. See id. at 1006 n.165 (the alternative disclosure
``would have been the most effective [ ] warning up to that time,
had it been adequately disseminated . . . . It did communicate the
fact that a hazard existed and the principal steps an operator
should take to avoid it.'').
---------------------------------------------------------------------------
Accordingly, the Bureau concludes that the 2017 Final Rule applied
a problematic standard for reasonable avoidability under section
1031(c)(1)(A) of the Dodd-Frank Act and adopts the better
interpretation of reasonable avoidability set forth in the 2019 NPRM.
Final Rule--Consumer Understanding of Risk of Harm
Applying the revised standard for reasonable avoidability pursuant
to section 1031(c)(1)(A) of the Dodd-Frank Act, the Bureau concludes
that there is not a sufficient evidentiary basis for the Bureau to
conclude that consumers cannot reasonably avoid substantial injury from
lenders making covered short-term and longer-term balloon-payment loans
without assessing borrowers' ability to repay the loan according to its
terms.
As discussed in part V.B.2 below of this preamble, the 2019 NPRM
proposed and the Bureau finalizes a determination that evidence is only
sufficient for purposes of finding that injury is not reasonably
avoidable if that evidence is robust and reliable, in light of the
dramatic impacts of the Rule on the payday market. Thus, the relevant
question here is whether there is robust and reliable evidence for that
finding, under the Bureau's revised standard for reasonable
avoidability.\162\
---------------------------------------------------------------------------
\162\ The Bureau does not make any comment as to the appropriate
evidentiary standard that would apply to unfairness citations or
claims brought through the enforcement or the supervisory process.
---------------------------------------------------------------------------
[[Page 44396]]
The Bureau concludes that the 2019 NPRM provided a reasoned
explanation for reconsidering the 2017 Final Rule's finding on
reasonable avoidability. Specifically, the 2017 Final Rule's
determination that a significant population of consumers do not
understand the risks of substantial injury from covered loans is not
adequately supported. The Bureau's determination was primarily
extrapolated from its own interpretation of limited data from the Mann
study. In support of its finding of lack of understanding, the 2017
Final Rule emphasized that ``consumers who experience long sequences of
loans often do not expect those long sequences to occur when they make
their initial borrowing decision.'' \163\ In its reasonable
avoidability analysis, the 2017 Final Rule did not significantly rely
on other evidence of consumer understanding with respect to covered
loans. The 2017 Final Rule's broad pronouncement about consumer
understanding is based on evidence that goes to the different question
of whether consumers can predict their individual likelihood of
reborrowing, rather than to the question of whether consumers
understand the magnitude and likelihood of risk of harm associated with
covered loans sufficient for them to anticipate that harm and
understand the necessity of taking reasonable steps to prevent
resulting injury. Thus, the evidence that the 2017 Final Rule presented
on consumer understanding does not satisfy the reasonable avoidability
analysis pursuant to the Bureau's better interpretation of section
1031(c)(1)(A).
---------------------------------------------------------------------------
\163\ 82 FR 54472, 54617.
---------------------------------------------------------------------------
The Bureau concludes that other studies, such as the Martin
study,\164\ which found that most consumers cannot identify the precise
APR or dollar cost of their payday loans, only suggest a lack of
understanding as to specific features of payday loans. These studies do
not ask the direct and relevant question of whether consumers
understand the magnitude and likelihood of risk of harm associated with
covered loans sufficient for them to anticipate that harm and
understand the need to take steps to avoid injury.
---------------------------------------------------------------------------
\164\ Nathalie Martin, 1,000% Interest--Good While Supplies
Last: A Study of Payday Loan Practices and Solutions, 52 Ariz. L.
Rev. 563 (2010). This study is discussed further below.
---------------------------------------------------------------------------
Other lender behavior or structural or behavioral factors that can
impact consumer understanding do not bear on the reasonable
avoidability of the identified practice. Citing, among other things,
Bureau enforcement and supervisory activities, numerous commenters
identified covered lender behavior that may cause consumer harm or
hinder consumer choice. The behavior that allegedly produces these
effects included steering borrowers into unaffordable reborrowing,
preventing borrowers from self-amortizing, engaging in deceptive
advertising or marketing, and failing to comply with State laws. The
Bureau notes that, depending on the facts and circumstances, some of
this behavior could violate Federal consumer financial law. The Bureau
has cited covered lenders for similar acts or practices in the
past.\165\ But there can be unlawful or harmful practices by some
market participants in all markets, and that does not establish that
other practices--specifically here lenders' failure to assess the
ability to repay--in those markets is unlawful. The Bureau concludes
that the existence of other practices in the markets for covered loans
that could be harmful to consumers or violate other laws does not
establish that the harm from a lender's decision to lend without
assessing a borrower's ability to repay is itself not reasonably
avoidable.
---------------------------------------------------------------------------
\165\ See, e.g., Consumer Fin. Prot. Bureau v. Navient Corp.,
No. 3:17-cv-00101-RDM (M.D. Penn. Jan. 18, 2017), https://www.consumerfinance.gov/documents/2297/201701_cfpb_Navient-Pioneer-Credit-Recovery-complaint.pdf. The Bureau has also filed lawsuits
against payday lenders for deceptive advertising. See, e.g., Press
Release, Bureau of Consumer Fin. Prot., CFPB Takes Action Against
Moneytree for Deceptive Advertising and Collection Practices (Dec.
16, 2016), https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-moneytree-deceptiveadvertising-and-collection-practices/.
---------------------------------------------------------------------------
Further, the Bureau declines to infer from the conclusion that
making payday loans without assessing the ability to repay causes or is
likely to cause substantial injury (a conclusion from the 2017 Final
Rule the Bureau assumed to be correct for purposes of the unfairness
analysis in the 2019 NPRM) the further conclusion that consumers cannot
reasonably avoid that injury. While the same facts in a rulemaking
record may support conclusions as to each of the three elements of
unfairness, to identify a practice as unfair the Bureau must separately
analyze and find adequate support for each of these three elements. As
discussed above, the Bureau based its conclusion on the evidence in the
record that was the most direct and most probative on the question of
reasonable avoidability. Having done so, the Bureau declines to rely on
indirect and less probative evidence, including that drawn from
inferences as some commenters have suggested.
The Bureau also declines to follow recommendations that it give
further consideration to behavioral factors. The 2017 Final Rule
considered whether behavioral economics factors make it difficult for
consumers to understand the implications of taking out a covered
loan.\166\ However, these considerations did not form an independent
basis for the 2017 Final Rule and, as set out in the 2019 NPRM, the
Bureau need not address them.
---------------------------------------------------------------------------
\166\ The Bureau in the 2017 Final Rule cited research stating
that certain consumer behaviors may make it difficult for them to
predict accurately the future implications of taking out a covered
short-term or longer-term balloon-payment loan. As the Bureau made
clear, however, this research helped to explain the Bureau's
findings from the Mann study but was not in itself an independent
basis to conclude that consumers do not predict whether they will
remain in reborrowing sequences. 82 FR 54472, 54571 (explaining that
``[r]egardless of the underlying explanation, the empirical evidence
indicates that many borrowers who find themselves ending up in
extended loan sequences did not expect that outcome'').
---------------------------------------------------------------------------
With respect to the 2019 NPRM's preliminary determination that goes
beyond withdrawing the 2017 Final Rule's reasonable avoidability
determination and posited that consumers affirmatively have the
requisite understanding of the likelihood and magnitude sufficient for
any harm to be reasonably avoidable, the Bureau has decided it is not
necessary to finalize this determination. As discussed above, the
Bureau has concluded that robust and reliable evidence in the
rulemaking record does not support the 2017 Final Rule's determination
that payday borrowers cannot reasonably avoid substantial injury from
lenders not assessing their ability to repay their loans.
Accordingly, the Bureau concludes that the Mandatory Underwriting
Provisions at 12 CFR part 1041 must be revoked in light of the Bureau's
determination to revoke the 2017 Final Rule's finding that consumers
lack sufficient understanding of the likelihood and magnitude or risks
of covered loans such that they cannot reasonably avoid substantial
injury from lenders making covered short-term and longer-term balloon-
payment loans without assessing borrowers' ability to repay.
Final Rule--Means To Avoid Harm
As explained above, the revised reasonable avoidability standard
adopted by the Bureau in this final rule requires that covered loan
borrowers have an understanding of the likelihood and magnitude of
risks of harm associated with payday loans sufficient for them to
anticipate those harms and understand the necessity of taking
[[Page 44397]]
reasonable steps to prevent resulting injury. The requirement that
consumers ``understand the necessity of taking reasonable steps to
prevent injury'' presupposes that reasonable steps exist and are
available to the consumer, i.e., there are practical means to avoid
harm. The Bureau concludes that the evidence in the record does not
support the conclusion in the 2017 Final Rule that, even assuming
consumers were adequately aware of the risk of substantial injury from
the failure of lenders to assess their ability to repay, consumers
could not take reasonable steps to prevent or mitigate that injury. The
Bureau reaches this conclusion in part based on the fact that consumers
continue to have access to short-term credit in States where covered
loans are prohibited or severely restricted as well as on the expanding
availability of alternatives to payday and other covered loans in the
marketplace.
The 2017 Final Rule found that ``once borrowers find themselves
obligated on a loan they cannot afford to repay,'' the resulting injury
is ``generally not reasonably avoidable at any point thereafter,''
because after that point the relevant long-term borrowers lack the
means to avoid injury.\167\ The Bureau has not sought to reconsider
that determination in this rulemaking. However, the 2017 Final Rule did
not assert that that determination was by itself sufficient to support
its finding that injury was not reasonably avoidable overall. It is
well-established that consumers can reasonably avoid injury through
either ``anticipatory avoidance'' or ``subsequent mitigation,'' so a
finding that consumers lack the means to avoid injury at a later time
is not generally sufficient if they could do so at an earlier
time.\168\ And the 2017 Final Rule did not rest its reasonable
avoidability analysis on a finding that consumers lack the means to
avoid injury before they have taken out any covered loans. Instead, the
2017 Final Rule explained that the ``heart of the matter here is
consumer perception of risk,'' and whether borrowers are in a position
before taking out covered loans ``to gauge the likelihood and severity
of the risks they incur.'' \169\ It is that critical issue from the
2017 Final Rule that the 2019 NPRM reconsidered.
---------------------------------------------------------------------------
\167\ 82 FR 54472, 54598 (emphasis added).
\168\ Orkin Exterminating Co., 849 F.2d at 1365 (quoting Orkin
Exterminating Co., 108 F.T.C. at 366).
\169\ 82 FR 54472, 54597.
---------------------------------------------------------------------------
The Bureau does not find persuasive these arguments in these
comments that before consumers have taken out any payday loans they
lacked the ability to take reasonable steps to avoid injury from the
lenders' failure to assess their ability to repay.
Consumers generally have viable alternatives to payday loans, which
is evidenced by the fact that millions of consumers live in States
where covered loans are prohibited or severely restricted and these
consumers obtain access to other alternative forms of credit.\170\
Evidence submitted by commenters that payday loan alternatives are
consistently expanding are persuasive and confirmed by the Bureau's
market monitoring. These alternatives include credit offered by
fintechs, credit unions, and other mainstream financial
institutions.\171\ Consistent with their incentive to make a profit,
creditors who offer products that compete with payday loans engage in
marketing and advertising to make consumers aware of the availability
of their products.
---------------------------------------------------------------------------
\170\ See discussion at part II.A.1. For example, Colorado is
one State where payday loans are restricted. Following its reform,
the number of payday lenders in Colorado substantially contracted,
but the lending volume remained stable and the cost of loans
dropped. See Pew Charitable Trusts, Trial, Error, and Success in
Colorado's Payday Lending Reforms (Dec. 2014), https://
www.pewtrusts.org/~/media/assets/2014/12/
pew_co_payday_law_comparison_dec2014.pdf.
\171\ See, e.g., Fin. Health Network, Financially Underserved
Market Size Study 2019, at 6 (2019), https://finhealthnetwork.org/research/2019-financially-underserved-market-size-study/ (noting the
transition in small-dollar credit markets away from payday and title
loans toward installment loans); CURO Group, Presentation at
Jefferies Consumer Finance Summit, at 9 (Dec. 2018), https://ir.curo.com/events-and-presentations (19 percent of a prominent
payday lender's revenue came from multi-payment loans in 2010, but
by the third quarter of 2018, that figure had quadrupled to 77
percent); Pew Charitable Trusts, From Payday to Small Installment
Loans: Risks, Opportunities, and Policy Proposals for Successful
Markets (Aug. 2016), https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2016/08/from-payday-to-small-installment-loans
(noting that non-bank small-dollar lenders already offered
installment loans in 26 of 39 States where they operated).
---------------------------------------------------------------------------
Consumers do not lack the practical ability to take advantage of
these alternatives. Arguments based on behavioral factors that attempt
to explain why borrowers may not seek out readily available covered
loan alternatives are hypothetical and do not compellingly rebut
available real-world evidence to the contrary. Further, that consumers
may choose payday and other covered loans over other credit options
because payday loans are ubiquitous and convenient is not evidence of a
lack of alternatives. It is consistent with some consumers preferring
payday or other covered loans based on speed and convenience of the
borrowing process, easy loan approval, the ability to take out a loan
without a traditional credit check, or other considerations as some
commenters suggested.
And contrary to some comments, the Bureau's approach would not make
any harm reasonably avoidable simply because a consumer can decline a
product or service. The small-dollar loan market is not comparable to
the circumstances addressed in AFSA, where the court found that
industry-wide use of boilerplate provisions prevented consumers from
making meaningful efforts to identify alternatives that did not feature
those provisions.\172\ Consumers in the market for covered loans do not
face a take-it-or-leave-it choice; they can potentially access formal
credit options with varied terms and conditions and other informal
credit options, such as borrowing from family and friends.\173\
---------------------------------------------------------------------------
\172\ AFSA, 767 F.2d at 977.
\173\ See Pew Charitable Trusts, Payday Lending in America: Who
Borrows, Where They Borrow, and Why, at 16-28, https://
www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/
pewpaydaylendingreportpdf.pdf.
---------------------------------------------------------------------------
Regarding comments that consumers cannot avoid injury after they
take out a loan, are trapped in an extended sequence, and are unable to
repay, the Bureau acknowledges, as it did in the 2017 Final Rule, that
some borrowers in extended sequences suffer financial harm. But the
identified unfair practice pertains to lender conduct when borrowers
are making an initial decision to take out a new loan. The fact that
some subgroup of borrowers may have limited options at a later point in
a repayment cycle does not negate the fact that all consumers had
alternatives to covered loans before taking out an initial loan, which
is the relevant inquiry where the identified practice and related rule
provisions apply to all covered loans to all consumers.
Conclusion
Accordingly, as discussed above, the Bureau is withdrawing the
conclusion in the 2017 Final Rule that any substantial injury from
lenders making covered short-term and longer-term balloon-payment loans
without assessing borrowers' ability to repay the loan according to its
terms is not reasonably avoidable.
2. Reconsidering the Evidence for the Factual Analysis of Reasonable
Avoidability in Light of the Impacts of the Mandatory Underwriting
Provisions
The Bureau has decided to adopt a different, better interpretation
of the level of understanding that payday borrowers need in order to
reasonably avoid injury, as discussed in part V.B.1.
[[Page 44398]]
But independent of that interpretive question, the Bureau has concluded
that it should withdraw the 2017 Final Rule's determination regarding
reasonable avoidability because it was supported by insufficiently
robust and reliable evidence. The Bureau believes that more robust and
reliable evidence for this key determination should be required, in
light of the impacts of the Mandatory Underwriting Provisions would
have on the market.
a. Background on the Impacts of the Mandatory Underwriting Provisions
Before reconsidering the evidence supporting the 2017 Final Rule's
determinations below in parts V.B.2.c and V.B.2.d, the Bureau discusses
the dramatic impacts of the Mandatory Underwriting Provisions that give
rise to the Bureau's application of the robust and reliable evidence
standard. The Bureau stated and explained in the 2019 NPRM its
preliminary belief that the Mandatory Underwriting Provisions would
have ``dramatic impacts'' on the market.\174\ As the 2019 NPRM
explained, the section 1022(b)(2) analysis for the 2017 Final Rule
observed that the primary impacts of the Rule on covered persons
derived mainly from the restrictions on who could obtain payday and
single-payment vehicle title loans and the number of such loans that
could be obtained. To simulate the impacts of the Mandatory
Underwriting Provisions, the section 1022(b)(2) analysis for the 2017
Final Rule assumed, on the basis of a number of studies by the Bureau
and outside researchers concerning payday borrowers, that only 33
percent of current payday and vehicle title borrowers would be able to
satisfy the Rule's ability-to-repay requirements when initially
applying for a loan and that for each succeeding loan in a sequence
only one-third of borrowers would satisfy the mandatory underwriting
requirement (i.e., 11 percent of current borrowers for a second loan
and 3.5 percent for a third loan).\175\ Applying these assumptions to
data with respect to current patterns of borrowing and reborrowing, the
section 1022(b)(2) analysis estimated that, absent the principal step-
down exemption in Sec. 1041.6, the Mandatory Underwriting Provisions
of the Rule would reduce payday loan volume and lender revenue by
approximately 92 to 93 percent relative to lending volumes in 2017 and
vehicle title volume and lender revenue by between 89 and 93
percent.\176\ Factoring in the expected effects of the novel principal
step-down exemption, and assuming that payday lenders would endeavor to
take full advantage of that novel exemption before seeking to qualify
consumers for a loan under the mandatory underwriting requirements of
Sec. 1041.5, the analysis estimated that the Mandatory Underwriting
Provisions would result in a decrease in the number of payday loans of
55 to 62 percent and, because of the step-down feature of the principal
step-down exemption, a decrease in payday lender revenue of between 71
and 76 percent.\177\
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\174\ 84 FR 4252, 4264.
\175\ 82 FR 54472, 54826-34.
\176\ Id. at 54826, 54834.
\177\ Id. at 54826. Given that short-term vehicle title loans
are not eligible for the principal step-down exemption, the analysis
estimated that the Mandatory Underwriting Provisions would result in
a decrease in the number of short-term vehicle title loans of
between 89 and 93 percent, with an equivalent reduction in loan
volume and revenue. Id. at 54834.
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The section 1022(b)(2) analysis that accompanied the 2017 Final
Rule stated that these revenue impacts would have a substantial effect
on the market. The analysis projected that unless lenders were able to
replace their reduction in revenue with other products, there would be
a contraction in the number of storefronts of similar magnitude to the
contraction in revenue, i.e., a contraction of between 71 and 76
percent for storefront payday lenders and of between 89 and 93 percent
for vehicle title lenders.\178\
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\178\ Id. at 54835.
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The section 1022(b)(2) analysis for the 2017 Final Rule identified
a number of impacts that the Mandatory Underwriting Provisions would
have on consumers' ability to access credit. Specifically, the analysis
estimated that approximately 6 percent of existing payday borrowers
would be unable to initiate a new loan because they would have
exhausted the loans permitted under the principal step-down exemption
and would not be able to satisfy the ability-to-repay requirement.\179\
The section 1022(b)(2) analysis that accompanied the 2017 Final Rule
identified, but did not quantify, certain other potential impacts of
the Mandatory Underwriting Provisions on consumers' access to credit.
Consumers seeking to borrow more than $500 after the 2017 Final Rule's
compliance date may find their ability to do so limited because of the
cap on the initial loan amount under the principal step-down exemption
and because of the impact of the Rule on vehicle title loans, which
tend to be for larger amounts.\180\ Additionally, because of the
principal step-down feature of the exemption, consumers obtaining loans
under that exemption would be forced to repay their loans more quickly
than they are required to do today. The analysis stated that 40 percent
of the reduction in payday revenue estimated to result from the
Mandatory Underwriting Provisions would be the result of the cap on
loan sizes under the principal step-down exemption and the remainder
would be the result of the restriction on the number of loans available
to consumers under that exemption coupled with the mandatory
underwriting requirement for any additional loans.\181\ Finally, the
analysis concluded, based on research concerning the implementation of
various State regulations, that although the reduction in the number of
storefronts would not substantially affect consumers' geographic access
to payday locations in most areas, a small share of potential borrowers
would lose easy access to stores.\182\
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\179\ Id. at 54840. Vehicle title borrowers would be more likely
to be unable to obtain an initial loan because the principal step-
down exemption does not extend to such loans. Id. The analysis noted
that while those borrowers could pursue a payday loan, there are
three States that permit some form of vehicle title loans (either
single-payment or installment) but not payday loans and that 15
percent of vehicle title borrowers do not have a checking account
and thus may not be eligible for a payday loan. Id.
\180\ Id. at 54841.
\181\ Id.
\182\ Id. at 54842 & n.1224. Research conducted by the Bureau
had found that in one State where regulatory restrictions resulted
in a substantial contraction of payday stores, the median distance
between stores in counties outside of metropolitan areas increased
from 0.2 miles to 13.9 miles. Supplemental Findings at 87.
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The section 1022(b)(2) analysis that accompanied the 2017 Final
Rule went on to observe that consumers who are unable to obtain a new
loan because they cannot satisfy the Rule's mandatory underwriting
requirement or cannot qualify for a loan under the principal step-down
exemption will have reduced access to credit. They may be forced at
least in the short term to forgo certain purchases, incur high costs
from delayed payment of existing obligations, incur high costs and
other negative impacts by defaulting on bills, or they may choose to
borrow from sources that are more expensive or otherwise less
desirable.\183\ Some borrowers may overdraft their checking accounts;
depending on the amount borrowed, an overdraft on a checking account
may be more expensive than taking out a payday or single-payment
vehicle title loan.\184\ Similarly, ``borrowing'' by
[[Page 44399]]
paying a bill late may lead to late fees or other negative consequences
like the loss of utility service.\185\
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\183\ See 82 FR 54472, 54841.
\184\ Id.
\185\ Id.
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b. The Bureau's Decision To Require Robust and Reliable Evidence of the
Reasonable Avoidability Element in Light of the Potential Dramatic
Impacts of the Mandatory Underwriting Provisions at 12 CFR Part 1041
The Bureau's Proposal
As explained above, were compliance with the Mandatory Underwriting
Provisions of the 2017 Final Rule to become mandatory,\186\ the
provisions would have the effect of eliminating most covered short-term
and longer-term balloon-payment loans. In the 2019 NPRM, the Bureau
stated its preliminary view that if a rule could have such dramatic
impacts on consumer choice and access to credit, then it would be
reasonable under the Dodd-Frank Act and prudent to have robust and
reliable evidence to support the key finding that consumers cannot
reasonably avoid injury (for purposes of the unfairness standard in
Dodd-Frank Act section 1031(c)).\187\ Similarly, the 2019 NPRM set
forth the Bureau's preliminary view that it would be reasonable under
the Dodd-Frank Act and prudent to have robust and reliable evidence to
support key findings of consumers' lack of understanding (for purposes
of the abusiveness standard in Dodd-Frank Act section 1031(d)(2)(A))
and inability to protect their own interests (for purposes of the
abusiveness standard in section 1031(d)(2)(B)).\188\
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\186\ As noted above, the Bureau published in June 2019 a final
rule delaying the compliance date for the Mandatory Underwriting
Provisions to November 19, 2020. See 84 FR 27907.
\187\ 84 FR 4252, 4264.
\188\ Id.
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Comments Received
In comments on the 2019 NPRM, consumer groups and others stated
that the 2017 Final Rule will not have a dramatic impact on consumers'
access to credit, because loan providers will respond to the rule by
shifting from providing short-term loans to providing longer-term
installment loans, which are not covered by the 2017 Final Rule's
Mandatory Underwriting Provisions.\189\
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\189\ Notably, these comments from consumer groups support the
Bureau's point in part V.B.1 above that consumers in these markets
have alternatives to payday loans and as a result have the means to
avoid any harm from the loans.
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Industry commenters and others stated that a shift from short-term
loans to longer-term installment loans would itself be a dramatic
impact on how credit is provided, consumer choice, and consumer access
to credit, sufficient to justify the Bureau's policy decision to adopt
the robust and reliable standard. These commenters also noted that
payday loans have traditionally been regulated by State law, and the
2017 Final Rule therefore raises federalism issues. These commenters
stated that these federalism issues constitute another reason to
require robust and reliable evidence in support of the 2017 Final Rule.
Consumer group commenters and others stated that the 2017 Final
Rule is a final rule adopted by the Bureau and, as such, is now the
baseline for determining the impact of Bureau rulemakings on a going-
forward basis. And, they stated, revoking the 2017 Final Rule is itself
a full rulemaking action that has the same magnitude of impact as the
2017 Final Rule, except in the opposite direction. They reason that the
Bureau cannot finalize the 2019 NPRM unless the evidence on which the
Bureau now relies satisfies the ``robust and reliable'' standard the
Bureau cited in the 2019 NPRM for re-evaluating the evidence supporting
the 2017 Final Rule. Further, these commenters stated, the 2019 NPRM
did not provide evidence sufficient to support revocation of the
Mandatory Underwriting Provisions pursuant to the rulemaking
requirements of the APA, and that action would, if finalized, be
arbitrary and capricious under the APA.
Consumer groups and others also stated that a Bureau determination
to require robust and reliable evidence for rules that have a dramatic
impact on consumer choice and access to credit will make it harder for
the Bureau to adopt consequential rules addressing consumer harm in the
future.
Final Rule
After reviewing the comments received, the Bureau finds that its
preliminary determination that the Mandatory Underwriting Provisions of
12 CFR part 1041 would eliminate most covered short-term and longer-
term balloon-payment loans was correct. The Bureau also concludes that
eliminating such loans would have a dramatic impact on consumer choice
and access to credit. Accordingly, the Bureau determines that the 2017
Final Rule would have a dramatic impact on consumer choice and access
to credit that consumers prefer.
In light of this dramatic impact, the Bureau determines that it is
reasonable and prudent to have robust and reliable evidence to support
the key finding that consumers cannot reasonably avoid injury (for
purposes of the unfairness standard in Dodd-Frank Act section 1031(c)).
Similarly, the Bureau determines that it is reasonable and prudent to
have robust and reliable evidence to support key findings of about
consumers' lack of understanding (for purposes of the abusiveness
standard in Dodd-Frank Act section 1031(d)(2)(A)) and inability to
protect their own interests (for purposes of the abusiveness standard
in section 1031(d)(2)(B)). Those abusiveness determinations are further
addressed in part VI below.
In making these determinations, the Bureau has not relied upon the
federalism concerns about the 2017 Final Rule raised by some
commenters. (Of course, the effect of the Bureau's decision to revoke
the Mandatory Underwriting Provisions for the reasons set forth herein
is to leave existing State approaches in place, some of which reflect a
preference to allow their citizens' access to payday loans.)
The Bureau does not agree with some commenters' characterization of
the Bureau's policy choice in requiring robust and reliable evidence as
being arbitrary and capricious. The Bureau makes this policy choice in
the context of Dodd-Frank Act section 1031(c)(1)(A), which provides
that the Bureau cannot identify an unfair practice unless there is
substantial injury that is ``not reasonably avoidable by consumers.''
As the 2019 NPRM notes, this element is premised on the fact that
``[n]ormally we expect the marketplace to be self-correcting, and we
rely on consumer choice--the ability of individual consumers to make
their own private purchasing decisions without regulatory
intervention--to govern the market.'' \190\ As a policy matter, the
Bureau believes that this principle of respecting consumer choice is
especially important where, as here, regulatory action by the Bureau
could result in dramatic impacts on consumer choice and access to the
credit that consumers prefer. Thus, in exercising the Bureau's
discretion to determine whether there is sufficient evidence that
consumers cannot reasonably avoid injury here, the Bureau believes that
such evidence should be robust and reliable. (And, although abusiveness
is a much newer standard than unfairness, the Bureau believes that
similar reasoning applies in this rulemaking to abusiveness' ``lack of
understanding'' and ``inability to protect'' elements. Those
abusiveness elements are similarly threshold determinations of consumer
vulnerability that must be made before regulatory intervention is
[[Page 44400]]
appropriate. The Bureau discusses those abusiveness elements in part
VI.C below.) In doing so, the Bureau need not and has not attempted to
provide an abstract definition of the terms ``robust'' or ``reliable''
beyond their commonly understood meanings. The measure of whether
evidence is robust and reliable is whether, as a practical matter, the
evidence gives the Bureau a level of confidence in the Bureau's
conclusion that is commensurate with the dramatic impacts on consumer
choice and access to credit that are at stake here.
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\190\ See FTC Unfairness Policy Statement, Int'l Harvester, 104
F.T.C. at 1074.
---------------------------------------------------------------------------
The Bureau disagrees with the argument by some commenters that
requiring robust and reliable evidence in this context will make it
harder for it to adopt consequential rules addressing consumer harm in
the future. In this final rule, the Bureau has made a determination to
require robust and reliable evidence to satisfy the ``not reasonably
avoidable,'' ``lack of understanding,'' and ``inability to protect''
elements in the context of regulatory provisions that would have a
dramatic impact on consumer choice and access to credit. The policy
considerations underpinning this rulemaking might, or might not, be
relevant to evaluation of the evidence in future Bureau rules. The
Bureau has made this determination consistent with the requirements of
the Administrative Procedure Act and the evidentiary record and is
explaining its basis for that determination after a full notice-and-
comment process.
The comments suggesting that the Bureau needs to have robust and
reliable evidence to prove that consumers can reasonably avoid injury
in order to finalize this rule misunderstand the Bureau's approach. The
Bureau is reconsidering the evidentiary basis for its prior
determination that consumers cannot reasonably avoid injury, not
seeking to establish that consumers can reasonably avoid injury.
Further, this approach is entirely consistent with the statutory
scheme. Under that scheme, consumers' choices in the marketplace are
respected, absent a determination that they cannot reasonably avoid
injury. And the Bureau's policy of requiring robust and reliable
evidence is based on caution about potentially interfering with
consumers' decision-making in the payday market on a massive scale.
Nor are commenters correct that the Bureau is violating the APA by
not offering sufficient new evidence in support of this final rule. The
Bureau is reconsidering the conclusions regarding unfairness (and
abusiveness) that it previously drew from the evidentiary record, and
the Bureau is explaining the basis for that reconsideration after a
full notice-and-comment process, consistent with the APA. Under section
1031 of the Dodd-Frank Act, consumers' choices in the marketplace are
respected, absent a threshold determination that they cannot reasonably
avoid injury (or lack understanding or are unable to protect their own
interests).
c. The Mann Study and the Findings Based On It
The Bureau's Proposal
In the 2019 NPRM, the Bureau preliminarily found that the 2017
Final Rule's interpretation of limited data from the Mann study was not
sufficiently robust and reliable, in light of the 2017 Final Rule's
dramatic impacts in restricting consumer access to payday loans, to be
the linchpin for the 2017 Final Rule's conclusion that consumers could
not reasonably avoid harm. Specifically, this limited data does not
support the determination that many payday loan consumers lack a
specific understanding of their personal risks and cannot accurately
predict how long they will be in debt after taking out covered short-
term or longer-term balloon-payment loans.\191\
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\191\ The 2017 Final Rule's finding that consumers do not have a
specific understanding of their personal risks of reborrowing was a
necessary predicate to its determination that consumers cannot
reasonably avoid the substantial injury that the 2017 Final Rule
asserted that consumers incur from payday loans (per the unfairness
standard set forth in Dodd-Frank Act section 1031(c)(1)(A)). The
finding was also a necessary predicate to the 2017 Final Rule's
determination that consumers do not understand the material risks,
costs, or conditions of such loans (per the abusiveness standard set
forth in Dodd-Frank Act section 1031(d)(2)(A)).
---------------------------------------------------------------------------
The 2019 NPRM preliminarily found that the Bureau's interpretation
of limited data from the Mann study was not sufficiently reliable
because the Mann study involved a single payday lender in just five
States and was administered at a limited number of locations.\192\ The
2019 NPRM stated that a study focusing on a single lender or limited
number of lenders may not be representative of the variety of payday
lenders across the United States. In addition, it stated, these five
States also are not necessarily representative of payday lending
nationally.\193\ Because consumer understanding and expectations may be
informed by the information consumers are provided--and because that
information can vary from lender to lender and State to State \194\--
the 2019 NPRM preliminarily concluded that the Bureau's interpretation
of limited data from the Mann study is not a sufficiently robust and
reliable basis to make general findings about all lenders making payday
loans to all borrowers in all States.
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\192\ See Mann study at 116.
\193\ The Mann study noted that rollover loans are technically
prohibited in all five of the States in which payday borrowers were
surveyed. Id. at 114. Further, same-day rollover transactions are
not possible in Florida, which has a 24-hour cooling-off period, and
are limited in Louisiana, which permitted rollovers only upon
partial payment of the principal. Id. Over half of the survey
participants were in Florida and Louisiana alone. Id. at 117 & tbl.
1.
\194\ 82 FR 54472, 54486 (identifying detailed disclosures
required of payday lenders under Texas law), and id. at 54577
(noting that some jurisdictions require lenders to provide specific
disclosures in order to alert borrowers of potential risks).
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Comments Received
Industry commenters and others stated that the single lender and
the five States represented in the limited data from the Mann study are
not representative of payday lending nationally and that the Bureau's
interpretation of that data is not sufficiently robust and reliable to
serve as the basis for findings about all lenders and all borrowers in
all States. These commenters (including Professor Mann himself) also
stated that the 2019 NPRM correctly interpreted the Mann study as
indicating that most payday loan consumers have a reasonable
understanding of their loans. They also stated that, because longer-
term reborrowers are typically more financially distressed consumers,
it is plausible that they are more constrained in their credit options
and less able to accurately predict when or if they can repay a loan.
Thus, even if longer-term borrowers generally have the same level of
understanding of the costs and risks of payday loans as shorter-term
borrowers, their predictions of their loan-sequence length will reflect
a greater amount of error than will those of shorter-term
borrowers.\195\
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\195\ Additionally, at least one commenter stated that the Mann
study participants with long loan sequences were only 12 percent of
sampled borrowers, or 62 people, and that that number was not an
adequate sample to support the 2017 Final Rule's position that
consumers lack understanding of payday loans. However, the share of
borrowers who gave an answer to how long they expected to borrow is
not relevant, because all consumers who ended up in sequences more
than 200 days long failed to make a numeric prediction at the
beginning of their debt cycle. Further, these commenters were
incorrect as factual matter. Specifically, the actual number of
borrowers in question was 12 percent of the 1,300 borrowers sampled,
or about 156 borrowers (plus the consumers in sequences more than
200 days long, none of whom provided responses). The commenter
improperly multiplied that 12 percent of 1,300 (or 156) by 40
percent, which was the 40 percent of borrowers who said they
expected to continue borrowing after their current loan's initial
due date.
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Consumer group commenters and others stated that the Mann study is
[[Page 44401]]
sufficiently robust and reliable to support the conclusion that
consumers cannot reasonably avoid harm from the identified practice,
for the following reasons. First, lenders tend to be uniform in
relevant ways: Loan structure, marketing, encouragement of rollovers,
and concentration of revenue from those borrowers who engage in
extended loan sequences. Also, these commenters stated, the Mann study
itself notes that the payday loan products of the one lender the study
involved are typical of large storefront lenders. Thus, they said, the
fact that the Mann study involved a single lender is not necessarily
problematic. Second, the five States included in the study comprise
over a quarter of the nation's payday loan market. The five States
account for over $1 billion in payday fees annually or roughly 27
percent of total fees collected by payday lenders each year. Further,
the population of these five States represents 32 percent of the
population of the States that authorize payday lending. Third, the Mann
study itself discusses the five States' rollover bans and crafts its
survey question to control for the fact that the States prohibited
rollovers. Fourth, rollover bans are common in payday loan States and
the bans do not change consumer behavior; \196\ it is therefore
unlikely that they would affect the accuracy of consumers' predictions.
And fifth, consumer group commenters stated that the Bureau could have
tested the representativeness of the data from the Mann study by
reviewing data in its possession. Specifically, these commenters said,
the Bureau has loan-level data from multiple lenders and should have
analyzed whether or not sequence lengths or renewal rates vary
significantly across lenders before asserting that consumer outcomes at
one lender's outlets are not representative. These commenters noted
that the Bureau's March 2014 payday lending data point analyzed
borrower outcomes across States with different restrictions on
rollovers and found virtually no difference in renewal rates between
States that had no restrictions and those that either prohibited
rollovers or required waiting periods between loans. These findings,
the commenters stated, indicate that greater geographic coverage beyond
the five States in question would not have led to different findings
than using the data from the Mann study.
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\196\ The commenters stated that approximately 16 States ban
rollovers (approximately half of the States that permit short-term
payday lending) while approximately another 10 States limit
rollovers or have similar restrictions. They further stated that
rollover bans and short cooling-off periods between loans
demonstrably have little impact on reborrowing rates. And, rollover
bans are particularly irrelevant in the five States in the Mann
study, because none of those States has a meaningful cooling-off
period, meaning that their ban on rollovers has particularly little
effect limiting long loan sequences.
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With respect to the substantive question at issue--whether the
Bureau's interpretation of data from the Mann study indicates that
payday loan consumers do not have a specific understanding of their
personal risks and cannot accurately predict how long they will be in
debt--consumer group commenters acknowledged that the Mann study found
that consumers of payday loans are generally able to predict in advance
the length of the payday loan sequence that they are entering into, a
finding they stated is largely driven by the fact that many study
participants accurately predicted that they would not remain in debt
for longer than one or two loans. Consumer groups stated, however, that
the 2017 Final Rule's analysis relied on a portion of the Mann study
data that, they stated, indicates that consumers with long payday loan
sequences did not accurately predict those sequences in advance. That
is, consumer groups argued that it was proper for the Bureau's
interpretation of data from the Mann study to focus on a portion of the
data as evidence that consumers with long loan sequences do not have a
specific understanding of the risks posed to them by payday loans.
Finally, consumer group commenters stated that the other evidence
cited by the 2019 NPRM as casting doubt on the Bureau's interpretation
of data from the Mann study was itself dubious or not applicable to
payday borrowers. These commenters also sought to rebut the other
evidence cited by the 2019 NPRM. Even if this other evidence were
valid, these commenters asserted that it does not undermine the 2017
Final Rule's findings based on the Bureau's interpretation of data from
the Mann study.
Final Rule
The Bureau has determined that the interpretation of the limited
data from the Mann study in the 2017 Final Rule is not sufficiently
robust and reliable to serve as the primary factual support for the
Bureau's determination in that Rule that many payday loan consumers do
not have a specific understanding of their personal risks and cannot
accurately predict how long they will be in debt when they take out
covered short-term or longer-term balloon-payment loans. In light of
the dramatic impacts the Mandatory Underwriting Provisions would have
in restricting consumer access to payday loans, the Bureau has
determined that a more solid foundation is needed.
As a preliminary matter, the Bureau does not dispute, and did not
dispute in the 2019 NPRM, that the 2017 Final Rule relied on limited
data from the Mann study that pertained to the predictions of consumers
who engage in long sequences of payday loans, and that the Bureau's
interpretation of that data suggests that some of those consumers may
not accurately predict their outcomes. At the same time, the Bureau
also believes that the Mann study's data overall indicates that payday
borrowers in general--i.e., including consumers who engage in short
sequences of payday loans--are able to predict the length of their loan
sequences with reasonable accuracy. Again, as discussed above, the
identified practice and the corresponding Mandatory Underwriting
Provisions apply to payday borrowers in general, not just payday
borrowers who engage in long sequences of payday loans.
It may be true, as industry commenters argued, that borrowers who
engage in long sequences of payday loans generally have the same level
of understanding of the costs and risks of payday loans as shorter-term
borrowers, but that these borrowers' predictions of their loan-sequence
length nonetheless are less accurate than those of shorter-term
borrowers. This would be because, in essence, the level of difficulty
of predicting loan-sequence length is higher for borrowers who turn out
to be longer-sequence borrowers than it is for borrowers who turn out
to be shorter-sequence borrowers. Nonetheless, accepting the 2017 Final
Rule's approach to the legal standard for reasonable avoidability for
present purposes (although the Bureau reconsiders that issue in part
V.B.1), the relevant issue here is whether these consumers lack a
specific understanding of their personal risks. That they may have the
same general understanding of the loans' costs and risks as shorter-
term payday loan borrowers would not affect the 2017 Final Rule's
interpretation of limited data from the Mann study to find that longer-
term reborrowers were not accurately predicting their outcomes, which
may suggest they lack specific understanding of their personal risks
from payday loans.\197\
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\197\ The issue of whether the 2017 Final Rule's used the best
legal standard is discussed in part V.B.1. As stated there, the
Bureau has determined that the best legal standard is whether
consumers lack an understanding of the magnitude and likelihood of
risk that is sufficient to alert them of the need to take steps to
protect themselves from the harm from taking out such loans. The
2017 Final Rule did not use that better standard--it required only
finding a lack of specific ability to predict their individual
likelihood of risk of lengthy reborrowing, rather than finding that
consumers lack a sufficient understanding to alert them of the need
to take steps to protect themselves from the harm from taking out
such loans. The use of the other legal standard is an independent
basis for the Bureau's present determination to revoke the 2017
Final Rule; i.e., it is separate from the basis for revocation that
is discussed here.
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[[Page 44402]]
The Bureau has determined that the Mann study, based on a single
lender operating in only five States, is not sufficiently robust and
reliable to serve as the basis for making findings of unfair practices
that are applicable nationwide to all lenders making payday loans to
borrowers in all States. Moreover, the Bureau's interpretation of the
data from the Mann study was based on 156 respondents plus the 19
percent of the 1,326 surveyed borrowers who did not respond to the
relevant question, which was 254 respondents, for a total of 410
respondents. These figures represent a miniscule portion of the up to
approximately 12 million consumers in the United States who take out a
payday loan in a given year.\198\ Consumer groups' assertions about the
single lender being a typical lender and about the five States being
significant payday lending States do not indicate that the limited data
from the Mann study the Bureau used is nationally representative.
Instead, the comments merely suggest it is possible that the Bureau's
interpretation of limited data from the Mann study is not
unrepresentative. In light of the dramatic impacts of the 2017 Final
Rule, the Bureau has concluded that its determination of lack of
understanding as a predicate to finding that harm is not reasonably
avoidable should be based on data and analysis thereof that is
nationally representative.\199\
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\198\ See Pew Charitable Trusts May 2016 Factsheet, Payday Loan
Facts and the CFPB's Impact, https://www.pewtrusts.org/-/media/assets/2016/06/payday_loan_facts_and_the_cfpbs_impact.pdf.
\199\ As stated in part VI.C.1.b.(2) below, the Bureau has
reached the same conclusion regarding its evidentiary basis for
determining lack of understanding in the abusiveness context.
---------------------------------------------------------------------------
Consumer group commenters argued that data the Bureau analyzed and
reported on in its March 2014 data point should enable the Bureau to
ascertain whether consumer outcomes at the one lender's outlets are
representative. However, these consumer outcomes are not relevant to
the issue of whether the limited data at issue are sufficiently
nationally representative concerning consumers' understanding of the
magnitude and likelihood of risks associated with their loans (as
opposed to predicting their ultimate outcomes with those loans, such as
length of reborrowing). And, for the reasons stated above, the Bureau
has determined that its prior interpretation of limited data from the
Mann study was based on data that is not sufficiently nationally
representative. As the 2019 NPRM explained, consumers using loans from
other lenders or in other places might not have the same understanding
as those in the Mann study. Because consumer understandings and
expectations may be informed by the information consumers are
provided--and because that information can vary from lender to lender
and State to State--the Bureau has concluded that the 2017 Final Rule's
interpretation of limited data from the Mann study is not a
sufficiently robust and reliable basis to make nationwide findings
about consumer understanding at all lenders making payday loans to all
borrowers in all States.
Finally, regarding consumer group commenters' criticisms of the
other evidence the 2019 NPRM cited as casting doubt on the 2017 Final
Rule's Mann data analysis, the 2019 NPRM cited this evidence merely to
corroborate the Bureau's concerns about its interpretation of limited
data from the Mann study. However, the Bureau would reach the same
conclusion about its prior use of the limited data from the Mann study
without that evidence. The Bureau's determination regarding the lack of
robustness and reliability of how the 2017 Final Rule used the Mann
study is not dependent upon the other evidence cited by the 2019 NPRM.
d. Other Evidence on the Consumer Understanding of Risk
The Bureau's Proposal
The 2017 Final Rule pointed to certain other evidence--i.e.,
evidence other than the Bureau's interpretation of limited data from
the Mann study--that it said showed that consumers were not able to
accurately predict the specific likelihood of their individual risk of
entering a long reborrowing sequence from taking out a covered short-
term or longer-term balloon-payment loan. In part V.B.2 of the 2019
NPRM, the Bureau preliminarily found that this other evidence did not
suffice to compensate for the insufficient robustness and reliability
of the Bureau's prior use of the Mann study in the 2017 Final Rule.
Comments Received
Industry commenters and others stated that the studies, other than
the Mann study, cited by the 2017 Final Rule did not address the issue
of whether consumers were able to predict their specific risk from
payday loans. They further noted that even if some studies were in part
suggestive that consumers do not have a complete understanding of their
loans, other aspects of the studies indicated that consumers do have a
reasonable understanding of the risks associated with their loans.
In addition, these commenters noted that the rate of consumer
complaints about payday loans is low relative to other consumer
financial products, which indicates that consumers' experience with
payday loans is not unexpected. Further, of the payday loan complaints
that are submitted, many are about unregulated offshore lenders and
illegal operators, and others do not actually relate to payday lenders
but are in fact about debt collection or other issues. Finally, these
commenters noted, the Bureau has acknowledged that consumer complaints
related to payday loans have been declining for the past several years.
Consumer group commenters and others stated that there was a
substantial amount of what they considered to be robust and reliable
evidence, other than the Mann study, that the 2017 Final Rule pointed
to as showing that payday loan consumers do not have a specific
understanding of their personal risks from payday loans sufficient to
allow them to take reasonable steps to prevent or mitigate the injury
from those risks. And, these commenters said, the 2019 NPRM did not
address or consider this evidence. Specifically, consumer group
commenters asserted, the evidence in the 2017 Final Rule record, which
the 2019 NPRM did not address, and which robustly shows consumer lack
of understanding, includes the following:
(1) Data showing that substantial numbers of payday loan consumers
reborrow repeatedly prior to defaulting on their loans.\200\ Consumer
group commenters said that this pattern indicates that consumers do not
understand their specific risk of defaulting, because, if they had such
understanding, they would default earlier in the loan sequences. That
is, the consumers could have avoided rollover fees from which they
received no benefit if they had defaulted earlier in the loan
sequences.
---------------------------------------------------------------------------
\200\ See 82 FR 54472, 54620. See also id. at 54572, where the
2017 Final Rule cited to a June 2016 CFPB Report on Supplemental
Findings, https://www.consumerfinance.gov/data-research/research-reports/supplemental-findings-payday-payday-installment-and-vehicle-title-loans-and-deposit-advance-products/.
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[[Page 44403]]
(2) Data showing consumer harm from payday loans and that a large
percentage of payday loans are made to consumers who take out the loans
repeatedly. Consumer group commenters argued that consumers' recurring
use of loans that harm them shows that the consumers cannot reasonably
avoid the harm from the loans.\201\
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\201\ Consumer group commenters made this comment in a July 2019
ex parte meeting with Bureau staff. The ex parte memo prepared by
Bureau staff setting forth the comments made during the meeting is
available at https://www.regulations.gov/document?D=CFPB-2019-0006-52033.
---------------------------------------------------------------------------
(3) One hundred and fifty studies mentioned by the 2017 Final Rule,
of which, commenters said, the 2019 NPRM reconsidered only the Mann
study and the Pew study.
(4) Additionally, consumer group commenters pointed to other
miscellaneous evidentiary sources discussed in the 2017 Final Rule.
Specifically, they pointed to: Lenders marketing of payday loans as
bridges for short-term cash shortfalls, whereas the loans actually
function as longer-term, high-cost sources of credit; lenders
encouraging consumers to reborrow the full amount of the loan--i.e., to
rollover the loan at the end of its term--rather than offering a
repayment plan; lenders not evaluating consumers' ability to repay
their loans, notwithstanding what commenters describe as consumer
expectations that lenders would not permit consumers to take out loans
they cannot afford; evidence from the Bureau's supervision,
enforcement, and market monitoring activities; consumer complaints
submitted to the Bureau's consumer complaints function; the Bureau's
stakeholder outreach during the course of its rulemaking that led to
the 2017 Final Rule; the 1.4 million public comments submitted in
response to the Bureau's 2016 NPRM; the effects of financial distress
on consumers' decision-making; and the Bureau's expertise generally.
(5) Finally, consumer group commenters pointed to the Martin study
as particularly indicative of consumer lack of understanding.\202\ The
Martin study reflects the results of interviews with 109 borrowers at
New Mexico storefront payday locations. The study found that nearly 60
percent of borrowers who had just exited a payday storefront location
after completing their transactions did not know the APR of their
loans, while another 16 percent made estimates of their APRs that were
incorrect by a substantial margin. Further, nearly a fifth of
respondents could not describe the dollar cost of their loans, while
nearly 40 percent inaccurately described the dollar cost. Additionally,
nearly 80 percent of borrowers in the study did not shop around for
loan terms, and choice of lender was driven more by the convenience of
a storefront location than by any other factor; almost no respondents
cited the economic terms of the loans as being a factor in their choice
of lender.
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\202\ The Martin study was attached to two comments submitted in
response to the Bureau's 2016 NPRM, but was not cited by the 2017
Final Rule.
---------------------------------------------------------------------------
Additional Evidence Available Subsequent to Publication of the 2019
NPRM
Since publication of the NPRM in February 2019, information about
two relevant studies has become available. The first study is a working
paper concerning a study of payday lending in Iceland, published in
September 2019 (Carvalho study).\203\ The study authors use two sources
of data to distinguish poor financial conditions from ``imperfect
decision-making'' for consumers. The authors find that 53 percent of
the payday loan dollars lent go to consumers in the lowest 20 percent
of decision-making ability, which is estimated according to a scale
developed by the authors. The study's findings hold in regressions if
the authors control for experimental assessments regarding impatience,
present bias, risk aversion, financial resources and available
demographics. Further, the authors state that low decision-making
ability can accurately be characterized as driving payday borrowing
mistakes. Finally, the authors suggest that their analysis could likely
provide information relevant to U.S. borrowers, offering as support how
various characteristics align between their sample and a representative
sample of those in the United States. While the authors do not have
controls for liquidity for U.S. consumers, after controlling for other
characteristics (risk preferences, income, and demographics), their
study predicts the same increase in payday loan usage for a given
change in decision-making ability.
---------------------------------------------------------------------------
\203\ Leandro Carvalho et al., Misfortune and Mistake: Financial
Conditions and Decision-making Ability of High-Cost Loan Borrowers,
NBER Working Paper No. 26328 (Sept. 2019), https://www.nber.org/papers/w26328.
---------------------------------------------------------------------------
The second study is a working paper publicly released in March 2020
of a study that surveyed borrowers at a lender in Indiana to evaluate
their borrowing expectations and attitudes toward restrictions on
payday lending (Allcott study).\204\ After exiting a payday storefront,
2,122 borrowers were asked survey questions about their expected
probability of borrowing another loan within the next eight weeks and,
after the application of several pre-registered sample restrictions,
1,205 of these borrowers were used in the analysis. On average, the
study participants predicted they had a 70 percent chance of
reborrowing, not far from the actual 74 percent reborrowing rate for
the sample. On the other hand, borrowers who used payday loans less
frequently in the six months prior to the survey were much more likely
to underestimate their likelihood of reborrowing.
---------------------------------------------------------------------------
\204\ Hunt Allcott et al., Are High Interest Loans Predatory?
Theory and Evidence from Payday Lending, working paper (Mar. 2020),
https://www.dropbox.com/s/ibavoq0pvr8p9ww/Payday.pdf?dl=0.
---------------------------------------------------------------------------
Most surveyed borrowers said they would ``very much'' like to give
themselves extra motivation to avoid payday loan debt and a
supermajority (about 90 percent) would at least somewhat like to give
themselves extra motivation. Consistent with this response, borrowers
were also willing to pay a large premium for an incentive to avoid
reborrowing. Finally, the authors use the survey responses as inputs to
a model to estimate borrower awareness of present bias and consumer
welfare responses to potential policy interventions. They find
borrowers in their sample do put more weight on near-term payoffs, but
that borrowers are also aware of this.\205\ The authors use simulations
to predict the effect of different restrictions on payday lending,
finding that consumer welfare decreases under full payday loan bans or
under caps on loan sizes, but consumer welfare slightly increases in
many scenarios under a three-loan rollover restriction.
---------------------------------------------------------------------------
\205\ In an appendix, the study authors allow that a different
interpretation of the motivation-related survey parameter is
possible. If this alternative interpretation is more accurate, it
dramatically increases the weight consumers place on near term
payoffs and decreases their awareness of it.
---------------------------------------------------------------------------
Final Rule
The Bureau has considered all of the applicable evidence, including
all of the evidence raised by commenters. For the following reasons,
the Bureau determines that the evidence does not provide a sufficiently
robust and reliable basis to conclude that consumers who use covered
short-term or longer-term balloon-payment loans do not have an adequate
understanding of their risk of substantial injury from taking out
payday loans where lenders have not determined they have the ability to
repay them.
[[Page 44404]]
Evidence of Repeated Borrowing Prior to Default
The Bureau turns first to the evidence showing that substantial
numbers of payday loan consumers reborrow repeatedly prior to
defaulting on their loans. This evidence arguably indicates that, with
hindsight, the actions that the consumers took turned out not to have
been optimal. That is, the consumers could have made themselves better
off (than they ended up being) by defaulting earlier in their loan
sequences. Nonetheless, the Bureau does not believe that whenever a
consumer makes a choice that turns out to have been suboptimal it
follows that the consumer lacked understanding of the risk at the time
the choice was made. Consumers often make decisions in conditions of
uncertainty--uncertainty of which the consumers are aware--and those
decisions sometimes turn out to be suboptimal. It does not follow that
the consumers at the time of their decisions lacked adequate
understanding of their risk of substantial injury from the relevant
practice. Moreover, the Bureau has determined that more direct evidence
of lack of understanding is necessary in order for the evidence to be
robust and reliable.
Evidence of Harmed Consumers Initiating Payday Loan Sequences
Recurringly
Regarding the evidence that consumer group commenters asserted
shows consumer harm from payday loans and that many initial loans go to
consumers who enter into loan sequences repeatedly, the Bureau
concludes that that evidence does not in any way suggest that consumers
lack adequate understanding of their risk of substantial injury from
taking out payday loans if lenders have not determined that they have
the ability to repay them. The evidence does not suggest that consumers
have inadequate information about, or lack understanding of, or do not
have alternatives to, payday loans. Indeed, the Bureau believes the
evidence indicates that the consumers, making their own choices, have
decided that payday loans are the best option among the alternatives
available to them. That is, this evidence does not suggest that
consumers lack understanding of any of the options available to them or
of the option they have chosen, which is a payday loan.
Other Studies Mentioned by the 2017 Final Rule
In addition, the Bureau has determined that the other studies--
e.g., the ``150 studies'' pointed to by consumer group commenters--
mentioned by the 2017 Final Rule are not relevant to the specific issue
at hand here. The number of studies is not the point when it comes to
the merits of an issue (just like the number of comments on a given
issue is not the point). Instead, the Bureau relies on the relevance,
rigor, and consistency of findings across studies. The large set of
studies discussed in the 2017 Final Rule concerned the experiences of
low-income consumers, State reports on payday and vehicle title
lending, and responses to changes in State regulations for small dollar
lending, all of which provide useful context and evidence on how the
market functions and how consumers engage with these products. But
these studies do not constitute evidence, let alone robust and reliable
evidence, regarding the point at issue here: Whether consumers lack
adequate understanding of their risk of substantial injury from taking
out payday loans where lenders have not determined they have the
ability to repay them.
Other Miscellaneous Sources of Evidence Cited by Commenters
The other miscellaneous evidence pointed to by consumer group
commenters--i.e., the evidence summarized under (4) above--does not
robustly and reliably indicate that consumers lack specific
understanding of their personal risks from payday loans. Some of these
sources of information were cited by the 2017 Final Rule for various
purposes, but they were not the basis for the 2017 Final Rule's
determination that consumers lack the required level of understanding.
This is because these sources are even less probative of this issue
than the limited data from the Mann study that the Bureau focused on in
the 2017 Final Rule and has now determined to be insufficient to
support the conclusion in the 2017 Final Rule. As the 2017 Final Rule
noted: ``Measuring consumers' expectations about re-borrowing is
inherently challenging.'' \206\ Contrary to some commenters'
suggestions, the Bureau did not have, and does not have, easy access to
robust and reliable information on this subject. The miscellaneous
sources cited by commenters provide no specific, direct insights into
consumers' level of understanding. Commenters instead invite the Bureau
to draw indirect inferences from some lenders' behavior; from the
Bureau's past activities related to the payday market; from outreach
and public comments associated with the Bureau's rulemaking; from
consumers' financial situations; and from the Bureau's general
expertise. But commenters have not pointed to specific, direct evidence
about consumers' understanding that is shown to be scientifically
rigorous and representative and therefore robust and reliable.\207\
---------------------------------------------------------------------------
\206\ 82 FR 54472, 54568.
\207\ For this reason, these sources are also not sufficiently
robust and reliable to supply evidence under the revised standard
for reasonable avoidability that the Bureau adopts in part V.B.2.
---------------------------------------------------------------------------
The Martin Study
The Bureau did not rely on the Martin study in the 2017 Final Rule
and does not rely upon it in this rulemaking. The Bureau does not
believe that commenters' arguments regarding the Martin study suggest
that consumers lack the requisite understanding of their risks from
payday loans, for the following reasons.
The Martin study showed that 60 percent of payday loan borrowers
did not know the APR of their loans and 52 percent could not provide a
reasonable dollar cost of their loans. Even if the Bureau were to grant
that this study suggests that some consumers might not know the exact
price of their payday loans in APR or dollar terms, the Bureau believes
that such lack of knowledge does not indicate that consumers lack
adequate understanding of their risk of substantial injury from taking
out a payday loan where lenders have not determined that they have the
ability to repay them. A consumer can be familiar with payday loans,
understand that they are a relatively expensive source of credit,\208\
and understand the risks and costs of reborrowing and default, even if
the consumer does not know the APR or dollar cost of a payday loan. For
example, the consumer might have prior experience using payday loans or
might have family, friends, or neighbors who
[[Page 44405]]
have used payday loans and other forms of credit and from whom the
consumer might have developed a reasonable sense of the desirability
and risks, and relative expensiveness, of payday loans relative to
other forms of credit, even if the consumer does not know the specific
APR or dollar cost of the payday loan the consumer received. The Bureau
therefore determines that the information from the Martin study about
consumer awareness of APRs or dollar costs on payday loans does not
indicate that consumers lack understanding of their risk of substantial
injury from taking out a payday loan where lenders have not determined
they have the ability to repay them.
---------------------------------------------------------------------------
\208\ Evidence overall is mixed as to whether consumers
understand the price of their loans in dollar-cost terms (e.g., $15
for $100 for 2 weeks), even if they might not remember or understand
the loans' APR. For example, a 2009 study by Gregory Elliehausen
(Elliehausen study) states that most payday loan consumers say they
are aware of the finance charge of their payday loans and report
plausible finance charges for their loans. Gregory Elliehausen, An
Analysis of Consumers' Use of Payday Loans, at 36-37 (Geo. Wash.
Sch. of Bus., Monograph No. 41, 2009), https://www.researchgate.net/profile/Gregory_Elliehausen/publication/237554300_AN_ANALYSIS_OF_CONSUMERS'_USE_OF_PAYDAY_LOANS/links/
00b7d5362429f9db10000000/AN-ANALYSIS-OF-CONSUMERS-USE-OF-PAYDAY-
LOANS.pdf.
---------------------------------------------------------------------------
Evidence Available Subsequent to Publication of the 2019 NPRM
Finally, the Bureau is not relying on the Carvalho study and the
Allcott study because they do not show that consumers lack the
requisite understanding of their risks of substantial injury from
taking out a payday loan where lenders have not determined they have
the ability to repay them.
The Carvalho study, as noted above, pertained to Icelandic
consumers and found that about half of payday loan dollars go to
consumers in the bottom 20 percent of decision-making ability. The
primary data from the study concerns Icelandic consumers, which makes
its usefulness unclear when considering a regulatory intervention for
payday loan borrowers in the United States--absent further research
demonstrating that additional key characteristics (such as the
liquidity of Icelandic and U.S. borrowers) that could affect their
decisionmaking are comparable. In any event, even if Icelandic and
United States consumers are comparable in key characteristics, the
Bureau concludes that this study does not demonstrate, let alone
robustly and reliably demonstrate, that payday loan consumers lack the
requisite understanding of their risks of substantial injury from
taking out payday loans where lenders have not determined that they
have the ability to repay them. While consumers with low decision-
making ability could have more difficulty than other consumers in
general understanding any credit, financial, or other product, it does
not necessarily follow that if these consumers take out payday loans
they lack an adequate understanding of their substantial risks of
injury from taking out payday loans where lenders have not determined
that they have the ability to repay them. The Carvalho study does not
show that these consumers do not understand the costs and risks of
their payday loan transactions. The consumers in question can be
familiar with payday loans and understand that they are a relatively
expensive source of credit, even if the consumers generally have low
decision-making ability. Moreover, even assuming for the sake of the
argument that the subset of payday borrowers in the lowest 20 percent
of decision-making ability do not have the requisite understanding of
the risks of harm from the practice at issue, roughly one-half of the
consumers in the Carvalho study are not in the lowest 20 percent of
decision-making ability and so any such conclusion would not be
applicable to them. For all of the reasons discussed above, the
Carvalho study does not support the conclusions in the 2017 Final Rule
that consumers could not reasonably avoid substantial injury from the
identified practice.
The Allcott study, as described above, indicates that on average
payday borrowers are able to predict their likelihood of reborrowing,
but that infrequent borrowers are much more likely to underestimate
their likelihood of reborrowing. The Bureau believes that the study
does not demonstrate, let alone robustly and reliably demonstrate, that
consumers lack the requisite understanding of their risk of substantial
injury from taking out payday loans where lenders have not determined
that they have the ability to repay them. In the study borrowers were
able to predict their probability of reborrowing on average, but the
authors did not establish whether the lender determined borrowers'
ability to repay their loans and they did not estimate the net costs to
consumers of requiring such an assessment. As an additional reason, the
study involves a single lender in a single State (Indiana). The Bureau
therefore believes that the study is not sufficiently representative to
serve as the basis for making findings applicable nationwide about all
lenders making payday loans to borrowers in all States. For these
reasons, the Bureau is not relying on the Allcott study to support any
conclusions in this rulemaking about reasonable avoidability.
For the reasons described above, the Bureau determines that the
available evidence does not provide a sufficiently robust and reliable
basis to conclude that consumers who use covered short-term or longer-
term balloon-payment loans lack an adequate understanding of their risk
of substantial injury from taking out payday loans where lenders have
not determined that they have the ability to repay them. Accordingly,
the Bureau determines to revoke the 2017 Final Rule's findings that any
consumer harm from payday loans is not reasonably avoidable and that
consumers lack adequate understanding of their risk of substantial
injury from taking out payday loans where lenders have not determined
that they have the ability to repay them.
C. Countervailing Benefits to Consumers and to Competition
The 2019 NPRM reconsidered whether the identified practice's
substantial injury to consumers which is not reasonably avoidable was
outweighed by countervailing benefits to consumers or to competition
pursuant to section 1031(c)(1)(B) of the Dodd-Frank Act. The Bureau
revisited the 2017 Final Rule's determination regarding this element
and preliminarily determined that certain countervailing benefits from
the identified practice were greater than the Bureau found in the 2017
Final Rule. The Bureau preliminarily revalued the countervailing
benefits, proposed to find that they were greater than the Bureau found
in the 2017 Final Rule, and proposed to find that the benefits to
consumers and competition from the practice outweigh any such injury.
1. Reconsideration of the Dependence of the Unfairness Identification
on the Principal Step-Down Exemption
Section 1031(b) of the Dodd-Frank Act authorizes the Bureau to
prescribe rules ``identifying as unlawful unfair, deceptive, or abusive
acts or practices'' if the Bureau makes the requisite findings with
respect to such acts or practices.\209\ The Bureau exercised this
authority in Sec. 1041.4 to determine that it is unfair and abusive
for a lender to make covered loans ``without reasonably determining
that the consumers will have the ability to repay the loans according
to their terms.'' \210\ The Bureau also exercised its authority under
section 1031(b) of the Dodd-Frank Act to impose ``requirements for the
purpose of preventing such acts or practices'' by adopting requirements
in Sec. 1041.5 for how lenders should go about making such an ability-
to-repay determination.\211\
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\209\ 12 U.S.C. 5531(b).
\210\ 12 CFR 1041.4 (emphasis added).
\211\ 12 U.S.C. 5531(b); 12 CFR 1041.5.
---------------------------------------------------------------------------
In the section 1022(b)(2) analysis of the 2017 Final Rule, the
Bureau estimated that if lenders ceased to engage in the identified
practice and instead followed the mandatory underwriting requirements
designed to prevent that practice, only one-third of current borrowers
would be able to
[[Page 44406]]
obtain any loans and, of those who obtained a loan, only one-third
would be able to obtain a subsequent loan.\212\ The end result, the
Bureau estimated, would be to eliminate between 89 and 93 percent of
all loans.\213\
---------------------------------------------------------------------------
\212\ 82 FR 54472, 54833.
\213\ Id. at 54826 (storefront payday), 54834 (vehicle title).
---------------------------------------------------------------------------
In conducting its countervailing benefits analysis, the 2019 NPRM
stated that the Bureau in the 2017 Final Rule did not address the
benefits to consumers or competition from lenders making covered short-
term and longer-term balloon-payment loans without an ability-to-repay
determination. Rather than focusing on the effects of the identified
practice itself, the 2019 NPRM stated that the Bureau interjected into
its analysis the effect of Rule provisions that were intended to
mitigate the general effects of the requirement that lenders make an
ability-to-repay determination.
Specifically, the Bureau included in its countervailing benefits
analysis the principal step-down exemption in Sec. 1041.6. The
principal step-down exemption permits a certain number of covered
short-term and longer-term balloon-payment loans to be made without
assessing the consumer's ability to repay so long as the loans meet a
series of other conditions, including a requirement that the loan
amount is amortized over successive loans by stepping down the
principal over such loans. None of these conditions involve any
ability-to-repay determination by the lender. Rather, the conditions
generally focus on whether the loan amount is amortized (stepped down)
over successive loans. The Bureau predicted that the novel principal
step-down exemption would actually be the predominant approach that
payday lenders would use to comply with the Mandatory Underwriting
Provisions, because of the substantial burdens the Mandatory
Underwriting Provisions would impose on lenders.
The principal step-down exemption was not part of the identified
practice. Rather, the exemption was added pursuant to the Bureau's
authority to create exemptions which the Bureau deems ``necessary or
appropriate to carry out the purposes and objectives of'' title X of
the Dodd-Frank Act.\214\
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\214\ 12 U.S.C. 5512(b)(3).
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The 2019 NPRM proposed to find that the Bureau in the 2017 Final
Rule did not consider in the countervailing benefits analysis the full
benefits to consumers and competition from the identified practice of
lenders making covered loans without making an ability-to-repay
determination. As the 2017 Final Rule stated, the combination of the
mandatory underwriting requirements plus the principal step-down
exemption meant that only a ``relatively limited number of consumers''
would face a ``restriction on covered loans'' which ``decreases the
cost of the remedy, which in turn reduces the weight on the
countervailing benefits side of the scale.'' \215\ This weight would
have been much greater had the Bureau properly considered the full
benefits from lenders engaging in the identified practice.
---------------------------------------------------------------------------
\215\ 82 FR 54472, 54609, 54603.
---------------------------------------------------------------------------
The 2019 NPRM observed that the approach taken by the Bureau in the
2017 Final Rule puts the proverbial cart before the horse. A predicate
for the exemption is the existence of an act or practice which is
unfair--which is to say, the existence of an act or practice for which
the substantial injury that consumers cannot reasonably avoid outweighs
countervailing benefits to consumers or to competition. According to
the 2019 NPRM, it follows that an exemption predicated on the existence
of an unfair practice should not be taken into account in determining
whether a particular act or practice is unfair (i.e., in assessing the
countervailing benefits of the act or practice at issue).
As the FTC Unfairness Policy Statement explains, ``[m]ost business
practices entail a mixture of economic and other costs and benefits for
purchasers. . . . The [FTC] is aware of these tradeoffs and will not
find that a practice unfairly injures consumers unless it is injurious
in its net effects.'' \216\ In the 2017 Final Rule, the Bureau declared
a practice unfair based on its net aggregate costs to consumers, but in
doing so it relied analytically on a large-scale exemption to avoid
fully considering the practice's benefits, thereby discounting the
benefits of the practice relative to its costs. Because the 2017 Final
Rule did not confront the total tradeoffs between the benefits and
costs of the identified practice, the 2019 NPRM preliminarily
determined that the 2017 Final Rule undervalued countervailing
benefits. Doing so may result in business practices being treated as
unfair even though they in fact are beneficial on net to consumers or
competition.
---------------------------------------------------------------------------
\216\ See FTC Unfairness Policy Statement, Int'l Harvester, 104
F.T.C. at 1074.
---------------------------------------------------------------------------
Accordingly, the Bureau preliminarily determined that when
evaluating the countervailing benefits of the identified practice, the
Bureau should have accounted for the complete benefits from that
practice. The complete benefits to consumers and competition should
reflect the benefits that would be lost if the identified practice were
prohibited. Otherwise, it is not possible to accurately assess (as the
Bureau now preliminarily interprets the unfairness test as requiring)
whether the benefits of making such loans without determining ability
to repay outweigh the injury from doing so.
Comments Received
Twelve State attorneys general commented that the 2017 Final Rule
improperly considered the principal step-down exemption. According to
this comment, this led the Bureau to artificially reduce the costs of
the Mandatory Underwriting Provisions and incorrectly determine that
countervailing benefits did not offset substantial injury.
Other commenters stated that it was appropriate to consider the
principal step-down exemption in the countervailing benefits analysis.
Commenters stated that the principal step-down exemption was part of
the remedy and consideration of the remedy in a countervailing benefits
analysis is appropriate. In support of this proposition, commenters
cited the FTC Unfairness Policy Statement, which provides that an
agency must ``take account of the various costs that a remedy would
entail,'' which includes compliance costs and costs to society more
broadly.\217\ At least one commenter cited examples of remedies being
considered in other unfairness rules, including the FTC's Credit
Practices Rule and the FRB's Credit Cards Rule.\218\ The commenter
stated that these rules provide examples of agencies assessing the
real-world benefits and costs and demonstrate that the countervailing
benefits analysis should not assess the prohibition they design in
isolation.
---------------------------------------------------------------------------
\217\ Int'l Harvester, 104 F.T.C. at 1073.
\218\ See 49 FR 7740, 7766, 7759; 74 FR 5498, 5515, 5524.
---------------------------------------------------------------------------
A commenter stated that to exclude the remedy is irrational because
the unfair practice could be reframed to incorporate the remedy. The
commenter stated that the Bureau could have defined the unfair practice
to incorporate the principal step-down exemption in the following
manner: The practice of making covered loans without making a
reasonable determination that a borrower will have the ability to repay
the loans according their terms or without providing a means to pay off
the loans in a reasonable number of installments when it becomes
evident that a borrower
[[Page 44407]]
cannot repay the loans according to their terms.
Some commenters asserted that the countervailing benefits
determination did not depend on the principal step-down exemption. At
least one commenter noted that the 2017 Final Rule concluded that the
countervailing assessment based on the 2016 NPRM--which the commenter
suggested (erroneously) did not propose a principal step-down
exemption--was correct. This commenter states that the Bureau
implemented the principal step-down exemption to not overly restrict
access to credit--not because the principal step-down exemption was
essential to the countervailing benefits analysis.\219\ Further, the
commenter asserted that the 2017 Final Rule could not have taken the
principal step-down exemption into account for vehicle title loans, for
which no conditional exemption is available.
---------------------------------------------------------------------------
\219\ See 82 FR 54472, 54603.
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Final Rule
After reviewing the comments received, the Bureau concludes that it
should not have relied upon the principal step-down exemption when
evaluating the countervailing benefits of the identified practice.
As an initial matter, the Bureau concludes that remedies are a
proper consideration in the countervailing benefits analysis. As the
FTC Unfairness Policy Statement states, it is proper to take ``account
of the various costs that a remedy would entail.'' \220\ However, the
principal step-down exemption simply does not represent a remedy for
the identified unfair practice of making covered loans ``without
reasonably determining that the consumers will have the ability to
repay the loans according to their terms.'' \221\ The principal step-
down exemption establishes approximately sixteen conditions devised by
the Bureau, none of which call upon the lender to make any
determination of the consumer's ability to repay.\222\ And as the 2019
NPRM noted, the 2017 Final Rule anticipated that the principal step-
down exemption would be the predominant approach that payday lenders
would use to comply. In other words, the principal step-down exemption
was expected to create a situation in which most lenders engage in the
identified unfair practice, that is, making payday loans to consumers
where lenders have not determined they have the ability to repay them.
Certainly, the conditions imposed by the principal step-down exemption
created a financial product that the Bureau considered to be more
desirable than a product without those conditions, but only by
permitting most lenders to continue to engage in the purportedly unfair
practice of making payday loans to consumers where lenders have not
determined that they have the ability to repay them. The logical remedy
to consider when evaluating whether not making a reasonable ability-to-
repay determination is unfair is the remedy of requiring lenders to
make a reasonable ability-to-repay determination.\223\
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\220\ Int'l Harvester, 104 F.T.C. at 1073.
\221\ 12 CFR 1041.4.
\222\ 12 CFR 1041.6; see also 12 CFR part 1041, supp. I, section
1041.6.
\223\ The agency's chosen remedy can, of course, include
additional preventative requirements so long as those have a
``reasonable relation'' to the identified unfair practice. 82 FR
54472, 54519 (citing Am. Fin. Servs. Ass'n v. FTC, 767 F.2d 957, 988
(D.C. Cir. 1985)).
---------------------------------------------------------------------------
The FTC precedents cited by some commenters are not inconsistent
with this conclusion. For example, the FTC Credit Practices Rule
prohibited wage assignments in consumer contracts with some exceptions,
such as revocable wage assignments, that were deemed ``noninjurious.''
\224\ The FTC Credit Practices Rule also prohibited non-purchase money
security interests in household goods, but allowed purchase money loans
and security interests in valuable possessions because, unlike blanket
security interests, they were necessary to preserve the commercial
viability of lenders.\225\ The FTC Credit Practices Rule simply
provides an example of an agency defining the appropriate scope of an
unfair practice, which is not comparable to the 2017 Final Rule's use
of the principal step-down exemption. For instance, the FTC Credit
Practices Rule did not declare that purchase money loans and security
interests in valuable possessions were within the unfair practice, then
exempt them if they satisfied various conditions specified by the
agency, and then disregard their countervailing benefits in evaluating
the overall countervailing benefits of the unfair practice. Instead,
the FTC Credit Practices Rule excluded certain transactions from the
scope of the unfair practice, and it did not attempt to rely upon them
in conducting the countervailing benefits analysis that was necessary
to establish an unfair practice. Revocable wage assignments were
allowed because they were non-injurious. Security interests in valuable
possessions were deemed to pose limited consumer risk but provided
significant benefit to competition.
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\224\ 49 FR 7740, 7760-61.
\225\ Id. at 7766.
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Another rule cited by commenters, the Federal Reserve's Credit Card
Rule, identified applying excess payments to different balances on a
consumer credit card ``in a manner that does not apply a significant
portion of the amount to the balance with the highest annual percentage
rate'' as an unfair practice under the FTC Act.\226\ When assessing
countervailing benefits, the Federal Reserve recognized that the rule
would reduce lender revenue and potentially increase interest rates on
all loans. But the Federal Reserve determined that these costs would be
muted because lenders could choose between two specified methodologies
for applying excess payments.\227\ These permitted methodologies (i.e.,
specific methods about how to apply excess payments) were both
effective in remedying the identified unfair practice (i.e., not
applying a significant amount of an excess payment to the balance with
the highest APR).
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\226\ 74 FR 5498, 5514.
\227\ Id. at 5515. Among other prohibitions, the Rule also found
it unfair for lenders to increase APR applicable to an outstanding
balance on consumer credit card, except in certain prescribed
circumstances. See id. at 5521.
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A commenter argued that the Bureau should reframe the identified
unfair practice to incorporate the principal step-down exemption. This
commenter argued that the Bureau should add the following words to the
identified unfair practice: ``or without providing a means to pay off
the loans in a reasonable number of installments when it becomes
evident that a borrower cannot repay the loans according to their
terms.'' In the commenter's view, this would provide a basis for the
principal step-down exemption as a remedy for the modified unfair
practice. But if the identified practice were redefined, then the
Bureau would have to reassess each of the elements of unfairness for
that identified practice, not just reassess countervailing benefits.
The approach proposed by the commenter would do nothing to address the
Bureau's separate conclusions regarding the reasonable avoidability
element of unfairness in part V.B. Such a fundamental change would
entail an additional complex rulemaking, which as the Bureau explains
in part VII on consideration of alternatives is not consistent with the
Bureau's rulemaking priorities. Moreover, even if the Bureau was to
modify the unfair practice in the manner suggested by the commenter,
the principal step-down exemption includes various conditions that are
unrelated to remedying such a modified unfair practice, such as the
principal limit of $500.
[[Page 44408]]
Some commenters pointed to statements in the 2017 Final Rule that
they claim indicate that the Bureau did not rely upon the principal
step-down exemption in its countervailing benefits analysis. As
background, in the 2016 NPRM, the Bureau had not proposed to include
the principal step-down exemption in its countervailing benefits
analysis.\228\ The 2017 Final Rule does contain a statement that the
2016 NPRM's preliminary determination that countervailing benefits
element was satisfied ``was correct,'' \229\ and it contains some other
positive language about the 2016 NPRM's proposed countervailing
benefits analysis.\230\ But these summary statements do not mean that
the 2017 Final Rule was based upon and relied upon everything in the
2016 NPRM's proposed analysis, as commenters suggest.
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\228\ See 81 FR 47863, 47939 n.540.
\229\ 82 FR 54472, 54603.
\230\ Id. (suggesting that certain improvements at the final
rule stage resulted in the ``injury from the identified practice
outweighing the countervailing benefits to consumers by even more
than it did at the proposal stage'').
---------------------------------------------------------------------------
And in fact, in both its description of its countervailing benefits
analysis and in the substance of that analysis, the 2017 Final Rule
relied upon the principal step-down exemption. The Bureau referred to
the principal step-down exemption's impact on credit access several
times in the preamble to Sec. 1041.4.\231\ In particular, in assessing
the countervailing benefits to a particular group of covered loan
users--reborrowers--the Bureau explicitly invoked the principal step-
down exemption's mitigating effect.\232\ Further, when considering the
2017 Final Rule's major impacts in the section 1022(b)(2) analysis, the
Bureau cited a simulation that accounted for the principal step-down
exemption.\233\ Thus, the countervailing benefits analysis did rely
upon the conditional exemption.
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\231\ See, e.g., id. at 54603, 54604, 54606.
\232\ Id. at 54606 (``The Bureau concludes that this aggregate
injury to many `reborrowers' outweighs the countervailing access-to-
credit benefits that other `re-borrowers' may receive as a result of
lenders not reasonably assessing the borrower's ability to repay the
loan according to its terms, in light of all the provisions of the
final rule, including the effect that Sec. 1041.6 will have in
reducing the magnitude of those benefits.'') (emphasis added).
\233\ Id. at 54817.
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Finally, the Bureau does not agree with the comment suggesting that
the fact that vehicle title loans cannot qualify for the principal
step-down exemption but are included in the definition of covered loan
indicates that the exemption did not affect the countervailing benefits
analysis; borrowers' and lenders' activities across the covered loan
markets were incorporated into the Bureau's analysis. As both the 2017
Final Rule and the 2019 NPRM noted, the relevant injuries and
countervailing benefits of the identified unfair practice are
considered in the aggregate.\234\
---------------------------------------------------------------------------
\234\ Id. at 54602, 54591.
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The Bureau now determines that, by relying upon the principal step-
down exemption in its countervailing benefits analysis, the 2017 Final
Rule failed to acknowledge the full measure of the Mandatory
Underwriting Provisions' costs to consumers and competition. Based on
the 2017 Final Rule's simulations, these unacknowledged costs may have
dramatic effects.\235\ Accordingly, the Bureau concludes that the 2017
Final Rule should not have relied on the principal step-down exemption
in its assessment of countervailing benefits to consumers and
competition, and therefore the 2017 Final Rule undervalued the
identified practice's benefits to consumers and competition.
---------------------------------------------------------------------------
\235\ In the 2017 Final Rule, when assuming the existence of the
conditional exemption, the Bureau estimated that the Mandatory
Underwriting Provisions would decrease total covered loan volume by
71 to 76 percent. But without the conditional exemption, the Bureau
estimated a reduction of loan volume of approximately 92 to 93
percent. Id. at 54826.
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2. Effect of Undervaluing Countervailing Benefits
In the 2019 NPRM the Bureau preliminarily determined that after
fully accounting for the countervailing benefits--including benefits it
disregarded in the 2017 Final Rule because of its reliance on the
principal step-down exemption and also other benefits that the 2017
Final Rule undervalued--that the substantial injury from the identified
practice that consumers cannot reasonably avoid is outweighed by the
aggregate countervailing benefits to consumers and competition of that
practice.
As the 2017 Final Rule noted and the 2019 NPRM reiterated, the
relevant question under section 1031(c)(1)(B) of the Dodd-Frank Act is
whether the countervailing benefits ``outweigh the substantial injury
that consumers are unable reasonably to avoid and that stems from the
identified practice.'' \236\ For purposes of the countervailing
benefits analysis, the 2019 NPRM accepted the 2017 Final Rule's
conclusion that there is injury that is not reasonably avoidable
(although elsewhere the 2019 NPRM proposed to withdraw that conclusion
regarding reasonable avoidability, and this rule withdraws that
conclusion for the reasons described in part V.B). The 2019 NPRM noted
that the 2017 Final Rule approached the countervailing benefits
analysis by first weighing the relevant injury in the aggregate, then
weighing countervailing benefits in the aggregate, and then assessing
which of the two predominates.\237\ As both the 2017 Final Rule and the
2019 NPRM explained, the substantial, not-reasonably-avoidable injury
``is weighed in the aggregate, rather than simply on a consumer-by-
consumer basis,'' and conversely ``the countervailing benefits to
consumers are also measured in the aggregate, and the Bureau includes
the benefits even to those consumers who, on net, were injured.'' \238\
---------------------------------------------------------------------------
\236\ 82 FR 54472, 54602 (emphasis added).
\237\ Id.
\238\ Id. at 54591.
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a. Countervailing Benefits to Consumers
The Bureau's Proposal
In the 2017 Final Rule and the 2019 NPRM, the Bureau analyzed the
countervailing benefits separately for three segments of consumers,
defined by their ex post behavior: Repayers (those who repay a covered
short-term or longer-term balloon-payment loan when due without the
need to reborrow within 30 days); reborrowers (those who eventually
repay the loan but after one or more instances of reborrowing); and
defaulters (those who default either on an initial loan or on a
subsequent loan that is part of a sequence of loans).\239\ In the 2019
NPRM, the Bureau requested comment on whether these were the
appropriate categories to use to analyze the existence of
countervailing benefits.
---------------------------------------------------------------------------
\239\ Id. at 54599-600.
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Repayers. In between 22 percent and 30 percent of payday loan
sequences \240\ and a smaller slice of vehicle title sequences,\241\
borrowers obtain a single loan, repay it in full when first due, and do
not reborrow again for a period of 14 to 30 days thereafter. In
conducting the countervailing benefits analysis in the 2017 Final Rule
with respect to repayers, the Bureau did not suggest that the
identified practice was without benefit to these repayers. Rather, the
Bureau's countervailing benefits analysis in the 2017 Final Rule
[[Page 44409]]
effectively acknowledged the identified practice had benefits for some
repayers because the Rule recognized that it was important to avoid
``false negatives,'' i.e., consumers who in fact have the ability to
repay but who could not establish it ex ante.\242\ However, the Bureau
determined that these countervailing benefits were ``minimal,'' in part
because the Bureau anticipated that lenders would make substantially
all the loans permitted by the Mandatory Underwriting Provisions of the
2017 Final Rule and in part because the Bureau believed that the
principal step-down exemption would mitigate any false negative
concerns.\243\
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\240\ See Supplemental Findings at 120. The higher number uses a
14-day definition of loan sequence and thus includes consumers who
repay their first loan and do not borrow within the ensuing two
weeks. The lower number uses a 30-day definition and thus counts
only those who do not reborrow within 30 days after repayment.
\241\ See Bureau of Consumer Fin. Prot., Single-Payment Vehicle
Title Lending, at 11 (May 2016), https://files.consumerfinance.gov/f/documents/201605_cfpb_single-payment-vehicle-title-lending.pdf (11
to 13 percent).
\242\ See 82 FR 54472, 54603-04.
\243\ Id.
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In the 2019 NPRM, the Bureau preliminarily determined that in the
2017 Final Rule it understated the risk that, under the mandatory
underwriting requirements, some consumers who would be repayers and
would benefit from receiving a loan would nonetheless be denied a loan.
According to the 2019 NPRM, this risk arises in part from the
difficulty some borrowers may have in proving their ability to repay
and in part from the fact that some lenders may choose to ``over-
comply'' in order to reduce their legal exposure. Although the 2017
Final Rule minimized the possibility that lenders would take a
``conservative approach . . . due to concerns about compliance risk,''
\244\ the Bureau preliminarily concluded in the 2019 NPRM that somewhat
greater weight should be placed on this risk. In reaching this
preliminary determination, the Bureau cited its experience in other
markets which indicates that some lenders generally seek to take steps
to avoid pressing the limits of the law.
---------------------------------------------------------------------------
\244\ Id. at 54603.
---------------------------------------------------------------------------
Moreover, from the perspective of the repayers, the 2019 NPRM
stated there may also be significant effects of requiring lenders to
make ability-to-repay determinations that might be termed ``system''
effects. As previously noted, the 2017 Final Rule's assessment of
benefits and costs estimated that, if covered short-term or longer-term
balloon-payment loans could be made only to those consumers with an
ability to repay in a single installment without reborrowing, lenders
would not make upwards of 90 percent of all loans and of course not
receive revenue from loans that are not made. At a minimum, the 2019
NPRM stated that would lead to a vast constriction of supply. The
Bureau in the 2019 NPRM preliminarily determined that a 90 percent
reduction in revenue would produce at least a corresponding reduction
in supply \245\ and could have even a more profound effect if the
remaining revenue were insufficient for lenders to remain in operation
using their current business model. In other words, the Bureau
preliminarily believed that one of the countervailing benefits of
permitting lenders to engage in the identified practice is that it
makes it possible to offer loans on a wide-scale basis to the repayers.
According to the 2019 NPRM, prohibiting such lending will necessarily
decrease the ability of the repayers to obtain covered short-term and
longer-term balloon-payment loans.
---------------------------------------------------------------------------
\245\ See id. at 54817, 54842 (estimating that the 2017 Final
Rule as a whole, including the principal step-down exemption, would
reduce loan volume by between 62 and 68 percent and would result in
a corresponding reduction in the number of retail outlets).
---------------------------------------------------------------------------
Reborrowers. As the Bureau noted in the 2017 Final Rule, over 55
percent of both payday and vehicle title sequences result in the
consumer reborrowing one or more times before finally repaying and not
borrowing again for 30 days.\246\ The Bureau acknowledged that some of
these borrowers who are unable to repay in a single installment (i.e.,
without reborrowing) may nonetheless benefit from having access to
covered short-term and longer-term balloon-payment loans because the
borrowers may be income-smoothing across a longer time span. These
borrowers also may benefit because they may face eviction, overdue
utility bills, or other types of expenses, with paying such expenses
sometimes creating benefits for consumers that outweigh the costs
associated with the payday loan sequence. But the Bureau in the 2017
Final Rule stated that the principal step-down exemption--which it said
is ``worth emphasizing'' in this context--would ``reduc[e] the
magnitude'' of the countervailing benefits flowing from the identified
practice.\247\ After taking into account this reduction, the Bureau in
the 2017 Final Rule concluded, however, that the remaining
countervailing benefits were outweighed by the injury to those
reborrowers who find themselves ``unexpectedly trapped in extended loan
sequences.'' \248\
---------------------------------------------------------------------------
\246\ Id. at 54605.
\247\ Id. at 54606.
\248\ Id. at 54605.
---------------------------------------------------------------------------
The 2019 NPRM stated that, on its own terms, this reasoning has no
applicability with respect to vehicle title reborrowers for whom the
principal step-down exemption would not be available and who thus would
lose the ability to income smooth over more than one vehicle title loan
or deal with the expenses referenced above. According to the 2019 NPRM,
this reasoning similarly does not apply to payday loan reborrowers who
cannot qualify for the principal step-down exemption, for example,
borrowers who find that they have a new need for funds but have already
exhausted the various borrowing limits imposed by the exemption.\249\
Moreover, the Bureau preliminarily determined that this reliance on the
principal step-down exemption was inappropriately considered.
---------------------------------------------------------------------------
\249\ 12 CFR 1041.6.
---------------------------------------------------------------------------
The Bureau in the 2019 NPRM preliminarily believed that the
consequences of this reliance on the exemption are profound. Under an
ability-to-repay regime, assuming the systemic effects did not
eliminate the industry completely, the 2019 NPRM stated that most of
the 58 percent of payday borrowers or 55 percent of vehicle title
borrowers would lose access to covered short-term and longer-term
balloon-payment loans because reborrowers lack the ability to repay the
loans according to their terms. To the extent some consumers passed an
ability-to-repay assessment and needed to reborrow, the 2019 NPRM
stated that most would be precluded from taking out a second loan. In
other words, the practice of making covered short-term or longer-term
balloon-payment loans to consumers who cannot satisfy the mandatory
underwriting requirement is the linchpin of enabling the reborrowers to
access these types of loans.
The Bureau acknowledged in the 2019 NPRM that among reborrowers
there is a sizable segment of consumers who end up in extended loan
sequences before repaying and thus incur significant costs. But even
for these borrowers, there is some countervailing benefit in being able
to obtain access to credit, typically through the initial loan, that is
used to meet what the Bureau acknowledged in the 2017 Final Rule to be
an ``urgent need for funds'' \250\--for example, to pay rent and stave
off an eviction or a utility bill and avoid a shutdown, or to pay for
needed medical care or food for their family.\251\ Moreover, over 35
percent of the reborrowers required only between one and three
additional loans before being able to repay and stop borrowing for 30
days and an additional almost 20
[[Page 44410]]
percent of the reborrowers required between four and six additional
loans before being able to repay.\252\ The 2019 NPRM stated that these
shorter-term reborrowers would forgo any benefits associated with these
additional loans if lending was limited to those who can demonstrate an
ability to repay in a single installment.
---------------------------------------------------------------------------
\250\ 82 FR 54472, 54620.
\251\ As discussed in the Rule, id. at 54538, surveys which ask
borrowers about the reasons for borrowing may elicit answers
regarding the immediate use to which the loan proceeds are put or
about a past expense shock that caused the need to borrow, making
interpretation of the survey results difficult. But what seems
beyond dispute is that these borrowers have a pressing need for
additional money.
\252\ See Supplemental Findings at 122 (fig. 36).
---------------------------------------------------------------------------
In sum, the Bureau preliminarily believed that there are
substantial countervailing benefits for reborrowers that flow from the
identified practice that the Bureau preliminarily determined should not
have been discounted in the 2017 Final Rule by relying on the principal
step-down exemption.
Defaulters. The third group of borrowers discussed in the 2017
Final Rule were those whose sequences end in default. As to this group,
representing 20 percent of payday borrowers \253\ and 32 percent of
vehicle title borrowers,\254\ the Bureau in the 2017 Final Rule
acknowledged that ``these borrowers typically would not be able to
obtain loans under the terms of the final rule'' (and thus the Bureau
did not rely on the principal step-down exemption in assessing the
effects on these consumers).\255\ The Bureau went on to note that
``losing access to non-underwritten credit may have consequences for
some consumers, including the ability to pay for other needs or
obligations'' and the Bureau stated that this is ``not an insignificant
countervailing benefit.'' \256\ But the Bureau went on to state that
these borrowers ``are merely substituting a payday lender or title
lender for a preexisting creditor'' and obtaining ``a temporary
reprieve.'' \257\
---------------------------------------------------------------------------
\253\ See id. at 120 (tbl. 23).
\254\ See Bureau of Consumer Fin. Prot., Single-Payment Vehicle
Title Lending, at 11 (May 2016), https://files.consumerfinance.gov/f/documents/201605_cfpb_single-payment-vehicle-title-lending.pdf.
\255\ 82 FR 54472, 54604.
\256\ Id.
\257\ Id. at 54604, 54590.
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According to the 2019 NPRM, it is not necessarily true that all
defaulters use their loan proceeds to pay off other outstanding loans;
at least some use the money to purchase needed goods or services, such
as medical care or food. Moreover, the Bureau expressed concern that in
the 2017 Final Rule it minimized the value to consumers of substituting
a payday lender for other creditors, such as a creditor with the power
to initiate an eviction or shut off utility services or refuse medical
care. The Bureau also expressed concern that the 2017 Final Rule
minimized the value of a ``temporary reprieve'' which may enable
defaulters to stave off more dire consequences than the consequences of
defaulting on a payday loan.
Conclusion. In sum, the Bureau preliminarily concluded that the
2017 Final Rule's approach to its countervailing benefits analysis
caused it to underestimate the countervailing benefits to consumers in
terms of access to credit that flows from the identified practice.
According to the 2019 NPRM, it is not just the benefit of access to
credit for those payday loan consumers who would lose access under the
principal step-down exemption that should be weighed; rather the
systemic effects of ending the identified practice and eliminating over
90 percent of all payday and vehicle title loans would adversely affect
the interests of all borrowers--including even those with the ability
to repay. Furthermore, the Bureau preliminarily believed that it
underestimated the benefits of access to credit for a large segment of
reborrowers and even for some defaulters--including the benefits of a
temporary reprieve, of substituting a payday or vehicle title lender
for some other creditor and, for the reborrowers, the benefit of
smoothing income over a period longer than a single two-week or 30-day
loan. The Bureau preliminarily determined that after giving appropriate
weight to the interests of all affected consumers, the countervailing
benefits to consumers that flow from the practice of making covered
short-term and longer-term balloon-payment loans without making an
ability-to-repay determination outweigh the substantial injury that the
Bureau considered in the 2017 Final Rule to not be reasonably avoidable
by consumers. The Bureau invited comment on these preliminary
conclusions.
Comments Received
Industry, trade association, tribal, and other commenters largely
agreed that the 2017 Final Rule undervalued benefits to consumers.
Commenters stated that the 2017 Final Rule will limit access to short-
term credit, particularly for financially distressed consumers who lack
access to traditional forms of credit, including credit from depository
institutions. A commenter noted that lenders will not be able to obtain
information for underwriting for ``unscorable'' consumers without
credit files.
These commenters stated that the 2017 Final Rule would cause
consumers to resort to unregulated or more expensive credit
alternatives, including overdraft protection or pawnbrokers. Commenters
stated that consumers may suffer financial harms, including overdrawing
accounts, bouncing checks, missing payments, accruing late fees, or
defaulting. Commenters cited studies of Georgia, North Carolina, and
New York as evidence that consumers suffer adverse consequences where
payday loans are restricted.\258\
---------------------------------------------------------------------------
\258\ See Donald P. Morgan & Michael R. Strain, How Payday
Credit Access Affects Overdrafts and Other Outcomes, 44 J. Money
Credit & Banking 519, 521 (2012), and Payday Holiday: How Households
Fare after Payday Credit Bans (Feb. 2008), https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr309.pdf (borrowers were more likely to experience an adverse
change after a decrease in the number of payday lenders in Oregon);
Piotr Danisewicz & Ilaf Elard, The Real Effects of Financial
Technology: Marketplace Lending and Personal Bankruptcy (July 2018),
https://www.ssrn.com/abstract=3208908 (the reduction in marketplace
credit following Madden v. Midland Funding, LLC, 786 F.3d 246 (2d
Cir. 2015), led to an 8 percent increase in personal bankruptcies in
New York and Connecticut).
---------------------------------------------------------------------------
These commenters also responded to the 2019 NPRM's preliminary
reassessment of the 2017 Final Rule's effects on specific groups of
consumers, including reborrowers and defaulters.\259\ These commenters
agreed that the 2017 Final Rule underestimated the benefit of covered
loans to reborrowers, including hourly or gig economy workers with
fluctuating incomes, who benefit from income smoothing and the ability
to access credit in an emergency. These commenters agreed that the 2017
Final Rule minimized the value of the temporary reprieve to defaulters.
---------------------------------------------------------------------------
\259\ See 84 FR 4252, 4272-74.
---------------------------------------------------------------------------
Other commenters stated that the 2019 NPRM appropriately emphasizes
consumer sentiment and a balanced consideration of consumer sentiment
measures, including complaints, which suggests that payday loans
benefit consumers.
By contrast, some consumer groups and other commenters
characterized covered loans as dangerous financial products that
provide no productive economic value and trap vulnerable consumers in
cycles of debt. These commenters stated that covered lenders do not
provide access to productive credit that helps bridge a short-term
financial shortfall--they flip borrowers from one unaffordable loan to
another for as long as possible. Some other commenters similarly stated
that payday loan use is often driven by insufficient income to cover
expenses and that small-dollar loans do not fix this underlying
problem--they exacerbate it by becoming an additional liability.
Other commenters stated that the 2019 NPRM mischaracterized the
2017 Final Rule's findings with respect to the Mandatory Underwriting
Provisions'
[[Page 44411]]
impact on access to credit. They claimed that the 2019 NPRM paraphrased
the 2017 Final Rule's calculations of reduced covered loan volume and
lender revenue to imply a commensurate reduction in access to credit,
but the 2017 Final Rule did not reach this conclusion.
Some commenters stated that the 2017 Final Rule would preserve
appropriate access to covered loans. With respect to the specific
covered loan consumers (i.e., repayers, reborrowers, and defaulters)
that the 2019 NPRM identified, at least one commenter stated that
repayers would maintain access to covered loans. Another commenter
stated that short-term reborrowers could continue to take out one or
two loans to address a temporary financial hardship under the 2017
Final Rule. At least one commenter stated that the inability to access
covered loans would be concentrated among consumers who lack the
ability to repay and are most likely to be injured by covered loans.
Some commenters stated that the 2017 Final Rule would not prevent
consumers from accessing credit and non-credit alternatives to covered
loans. These commenters stated that the experience of consumers in
States with payday loan restrictions evidence this fact. Some
commenters stated that the 2019 NPRM failed to take into account that
covered lenders can shift to installment or longer-term loans, which
was the experience in some States after payday lending restrictions
were adopted, including Colorado, Illinois, New Mexico, Ohio, Texas,
Virginia, and Wisconsin.\260\ For example, a commenter noted that a
prominent payday lender recently disclosed that only 19 percent of its
revenue came from multi-payment loans in 2010, but by the third quarter
of 2018, that figure had quadrupled to 77 percent.\261\ Another
commenter stated that in at least 26 of the 32 States where payday and
vehicle title lenders operate today, non-bank small-dollar lenders can
already offer loans with terms beyond 45 days.\262\
---------------------------------------------------------------------------
\260\ These comments tend to support the conclusion that
consumers can turn to alternative products to avoid injury from
taking out a covered loan.
\261\ See CURO Group, Presentation at Jefferies Consumer Finance
Summit, at 9 (Dec. 2018), https://ir.curo.com/events-and-presentations.
\262\ See Pew Charitable Trusts, From Payday to Small
Installment Loans: Risks, opportunities, and Policy Proposals for
Successful Markets (Aug. 2016), https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2016/08/from-payday-to-small-installment-loans.
---------------------------------------------------------------------------
A commenter faulted the 2019 NPRM for attempting to compare the
number of consumers in specific groups who are benefitted and harmed by
covered loans--i.e., repayers, reborrowers, and defaulters--without
considering the magnitude of harm across those groups. According to
this commenter, even if the number of consumers that receive some
benefit from covered loans exceeds the number of harmed consumers, the
product may not produce a countervailing benefit if the harm
experienced by consumers is sufficiently severe.
Some commenters stated that the 2019 NPRM did not introduce new
evidence in support of the proposed reassessment of countervailing
benefits to consumers. These commenters stated that the 2019 NPRM fails
to provide any data to dispute the 2017 Final Rule's findings and
instead speculates about alternative scenarios and differences in
weights to hypothetical benefits. A commenter argued that the 2019
NPRM's approach to countervailing benefits is inconsistent with the
proposal's emphasis on robust and reliable evidence in other contexts
in within the 2019 NPRM.
Final Rule
After reviewing the comments, the Bureau concludes that the 2017
Final Rule underestimated the identified practice's countervailing
benefits to consumers in terms of access to credit that flows from the
identified practice.
At the outset, the Bureau reemphasizes one point made by the 2017
Final Rule regarding how evidence is considered in a countervailing
benefits analysis. Consistent with the approach to unfairness under the
FTC Act, the Bureau does not ``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.'' \263\ The Bureau does ``carefully evaluate the
benefits and costs of each exercise of its unfairness authority,
gathering and considering reasonably available evidence.'' \264\ But as
case law regarding FTC unfairness rules has recognized, ``much of a
cost-benefit analysis requires predictions and speculation.'' \265\ The
2017 Final Rule's countervailing benefits analysis was indeed limited
and qualitative in some respects, which compelled the Bureau in the
2017 Final Rule to make some predictions and speculations. Limitations
in evidence may require prediction or speculation. Such prediction or
speculation is a matter of degree based on the evidence available. The
Bureau's reconsideration is based on the same record as the 2017 Final
Rule.
---------------------------------------------------------------------------
\263\ S. Rep. No. 103-130, at 13 (1994) (quoted at 82 FR 54472,
54521 n.386).
\264\ Id.
\265\ Pa. Funeral Dirs. Ass'n v. FTC, 41 F.3d 81, 91 (3d Cir.
1994) (quoted at 82 FR 54472, 54521 n.386).
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The Bureau is not persuaded by commenters that the approach to
evidence in the context of reasonable avoidability is inconsistent with
the approach to evidence in the context of countervailing benefits. As
explained in part V.B.2, the Bureau has decided to require robust and
reliable evidence in order to conclude that consumers cannot reasonably
avoid injury, in light of the dramatic impacts of the Mandatory
Underwriting Provisions on the payday market and in turn consumer
choice. But for purposes of this countervailing benefits analysis, the
Bureau assumes that the relevant group of longer-term borrowers cannot
reasonably avoid injury, and so those concerns about consumer choice
are not determinative of the quality and quantity of evidence that is
appropriate when weighing countervailing benefits. Instead, the Bureau
must decide whether the relevant detrimental effects or beneficial
effects of the identified practice predominate, including those effects
that are significant without being quantifiable.
Turning to the substance of the countervailing benefits analysis,
the Bureau notes that commenters disagreed on whether the 2017 Final
Rule would result in reduced access to credit. Industry and consumer
groups largely divided along this question. After considering the
evidence cited in the 2019 NPRM and information submitted in comments
to the proposal, the Bureau concludes that the 2017 Final Rule would
dramatically reduce access to covered loans to the detriment of
consumers. As the 2017 Final Rule explained, a Bureau simulation that
excluded the principal step-down exemption estimated that the ability-
to-repay requirement would reduce storefront and online payday loan
volume and lender revenue by 92 to 93 percent.\266\ The simulation also
estimated that restrictions on short-term vehicle title lending will
reduce loan volume and revenue by 89 and 93 percent.\267\ Given these
dramatic impacts, the Bureau has substantial concerns about the ongoing
viability of the covered loan market more broadly and its effects on
consumer access to credit.
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\266\ 82 FR 54472, 54826, 54833.
\267\ Id. at 54834.
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[[Page 44412]]
As discussed in part V.B.1, the Bureau concludes that consumers
would have access to credit and non-credit covered loan alternatives if
the 2017 Final Rule went into effect. These would include a variety of
payday loan alternatives and credit offered by fintechs, credit unions,
and other mainstream financial institutions.
But the Bureau also concludes that the 2017 Final Rule's systemic
impacts on the payday market, absent the principal step-down exemption,
would prevent consumers who prefer covered loans from accessing them,
notwithstanding the availability of other products that they may not
prefer. For purposes of this countervailing benefits analysis, the
Bureau accepts the 2017 Final Rule's conclusion that the longer-term
borrowers identified by the Bureau cannot reasonably avoid taking out
loans. Thus, for purposes of this analysis, the Bureau does not posit
that these longer-term borrowers prefer payday loans. But the 2017
Final Rule also emphasized that it did not disagree with Professor Mann
that there are also ``borrowers who remain in debt for a relatively
short period, who constitute a majority of all borrowers, and who do
not appear to systematically fail to appreciate what will happen to
them when they re-borrow.'' \268\ As the Rule noted, there are ``many
individuals'' who ``appear to have anticipated short durations of use
with reasonable accuracy.'' \269\ Many borrowers appear to prefer
payday loans to other products that are currently available to them.
This could be for a number of reasons, depending upon the individual,
including the speed and convenience of the borrowing process, easy loan
approval, and the ability to take out a loan without a traditional
credit check. The available data does not explain the precise
characteristics of borrowers' preferences for payday loans compared to
other current alternatives, and there is also some uncertainty about
how those alternatives may evolve in the future. Nevertheless, the
Bureau believes that the Rule's large impacts on the payday market,
absent the principal step-down exemption, will deprive them of their
preferred form of credit.
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\268\ 82 FR 54569.
\269\ Id. at 54570. Research by the Bureau found that 80 percent
to 85 percent of payday borrowers succeed in repaying their loans,
of which between 22 percent and 30 percent do so after receiving a
single loan while the remainder repaid after reborrowing one or more
times. The Bureau found that borrowers end up taking out seven or
more loans in a row 27 to 33 percent of the time. Bureau of Consumer
Fin. Prot., Supplemental findings on payday, payday installment, and
vehicle title loans and deposit advance products, at 120, 123 (June
2016), https://files.consumerfinance.gov/f/documents/Supplemental_Report_060116.pdf.
---------------------------------------------------------------------------
The Bureau also finalizes its more specific preliminary
determinations regarding the 2017 Final Rule's effects on certain
segments of covered loan users: Repayers, reborrowers, and defaulters.
With respect to repayers, the Bureau concludes that the 2017 Final Rule
understated the risk that repayers would be denied a loan and that a
countervailing benefit of permitting lenders to engage in the
identified practice is that it makes it possible to offer loans on a
wide-scale basis to repayers. With respect to reborrowers, the Bureau
concludes that there are substantial countervailing benefits that flow
from the identified practice, such as income-smoothing and avoiding a
greater harm (e.g., eviction, overdue utility bills, or other types of
expenses), which the 2017 Final Rule discounted. With respect to
defaulters, the Bureau concludes that the 2017 Final Rule erroneously
minimized the value of the temporary reprieve.
In support of these conclusions, the Bureau notes that industry
commenters who provided feedback on the topic uniformly agreed with the
proposed reassessment in the 2019 NPRM of the benefits to repayers,
reborrowers, and defaulters. The Bureau acknowledges that consumer
group commenters generally disagreed with the 2019 NPRM's reweighing of
benefits to certain groups, but these commenters did not provide
evidence or raise arguments that lead the Bureau to reconsider its
preliminary determinations. In particular, the Bureau is unpersuaded by
a comment that the 2017 Final Rule would preserve appropriate access to
covered loans for repayers and reborrowers and only restrict covered
loans among defaulters who are most likely to be injured by covered
loans. Given the 2017 Final Rule's dramatic impacts--which itself
estimated would extinguish 89 to 93 percent of covered loan volume--the
Bureau does not believe that there would be a viable market to provide
covered loans to repayers and reborrowers because most lenders
(especially those that only offer covered loans) could not continue to
provide covered loans in such a shrunken market.
With respect to a comment that the 2019 NPRM's proposed
reassessment did not consider the magnitude of harm across groups
(i.e., the harm suffered by defaulters is greater than the benefit to
repayers and reborrowers), the Bureau disagrees. The Bureau has
consistently emphasized, in both the 2017 Final Rule and the 2019 NPRM,
that the appropriate approach to this analysis is to compare the
aggregate substantial injury that is not reasonably avoidable across
all consumers experiencing such injury with the aggregate benefits to
all consumers who are benefitted, quantifying aggregate injury and
benefits if feasible but relying on qualitative analysis if it is not.
This is different from simply counting the numbers of individual
consumers who experienced a net harm or net benefit. The 2019 NPRM did
not reconsider the 2017 Final Rule's characterization of the aggregate
injury. In reconsidering the aggregate benefits, the 2019 NPRM provided
a qualitative description of why the Bureau is reconsidering the
magnitudes of the countervailing benefits to repayers, reborrowers, and
defaulters.
The Bureau notes that although the 2017 Final Rule would reduce
access to covered loans, commenters did not provide evidence that the
rule would drive consumers toward unregulated or more expensive
alternatives. The 2017 Final Rule determined that limiting the number
of covered loans would not lead to more unregulated or illegal loans,
and the Bureau concludes that the evidentiary record is not sufficient
to revoke this specific finding.\270\
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\270\ 82 FR 54472, 54610 (citing Pew Charitable Trusts, Payday
Lending in America: Who Borrows, Where They Borrow, and Why, at 19-
24, https://www.pewtrusts.org/-/media/legacy/uploadedfiles/pcs_assets/2012/pewpaydaylendingreportpdf.pdf).
---------------------------------------------------------------------------
The Bureau is also unpersuaded by the specific argument that
consumer sentiment measures, such as purportedly low volumes of
consumer complaints about payday loans, which are typically made
without an ability-to-repay assessment, are indicative of consumer
benefit. As the Bureau has suggested before, this argument is based on
a flawed premise. An absence of consumer complaints does not lead to an
inference of consumer benefit. There are many reasons why consumers do
not complain even though they may not benefit from a product, or, more
specifically here, from a practice relating to a product.
The Bureau also disagrees with commenters that argued that the 2019
NPRM mischaracterized the 2017 Final Rule's findings. In asserting that
the 2017 Final Rule would reduce payday loan revenue and volume by 89
to 93 percent of all loans, the Bureau based this statement on
simulations from the 2017 Final Rule.\271\ By using the phrase ``of all
loans,'' the 2019 NPRM implicitly referred to all ``covered'' loans,
which are at issue in this rulemaking, not access to credit
[[Page 44413]]
generally. Although the 2019 NPRM specifically discussed covered loans
in this passage, the Bureau reiterates its broader concerns that the
2017 Final Rule's dramatic impacts on revenue and volume will
critically undermine the viability of covered loans to the detriment of
consumers.
---------------------------------------------------------------------------
\271\ Id. at 54817, 54834-35.
---------------------------------------------------------------------------
Accordingly, the Bureau concludes that the 2017 Final Rule
underestimated the identified practice's benefits to consumers. The
2017 Final Rule found that ``a substantial population of borrowers is
harmed, many severely,'' by the identified unfair practice.\272\ The
Bureau is conscious of the 2017 Final Rule's findings regarding that
injury and has not reconsidered them in this rulemaking. Nevertheless,
the 2017 Final Rule believed that identifying an unfair practice with
the goal of protecting longer-term borrowers would have relatively
little cost for the broader population of borrowers who take out
covered loans. But this analysis was reliant upon a principal step-down
exemption that obscured the true impact on borrowers if the identified
unfair practice were proscribed, and it placed too little weight on the
benefits to borrowers from access to their preferred form of credit.
---------------------------------------------------------------------------
\272\ Id. at 54591.
---------------------------------------------------------------------------
b. Countervailing Benefits to Competition
The Bureau's Proposal
As with its discussion of the countervailing benefits to consumers,
the 2017 Final Rule analyzed the countervailing benefits to competition
through the lens of the principal step-down exemption. Specifically,
the 2017 Final Rule acknowledged that ``a certain amount of market
consolidation may impact . . . competition'' but asserted that this
effect would be modest and would not reduce meaningful access to credit
because of the principal step-down exemption.\273\ For the reasons
previously discussed, in the 2019 NPRM the Bureau preliminarily
determined that the Bureau should not have factored into its analysis
this exemption but rather should have analyzed the effect on
competition from the identified practice. Lenders would not be able to
make upwards of 90 percent of the loans they would be able to make if
the identified practice were not prohibited. The Bureau preliminarily
determined in the 2019 NPRM that this decrease in lending activity
would have a dramatic effect on competition, especially if lenders
cannot stay in business in the face of such decreases in revenue from
lending.
---------------------------------------------------------------------------
\273\ Id. at 54611-12.
---------------------------------------------------------------------------
The Bureau recognized in the 2019 NPRM that because of State-law
regulation of interest rates, the effect of reduced competition may not
manifest itself in higher prices. However, according to the 2019 NPRM,
payday and vehicle title lenders compete on non-price dimensions and a
rule which caused at least a 90 percent reduction in lending would
likely materially impact such competition.
The Bureau also noted that, as the 2017 Final Rule recognized, a
number of innovative products are seeking to compete with traditional
short-term lenders. Some of these products assist consumers in finding
ways to draw on the accrued cash value of wages that have been earned
but not yet paid, while other products take the form of extensions of
credit.\274\ Other innovators are also providing emergency assistance
at no cost to consumers through a tip model.\275\ The 2017 Final Rule
included exclusions to accommodate these emerging products, thereby
recognizing that providers offering these products were doing so
without assessing the consumers' ability to repay without reborrowing.
The Bureau therefore preliminarily believed that a prohibition of
making short-term or longer-term balloon-payment loans without
assessing consumers' ability to repay would constrain innovation in
this market.
---------------------------------------------------------------------------
\274\ 12 CFR 1041.3(d)(7).
\275\ 12 CFR 1041.3(d)(8).
---------------------------------------------------------------------------
The Bureau preliminarily determined in the 2019 NPRM that these
countervailing benefits to competition provide an additional reason to
conclude that the countervailing benefits to consumers and to
competition outweigh the substantial injury that the Bureau considered
in the 2017 Final Rule to not be reasonably avoidable by consumers. The
Bureau invited comment on these preliminary conclusions.
Comments Received
Some commenters stated that the 2017 Final Rule would negatively
impact competition by reducing the number of covered lenders. At least
one commenter stated that ability-to-repay determination requirements
would impose burdensome manual administrative processes and information
gathering requirements for income verification, which are not cost-
efficient for small-dollar lending. A commenter stated that the 2017
Final Rule would be particularly burdensome for small entities. Some
commenters criticized the Bureau for not adequately studying the
economic impacts of the 2017 Final Rule. For example, a commenter
asserted that the Bureau never conducted a ``profitability analysis''
to determine how many stores would stay in business if the Mandatory
Underwriting Provisions went into effect.
Two academic commenters stated that fewer market participants may
lead to a lower supply of credit and higher prices because loan prices
and loan sizes do not invariably rise to State-level maximums. Other
commenters agreed that the price of credit would increase and stated
that lenders may limit credit approvals to borrowers with higher credit
profiles.\276\ Some commenters stated that fewer market participants
would increase consumer search costs, particularly for rural
consumers.\277\
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\276\ A commenter noted that when the UK Financial Conduct
Authority capped interest rates on payday loans in 2015, the ensuing
60 percent plunge in loan originations was accompanied by a decline
in the share of low-borrowers, from 50 percent to 35 percent of
loans. Fin. Conduct Auth., High-Cost Credit: Including Review of the
High-Cost Short-Term Credit Price Cap (July 2017), https://www.fca.org.uk/publication/feedback/fs17-02.pdf; Social Market
Foundation, A Modern Credit Revolution: An Analysis of the Short-
Term Credit Market (2016), https://cfa-uk.co.uk/wp-content/uploads/2016/11/SMF-Report-AKT10796.pdf.
\277\ Commenters cited several studies to suggest that lenders
in rural areas would see a steeper revenue decline than those in
urban areas. See Thomas Miller & Onyumbe Enumbe Ben Lukongo, Adverse
Consequences of the Binding Constitutional Interest Rate Cap in the
State of Arkansas (Oct. 2017), https://www.mercatus.org/publications/constitutional-interest-rate-cap-arkansas; Charles
River Assocs., Economic Impact on Small Lenders of the Payday
Lending Rules under Consideration by the CFPB (2015), https://www.crai.com/publication/economic-impact-small-lenders-payday-lending-rules-under-consideration-cfpb.
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Several commenters stated that the 2017 Final Rule would constrain
innovation, particularly in credit risk models and underwriting
strategies. Some commenters stated that the 2017 Final Rule could
hinder innovation at community banks and credit unions, even though
these institutions largely are exempt from the ability-to-repay
requirements pursuant to 12 CFR 1041.3(e)(4) and (f), and that it is
crucial that the Bureau provide these institutions with the flexibility
to underwrite and structure small-dollar loans. A trade association
stated that the elimination of the 2017 Final Rule's Mandatory
Underwriting Provisions will likely encourage credit unions and banks
to adopt short-term, small-dollar lending programs.
In contrast, other commenters stated that the 2017 Final Rule would
have a limited impact on competition. As discussed above, some
commenters
[[Page 44414]]
believed that the 2019 NPRM mischaracterized the 2017 Final Rule, which
did not conclude that a decrease in covered loan volume and revenues
would lead to a commensurate decrease in overall credit availability.
Other commenters also stated that the 2019 NPRM adduced no new evidence
regarding the number of storefront payday lenders that will be affected
by the 2017 Final Rule.
Some commenters stated that, even if the 2017 Final Rule resulted
in fewer covered lenders, consumers would not be negatively affected.
In reaction to the 2019 NPRM, an academic commenter accused the Bureau
of confusing ``competitors'' with ``competition.'' Some commenters
stated that the 2017 Final Rule found that while consolidation may
occur in the market, competitiveness would not be affected in the form
of higher consumer prices--because lenders uniformly charge the maximum
permitted by State law--or the distance that consumers would have to
travel to procure loans.\278\ One commenter stated that a decrease in
the covered lenders and loan volume might actually lead to healthier
competition that enhances consumer welfare. According to the commenter,
payday lending is an unusual market in which low barriers to entry and
few unique consumers per store result in cannibalistic competition that
drives up prices. Citing the experience in Colorado, the commenter
stated that with fewer lenders in the market, there would be more
borrowers per store and lower prices per borrower as costs would be
amortized over a larger borrower base.\279\
---------------------------------------------------------------------------
\278\ 82 FR 54472, 54601.
\279\ Following its reform, the number of payday lenders in
Colorado substantially contracted, but the lending volume remained
stable and the cost of loans dropped. See Pew Charitable Trusts,
Trial, Error, and Success in Colorado's Payday Lending Reforms (Dec.
2014), https://www.pewtrusts.org/~/media/assets/2014/12/
pew_co_payday_law_comparison_dec2014.pdf.
---------------------------------------------------------------------------
Some commenters stated that the 2017 Final Rule would benefit, not
hinder, innovation. These commenters stated that payday lenders crowd
out alternative forms of credit by disadvantaging lenders that
underwrite or provide more fulsome disclosures. Some commenters state
that restrictions on covered loans creates space for innovation for
loans at various price points and durations greater than 45 days,
expanding access to manageable credit, driving out inferior products,
and improving consumer choice over time. A commenter cited a study to
support the notion that borrowers desire alternatives to covered loans
that can be repaid in longer terms and smaller installments.\280\
---------------------------------------------------------------------------
\280\ See Pew Charitable Trusts, Payday Loan Customers Want More
Protections, Access to Lower-Cost Credit From Banks (Apr. 2017),
https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2017/04/payday-loan-customers-want-more-protections-access-to-lower-cost-credit-from-banks.
---------------------------------------------------------------------------
Other commenters noted that in the 2019 NPRM the Bureau did not
offer evidence showing how not assessing ability-to-repay improves the
availability of affordable products for consumers. A commenter stated
that in unregulated States, there is no evidence that increased
competition creates better products for consumers. A commenter stated
that without guardrails and regulation, revoking the 2017 Final Rule
would encourage new types of business models that harm consumers.
Final Rule
The Bureau concludes that the reduction in covered loan volume and
revenue resulting from the Mandatory Underwriting Provisions would
result in a corresponding reduction in competition in the covered loan
market. The 2017 Final Rule's estimates predicted that without the
conditional exemption covered loan revenue and volume would fall by 89
to 93 percent.\281\ The Bureau determines that competition inevitably
would suffer from a contraction in loan volume and revenues of this
magnitude. The 2017 Final Rule itself compels a conclusion that this
contraction will impact the size of the covered loan market. According
to the 2017 Final Rule, ``[to] the extent that lenders cannot replace
reductions in revenue by adapting their products and practices, Bureau
research suggests that the ultimate net reduction in revenue will
likely lead to contractions of storefronts of a similar magnitude, at
least for stores that do not have substantial revenue from other lines
of business. . . .'' \282\
---------------------------------------------------------------------------
\281\ 82 FR 54472, 54817, 54834-35.
\282\ Id. at 54835.
---------------------------------------------------------------------------
The Bureau concludes that this reduction in covered loan providers
would harm competition. As noted in the 2019 NPRM, the Bureau
recognizes that higher loan prices may not necessarily result from
reduced competition assuming that covered lenders typically charge
State-level maximums so covered lenders generally are unable lawfully
to raise prices for credit.\283\ But the reduction in covered lenders
may have effects on non-price competition among lenders, including
competing on the basis of convenience through number of locations,
thereby increasing consumer search costs when seeking covered loans.
This increase will particularly affect rural consumers, especially
those with limited internet access.
---------------------------------------------------------------------------
\283\ 84 FR 4252, 4274.
---------------------------------------------------------------------------
The Bureau also concludes that the 2017 Final Rule would constrain
rapid innovation in the market. The 2017 Final Rule would stifle lender
innovation, particularly in developing credit risk models and
underwriting strategies that better meet both lenders' and consumers'
needs. The Bureau points to the remarkable innovation in the short-
term, small-dollar credit market that has occurred in the absence of
the 2017 Final Rule's Mandatory Underwriting Provisions. The Bureau is
concerned that, if not revoked, the Mandatory Underwriting Provisions
may stifle this activity. For example, the Bureau determines that, as
commenters suggested, not revoking the Mandatory Underwriting
Provisions may hinder the adoption of short-term, small-dollar lending
programs by lenders that adopt new credit risk models and strategies.
These new methods do not appear to meet or be likely to meet the
specific ability-to-repay requirements that were set forth in the
Mandatory Underwriting Provisions of the 2017 Final Rule, and,
therefore, consumers might not be able to choose these products if such
requirements were applicable.
Accordingly, the Bureau concludes that the 2017 Final Rule
undervalued the identified practice's benefits to competition. The 2017
Final Rule would reduce the number of lenders nationwide, which would
have non-price effects, including increasing consumer search costs.
This increase will particularly affect rural consumers, especially
those without internet access. The Bureau also determines that the 2017
Final Rule would constrain innovation, including in the development of
credit risk models and underwriting strategies.
3. Conclusion on Countervailing Benefits
Accordingly, the Bureau concludes that the identified practice's
countervailing benefits to consumers and to competition must be
reweighed. After doing so, the Bureau concludes that these
countervailing benefits in the aggregate outweigh any substantial, not-
reasonably-avoidable injury to consumers where lenders make covered
loans to them without determining consumers' ability to repay those
loans. The 2017 Final Rule found that ``a substantial population of
borrowers is harmed, many severely,'' by the identified unfair
practice.\284\ The Bureau
[[Page 44415]]
assumes for purposes of this countervailing benefits analysis the 2017
Final Rule's findings regarding that injury. Nevertheless, in its
countervailing benefits analysis, the 2017 Final Rule determined that
identifying an unfair practice with the goal of protecting longer-term
borrowers would have relatively little cost for the broader population
of covered loan users and for competition. But the 2017 Final Rule's
analysis relied on a principal step-down exemption that obscured the
true impact of proscribing the identified unfair practice, and it
undervalued the benefits to borrowers from having access to their
preferred form of credit and to the benefits to competition.
Reconsidering these factors, the Bureau concludes that these
countervailing benefits to consumers and to competition, in the
aggregate, outweigh the relevant injury,\285\ and, therefore, the
identified practice does not satisfy the final prong of the test for
unfairness under section 1031(c) of the Dodd-Frank Act.
---------------------------------------------------------------------------
\284\ 82 FR 54472, 54591.
\285\ Because the Bureau is finalizing the 2019 NPRM's
conclusions that both the benefits to consumers and the benefits to
competition should be weighed more heavily than in the 2017 Final
Rule, and that together they outweigh the relevant injury, the
Bureau need not decide whether the benefits to consumers alone or
the benefits to competition alone would outweigh the relevant
injury.
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D. Conclusion on Unfairness
Based on its analysis in parts V.B through V.C above, the Bureau
concludes that it should no longer identify an unfair under section
1031(c) of the Dodd-Frank Act the practice set out in Sec. 1041.4.
Three discrete and independent grounds justify this conclusion. First,
as set out in part V.B.1, the Bureau determined that the 2017 Final
Rule should have applied a different interpretation of the reasonable
avoidability element of unfairness under section 1031(c)(1)(A) of the
Dodd-Frank Act. The Bureau concludes that the findings of an unfair
practice as identified in Sec. 1041.4 rested on applications of
section 1031(c) of the Dodd-Frank Act that the Bureau should no longer
use given the identification of better interpretations of these
statutory provisions.
Second, as set out in part V.B.2, the Bureau determined that even
under the 2017 Final Rule's interpretation of reasonable avoidability,
the evidence underlying this finding is insufficiently robust and
reliable.
Third, the Bureau also determines that countervailing benefits to
consumers and to competition in the aggregate outweigh the substantial
injury that is not reasonably avoidable as identified in the 2017 Final
Rule, injury which the Bureau assumes for purposes of this analysis.
That is, as set out in part V.C.1, the Bureau should have excluded the
principal step-down exemption in its calculation of countervailing
benefits in the 2017 Final Rule, and in light of this and other
factors, as set out in part V.C.2, the countervailing benefits to the
identified practice outweigh substantial injury that is not reasonably
avoidable.
Based on these cumulative findings, the Bureau revokes the portion
of Sec. 1041.4 which identifies the failure to conduct an ability-to-
repay assessment in connection with making a covered short-term or
longer-term balloon-payment loan as an unfair practice.
VI. Amendments to the 2017 Final Rule To Eliminate Its Mandatory
Underwriting Provisions--Revoking the Identification of Abusive
Practices
The Bureau determines that the factual and legal grounds provided
in the 2017 Final Rule do not support its conclusion that the
identified practice is abusive under section 1031 of the Dodd-Frank
Act, thereby eliminating that as a basis for the Mandatory Underwriting
Provisions to address that conduct.\286\
---------------------------------------------------------------------------
\286\ The rulemaking addresses the legal and evidentiary bases
for particular rule provisions identified in this final rule. It
does not prevent the Bureau from exercising tool choices, such as
appropriate exercise of supervision and enforcement tools,
consistent with the Dodd-Frank Act and other applicable laws and
regulations. It also does not prevent the Bureau from exercising its
judgment in light of factual, legal, and policy factors in
particular circumstances as to whether an act or practice meets the
standards for abusiveness under section 1031 of the Dodd-Frank Act.
---------------------------------------------------------------------------
Part VI.A considers the core principles of abusiveness under Dodd-
Frank Act section 1031(d). Part VI.B reviews the factual findings and
legal conclusions underlying this use of authority in the 2017 Final
Rule. Part VI.C considers the two different abusiveness theories
underlying the abusiveness finding in Sec. 1041.4 of the 2017 Final
Rule: The ``lack of understanding'' theory, and the ``inability to
protect'' theory. First, part VI.C.1 reviews the Bureau's reasons for
determining that, under section 1031(d) of the Dodd-Frank Act, the
Bureau no longer identifies the practices as abusive under a ``lack of
understanding'' theory as set out in Sec. 1041.4 of the 2017 Final
Rule. Second, part VI.C.2 sets forth the Bureau's reasons for
determining that, under section 1031(d) of the Dodd-Frank Act, the
Bureau no longer identifies the practices as abusive under an
``inability to protect'' theory as set out in Sec. 1041.4 of the 2017
Final Rule.\287\
---------------------------------------------------------------------------
\287\ The Bureau notes that, alongside covered short-term loans,
the 2017 Final Rule included covered longer-term balloon-payment
loans within the scope of the identified unfair and abusive
practice. The Bureau stated that it was concerned that the market
for covered longer-term balloon-payment loans, which is currently
quite small, could expand dramatically if lenders were to circumvent
the Mandatory Underwriting Provisions by making these loans without
assessing borrowers' ability to repay. 82 FR 54472, 54583-84. The
Bureau did not separately analyze the elements of unfairness and
abusiveness for covered longer-term balloon-payment loans. See id.
at 54583 n.626. Because the Bureau's identification in the Rule as
to covered longer-term balloon-payment loans was predicated on its
identification as to covered short-term loans, the Bureau proposed
that if the latter is revoked the former should also be revoked. The
Bureau received no comments that change this conclusion as to
covered longer-term balloon-payment loans and finalizes it as
proposed.
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A. Background on Abusiveness
Section 1031(a) of the Dodd-Frank Act provides that the Bureau may
use its enforcement authority, among other things, to prevent a covered
person or service provider from committing or engaging in an unfair,
deceptive, or abusive act or practice under Federal law in connection
with any transaction with a consumer for a consumer financial product
or service, or the offering of a consumer financial product or
service.\288\ Since its inception, the Bureau has used its supervisory
and enforcement authority to identify and seek relief where covered
persons engage in unfair, deceptive, or abusive acts or practices
(UDAAPs).
---------------------------------------------------------------------------
\288\ Public Law 111-203, tit. X, sec. 1031(a), 124 Stat. 1376,
2005 (2010) (codified at 12 U.S.C. 5531(a)).
---------------------------------------------------------------------------
The statutory standard for what the Bureau has authority to declare
an ``abusive act or practice'' is set forth in section 1031(d) of the
Dodd-Frank Act. Specifically, section 1031(d) states that the Bureau
shall have no authority under this section to declare an act or
practice abusive in connection with the provision of a consumer
financial product or service, unless the act or practice--(1)
materially interferes with the ability of a consumer to understand a
term or condition of a consumer financial product or service; or (2)
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; (B) the inability of the consumer to protect the
interests of the consumer in selecting or using a consumer financial
product or service; or (C) the reasonable reliance by the consumer on a
covered person to act in the interests of the consumer.\289\
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\289\ 12 U.S.C. 5531(d).
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[[Page 44416]]
Through the language in section 1031(d), Congress defined the
abusiveness standard in general terms and did not attempt to include a
complete list of abusive practices. To demonstrate a violation of
section 1031(d), the Bureau therefore must satisfy the specific
elements of sections 1031(d)(1), 1031(d)(2)(A), 1031(d)(2)(B), or
1031(d)(2)(C).
At the Federal level, the FTC and Federal banking regulators
traditionally have protected consumers through the prohibitions on
unfair and deceptive acts and practices in the FTC Act as well as
through the prohibitions and requirements included in special statutes,
such as the Truth in Lending Act \290\ and the Fair Credit Reporting
Act.\291\ The Dodd-Frank Act added to these consumers protections the
first Federal prohibition on abusive acts or practices with respect to
consumer financial products and services generally.\292\ Although
Congress, through the language in section 1031(d), provided some
indication of the abusiveness standard, the Dodd-Frank Act does not
further elaborate on the meaning of the terms used in section 1031(d),
and there is relatively limited legislative history discussing the
meaning of the language in section 1031(d) (including in distinguishing
the abusiveness standard from the deception and unfairness
standards).\293\ Moreover, the abusiveness standard does not have the
long and rich history of the deception and unfairness standards. The
FTC has used its authority under the FTC Act to address unfair and
deceptive acts or practices (UDAPs) for more than 80 years, over which
time policy statements, administrative and judicial precedent, and
statutory amendments have provided important clarifications about the
meaning of unfairness and deception.\294\ Federal prudential regulators
have also enforced the UDAP prohibitions in the FTC Act since before
the Bureau's existence.
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\290\ 15 U.S.C. 1601 et seq.
\291\ 15 U.S.C. 1681 et seq.
\292\ Certain other Federal consumer financial laws, including
the Fair Debt Collection Practices Act (FDCPA) and the Home
Ownership and Equity Protection Act (HOEPA), reference either the
term ``abusive'' or ``abuse.'' See 15 U.S.C. 1692d (FDCPA), 12
U.S.C. 1639(p)(2)(B) (HOEPA). The Telemarketing and Consumer Fraud
and Abuse Prevention Act, Public Law 103-297, 108 Stat. 1545 (1994),
also directed the FTC to ``prescribe rules prohibiting deceptive
telemarketing acts or practices and other abusive telemarketing acts
or practices.'' See 15 U.S.C. 6102(a)(1).
\293\ See, e.g., S. Rep. No. 111-176, at 172 (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''); see also S. Rep. No. 111-176, at 9 n.19 (``Today's
consumer protection regime . . . could not stem a plague of abusive
and unaffordable mortgages.''); id. at 11 (``This financial crisis
was precipitated by the proliferation of poorly underwritten
mortgages with abusive terms.''); H.R. Rep. No. 111-376, at 91
(2009) (``Th[e] disparate regulatory system has been blamed in part
for the lack of aggressive enforcement against abusive and predatory
loan products that contributed to the financial crisis, such as
subprime and nontraditional mortgages.''); H.R. Rep. No. 111-517, at
876-77 (2010) (Conf. Rep.) (``The Act also prohibits financial
incentives . . . that may encourage mortgage originators . . . to
steer consumers to higher-cost and more abusive mortgages.''). See
also the legislative history discussed in the 2017 Final Rule, 82 FR
54472, 54521.
\294\ See, e.g., Letter from the FTC to Hon. Wendell Ford and
Hon. John Danforth, Comm. on Commerce, Science and Transportation,
U.S. Senate, Commission Statement of Policy on the Scope of Consumer
Unfairness Jurisdiction (Dec. 17, 1980), reprinted in In re Int'l
Harvester Co., 104 F.T.C. 949, 1070, 1073 (1984); Letter from the
FTC to Hon. John D. Dingell, Chairman, Comm. on Energy and Commerce,
U.S. House of Representatives (Oct. 14, 1983) (FTC policy statement
on deception), reprinted in In re Cliffdale Assocs., Inc., 103
F.T.C. 110, 174 (1984); Int'l Harvester Co., 104 F.T.C. at 949;
AFSA, supra; section 5(n) of the FTC Act, 15 U.S.C. 45(n), as
enacted by the Federal Trade Commission Act Amendments of 1994,
Public Law 103-312, sec. 9, 108 Stat. 1691, 1695.
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The Dodd-Frank Act authorizes the Bureau to engage in supervision,
enforcement, and rulemaking for the purpose of ensuring that
``consumers are protected from unfair, deceptive, or abusive acts and
practices.'' \295\ 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.\296\ As
relevant to this rulemaking, section 1031(d)(2) protects consumers that
have the particular vulnerabilities that Congress identified in the
statute from harms that unreasonably take advantage of those
vulnerabilities.
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\295\ 12 U.S.C. 5511(b)(2).
\296\ See 82 FR 54472, 54621.
---------------------------------------------------------------------------
B. Overview of the Factual Predicates and Legal Conclusions Underlying
the Identification of Abusive Practices in Section 1041.4
Section 1031(d)(2) of the Dodd-Frank Act states in pertinent part
that the Bureau shall have no authority to declare an act or practice
abusive unless the act or practice ``takes unreasonable advantage'' of
either (A) ``a lack of understanding on the part of the consumer of the
material risks, costs, or conditions of the product or service;'' or
(B) ``the inability of the consumer to protect the interests of the
consumer in selecting or using a consumer financial product or
service.'' \297\ The Bureau, in imposing the Mandatory Underwriting
Provisions, relied on both of these prongs of the abusiveness standard.
---------------------------------------------------------------------------
\297\ 12 U.S.C. 5531(d)(2)(A), (B). Section 1031(d)(1) and
(d)(2)(C) of the Dodd-Frank Act provide alternative grounds on which
a practice may be deemed to be abusive, but the Bureau did not rely
on either of those grounds for the Mandatory Underwriting
Provisions.
---------------------------------------------------------------------------
With respect to the ``lack of understanding'' prong set forth in
section 1031(d)(2)(A) of the Dodd-Frank Act, the Bureau acknowledged in
the 2017 Final Rule that consumers who take out covered short-term or
longer-term balloon-payment loans ``typically understand that they are
incurring a debt which must be repaid within a prescribed period of
time and that if they are unable to do so they will either have to make
other arrangements or suffer adverse consequences.'' \298\ However, in
the 2017 Final Rule the Bureau interpreted ``understanding'' to require
more than a general awareness of possible negative outcomes. Rather,
the Bureau stated that consumers lack the requisite level of
understanding if they do not understand both their own individual
``likelihood of being exposed to the risks'' of the product or service
in question and ``the severity of the kinds of costs and harms that may
occur.'' \299\ The Bureau in the 2017 Final Rule found that ``a
substantial portion of borrowers, and especially those who end up in
extended loan sequences, are not able to predict accurately how likely
they are to reborrow.'' \300\ This finding also was based primarily on
the Bureau's interpretation of limited data from the Mann study and is
discussed further below.\301\
---------------------------------------------------------------------------
\298\ 82 FR 54472, 54615 (summarizing the Bureau's rationale for
the 2016 NPRM).
\299\ Id. at 54617.
\300\ Id. at 54615.
\301\ See id.
---------------------------------------------------------------------------
With respect to the alternative ``inability to protect'' prong of
abusiveness set forth in section 1031(d)(2)(B) of the Dodd-Frank Act,
the Bureau began by finding in the 2017 Final Rule that consumers who
lack an understanding of the material costs and risks of a product
often will be unable to protect their interests.\302\ The Bureau's
analysis found that consumers who use short-term loans ``are
financially vulnerable and have very limited access to other sources of
credit'' and that they have an ``urgent need for funds, lack of
awareness or availability of better alternatives, and no
[[Page 44417]]
time to shop for such alternatives.'' \303\ The Bureau also found in
the 2017 Final Rule that consumers who take out an initial loan without
the lender's reasonably assessing the borrower's ability to repay were
generally unable to protect their interests in selecting or using
further loans.\304\ According to the 2017 Final Rule, consumers who
obtain loans without an ability-to-pay determination and who in fact
lack the ability to repay may have to choose between competing
injuries--default, delinquency, reborrowing, and default avoidance
costs, including forgoing essential living expenses.\305\ The Bureau
concluded that, ``though borrowers of covered loans are not irrational
and may generally understand their basic terms, these facts do[ ] not
put borrowers in a position to protect their interests.'' \306\
---------------------------------------------------------------------------
\302\ Id. at 54618.
\303\ Id. at 54618-20.
\304\ Id. at 54619.
\305\ Id.
\306\ Id. at 54620.
---------------------------------------------------------------------------
In support of the conclusion that consumers with payday loans could
not protect their own interests, in the 2017 Final Rule the Bureau
relied primarily on a survey of payday borrowers conducted by the Pew
Charitable Trusts (Pew study).\307\ In the Pew study, 37 percent of
borrowers reported that at some point in their lives they had been in
such financial distress that they would have taken a payday loan on
``any terms offered.'' \308\ The Bureau viewed this study as showing
that borrowers of short-term loans ``may determine that a covered loan
is the only option they have.'' \309\ The Pew study is discussed
further below in part VI.C.2.b(1).
---------------------------------------------------------------------------
\307\ Pew Charitable Trusts, How Borrowers Choose and Repay
Payday Loans (2013), https://www.pewtrusts.org/~/media/assets/2013/
02/20/pew_choosing_borrowing_payday_feb2013-(1).pdf.
\308\ See id. (citing the Pew study at 20); see also 82 FR
54472, 54618-19 (further discussing the Pew study).
\309\ 82 FR 54472, 54619.
---------------------------------------------------------------------------
After determining that consumers lack understanding of the material
risks, costs, or conditions of covered short-term and longer-term
balloon-payment loans and that consumers are unable to protect their
interests in selecting or using such products, the Bureau went on to
conclude in the 2017 Final Rule that by making such loans to consumers
without first assessing the consumers' ability to repay, lenders took
unreasonable advantage of these consumers' vulnerabilities. In reaching
this conclusion, the Bureau acknowledged that section 1031(d) of the
Dodd-Frank Act ``does not prohibit financial institutions from taking
advantage of their superior knowledge or bargaining power'' and that
``in a market economy, market participants with such advantages
generally pursue their self-interests.'' \310\ The Bureau stated,
however, that section 1031(d) 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 the Bureau understood the statute
to delegate to the Bureau ``the responsibility for determining when
that line has been crossed.'' \311\ The Bureau in the 2017 Final Rule
did not identify any specific threshold, but nonetheless found that
``many lenders who make such loans have crossed the threshold.'' \312\
---------------------------------------------------------------------------
\310\ Id. at 54621.
\311\ Id.
\312\ Id. at 54622.
---------------------------------------------------------------------------
In support of its conclusion that lenders take unreasonable
advantage of consumers of covered short-term and longer-term balloon-
payment loans, the Bureau in the 2017 Final Rule pointed to a range of
lender practices, including the design of the loan products, the way
they are marketed, the absence of meaningful underwriting, the limited
repayment options and the way those are presented to consumers, and the
collection tactics used when consumers fail to repay.\313\ The Bureau
stated that ``the ways lenders have structured their lending practices
here fall well within any reasonable definition'' of what it means to
take unreasonable advantage under section 1031(d) of the Dodd-Frank
Act.\314\ The Bureau then singled out specifically the failure to
underwrite and concluded that lenders take unreasonable advantage in
circumstances if they make covered short-term loans or covered longer-
term balloon-payment loans without reasonably assessing the consumer's
ability to repay the loan according to its terms.\315\
---------------------------------------------------------------------------
\313\ Id. at 54622-23.
\314\ Id. at 54623.
\315\ Id.
---------------------------------------------------------------------------
C. Abusiveness Theories
1. Takes Unreasonable Advantage of Consumers' Lack of Understanding of
Material Risks, Costs or Conditions
a. Takes Unreasonable Advantage
The Bureau's Proposal
In the 2019 NPRM, the Bureau reconsidered how the 2017 Final Rule
applied section 1031(d)(2) of the Dodd-Frank Act, which proscribes
abusive conduct that takes ``unreasonable advantage'' of certain
consumer vulnerabilities enumerated in the statute. As described above,
the Bureau in the 2017 Final Rule focused on two such vulnerabilities
in connection with evaluating lenders making covered loans without
making an ability-to-repay determination--both lack of consumer
understanding and inability to protect their own interests. The Bureau
in the 2017 Final Rule stated that there comes a point at which a
financial institution's conduct in leveraging its superior information
or bargaining power relative to consumers becomes unreasonable
advantage-taking, and that the Dodd-Frank Act delegates to the Bureau
the responsibility for determining when advantage-taking has become
unreasonable.\316\ The Bureau's unreasonable advantage analysis applied
a multi-factor analysis, concluding that:
---------------------------------------------------------------------------
\316\ Id. at 54621.
At a minimum lenders take unreasonable advantage of borrowers
when they [1] develop lending practices that are atypical in the
broader consumer financial marketplace, [2] take advantage of
particular consumer vulnerabilities, [3] rely on a business model
that is directly inconsistent with the manner in which the product
is marketed to consumers, and [4] eliminate or sharply limit
feasible conditions on the offering of the product (such as
underwriting and amortization, for example) that would reduce or
mitigate harm for a substantial population of consumers.\317\
---------------------------------------------------------------------------
\317\ Id. at 54623 (bracketed numbers added).
The Bureau in the 2019 NPRM decided to reassess this application of
section 1031(d)(2) of the Dodd-Frank Act in light of the four factual
considerations identified in the 2017 Final Rule. According to the 2019
NPRM, this inquiry is inherently a question of judgment in light of the
factual, legal, and policy considerations that can inform what is
taking reasonable or unreasonable advantage in particular
circumstances. Upon further consideration of the approach in the 2017
Final Rule, the Bureau preliminarily determined in the 2019 NPRM that
the application of the factual circumstances cited in the 2017 Final
Rule do not support the conclusion that payday lenders took
unreasonable advantage of consumers through making payday loans to them
without determining they had the ability to repay those loans.
First, insofar as the Bureau in the 2017 Final Rule focused on the
atypicality of granting credit without assessing ability to repay, the
Bureau in the 2019 NPRM questioned whether this practice was an
appropriate indicator that lenders took unreasonable advantage of
consumers. Although the
[[Page 44418]]
Bureau pointed to the fact that the practice of extending credit
without assessing ability to repay is an unusual one, the 2019 NPRM
stated that it is common with regard to credit products for consumers
who lack traditional indicia of creditworthiness--for example, credit
products for consumers with little or no credit history, loans for
students, or reverse mortgages for the elderly. Further, the Bureau
preliminarily determined that innovators and new entrants into product
markets often engage in practices that deviate from established
industry norms and conventions. Many such practices are by definition
atypical. Thus, according to the 2019 NPRM, to presume that atypicality
is inherently suggestive that a lender has taken unreasonable advantage
of consumers would risk stifling innovation. The 2019 NPRM stated that
this reasoning suggests that even if payday lenders not making ability-
to-repay determinations about consumers before extending them loans was
atypical, it still should not be viewed as inherently suggestive that
lenders took unreasonable advantage of consumers in these
circumstances, given differences between particular consumer financial
markets and the needs of consumers in such varying markets.
Second, with regard to whether lenders making payday loans to
consumers without determining that they have the ability to repay them
takes unreasonable advantage of the particular consumer
vulnerabilities, as discussed in greater detail in parts VI.C.1 and
VI.C.2 below, the Bureau in the 2019 NPRM stated its preliminary
conclusion that limitations in the record of the 2017 Final Rule,
including issues related to the Bureau's interpretation of limited data
from the Mann study and its interpretation of the Pew study, call into
question the support for the Bureau's findings in the 2017 Final Rule
regarding the degree of vulnerabilities of covered short-term and
longer-term balloon-payment loan users. Even if the Bureau's findings
in the 2017 Final Rule regarding user vulnerabilities were valid, the
Bureau stated in the 2019 NPRM that it did not believe that they would
independently support an unreasonable advantage-taking determination.
The ``takes unreasonable advantage'' element in section 1031(d)(2) of
the Dodd-Frank Act requires that an act or practice take advantage of a
vulnerability specified by, as relevant here, section 1031(d)(2)(A)
(lack of understanding) or section 1031(d)(2)(B) (inability to
protect). The Bureau preliminarily determined in the 2019 NPRM that the
2017 Final Rule did not adequately explain how the practice of not
reasonably assessing a consumer's ability to repay a loan according to
its terms leveraged particular consumer vulnerabilities. On the
contrary, the 2019 NPRM noted that covered short-term and longer-term
balloon-payment loans are made available to the general public on
standard terms, and the 2017 Final Rule did not conclude, for example,
that lenders had the ability to identify consumers with particular
vulnerabilities prior to lending and use that information to treat some
consumers differently than others, for example, by charging them
different prices or including different terms in contracts for
them.\318\
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\318\ As previously noted, due to similarities between the
unfairness provisions in the Dodd-Frank Act and the FTC Act, FTC Act
precedent helps to inform the Bureau's understanding of unfairness
under the Dodd-Frank Act. Although Dodd-Frank Act abusiveness
authority is distinct, FTC Act precedent provides some factual
examples that may help illustrate leveraging particular
vulnerabilities of consumers. See, e.g., FTC Unfairness Policy
Statement, Int'l Harvester, 104 F.T.C. at 1074 (unfair practices may
include exercising ``undue influence over highly susceptible classes
of purchasers, as by promoting fraudulent `cures' to seriously ill
cancer patients''); In re Ideal Toy Corp., 64 F.T.C. 297, 310 (1964)
(``False, misleading and deceptive advertising claims beamed at
children tend to exploit unfairly a consumer group unqualified by
age or experience to anticipate or appreciate the possibility that
representations may be exaggerated or untrue.'').
---------------------------------------------------------------------------
Third, the 2019 NPRM asserted that the 2017 Final Rule conflated
the significance of a consumer's understanding of a company's business
model with the consumer's understanding of that company's products or
services. The 2017 Final Rule stated that lenders' ``business model--
unbeknownst to borrowers--depends on repeated re-borrowing.'' \319\ The
2017 Final Rule concluded that lenders take unreasonable advantage of
consumers when they, in addition to other factors, ``rely on a business
model that is directly inconsistent with the manner in which the
product is marketed to consumers.'' \320\
---------------------------------------------------------------------------
\319\ 82 FR 54472, 54621.
\320\ Id. at 54623.
---------------------------------------------------------------------------
According to the 2019 NPRM, whether or not consumers understand the
lender's revenue structure does not in itself determine whether they
lack understanding about the features of the loan that they choose to
take out. The 2019 NPRM stated that the Bureau in the 2017 Final Rule
did not offer evidence that consumers erroneously believe or are
misinformed by lenders that loans are offered only to those consumers
who have the ability to repay without reborrowing. In the 2019 NPRM the
Bureau expressed doubts that an inconsistency between a company's
business model and its marketing of a product or service is a pertinent
factor in assessing whether the method of deciding to extend credit
constitutes unreasonable advantage-taking. According to the 2019 NPRM,
the 2017 Final Rule noted that ``covered short-term loans are marketed
as being intended for short-term or emergency use,'' \321\ but that
appears to be a statement about how most consumers use these loans, not
a statement about the lenders' revenue structures.\322\
---------------------------------------------------------------------------
\321\ Id. at 54616.
\322\ Moreover, to the extent that certain lenders are using
particular language to mislead consumers regarding either the
features of loans or the lenders' own revenue structures, it is not
clear that this is related to a failure to make an ability-to-repay
determination. Rather, that would appear to be a fact-specific
problem that is already unlawful under the Dodd-Frank Act's
prohibition on deceptive acts or practices. See 12 U.S.C. 5531(a).
---------------------------------------------------------------------------
Fourth, in considering whether payday lenders take unreasonable
advantage of consumers through extending them loans without determining
that consumers could repay them, the Bureau in the 2017 Final Rule
considered lenders eliminating or sharply limiting feasible conditions
that would reduce harm for a substantial portion of consumers. In the
2019 NPRM, the Bureau questioned whether a lender's decision not to
offer such conditions constitutes unreasonable advantage-taking in this
context. According to the 2019 NPRM, a lender's decision not to offer a
short-term, non-amortizing product for which it does not determine
whether consumers have the ability to repay may be reasonable given
that some States constrain the offering of longer-term products. In
addition, even if State law were not a constraint, longer-term,
amortizing products would require lenders to assume credit risk over a
longer period of time. The Bureau therefore preliminarily determined in
the 2019 NPRM that this factor is not of significant probative value
concerning whether lenders take unreasonable advantage of consumers by
making payday loans to them without determining they have the ability
to repay those loans.
For these reasons, the Bureau preliminarily determined in the 2019
NPRM that it did not have a sufficient basis to find that lenders take
unreasonable advantage of consumers under section 1031(d)(2) of the
Dodd-Frank Act by making covered short-term loans or covered longer-
term balloon-payment loans without reasonably assessing the consumer's
ability to repay the loan according to its terms.
[[Page 44419]]
In the 2019 NPRM, the Bureau sought comment on this issue,
including how the Bureau should interpret ``taking unreasonable
advantage'' and the appropriate test for distinguishing between
reasonable and unreasonable conduct under section 1031(d)(2) of the
Dodd-Frank Act. The Bureau also sought comment about the extent to
which firms make loans for other consumer financial products without
engaging in traditional underwriting, such as what a bank would do
before making an automobile loan or a consumer finance lender would do
for a small business loan.
Comments Received
Industry-affiliated commenters generally agreed with the 2019
NPRM's preliminary determination. The majority of relevant industry
comments addressed abusiveness in general terms. Without citing
specific authority, a commenter stated that the revised interpretation
of unreasonable advantage-taking better aligned with FTC precedent.
Several commenters argued that under the common law and by common
definition, an advantage is only unreasonable if it is extreme or
excessive, outside the bounds of normal conduct, or there must be no
rational reason to support the unfavorable advantage. According to
commenters, the Bureau cannot find that covered loans, which are used
by millions of consumers and permitted by a majority of State
legislatures, are outside the bounds of normal conduct.
A number of commenters expressed general support for the
preliminary findings in the 2019 NPRM regarding the factors in the 2017
Final Rule's four-factor test for determining whether a lender or other
consumer financial services provider has taken unreasonable advantage
of consumers. The one element of the four-factor test that commenters
addressed in detail was whether atypicality is an appropriate indicator
of unreasonable advantage-taking. A payday lender argued that the 2017
Final Rule presented no evidence that lenders do not assess ability-to-
repay through manual underwriting at storefronts or centrally by use of
credit reporting data. Other commenters argued that lenders employ
various underwriting strategies and that foregoing burdensome
underwriting is what makes it feasible for lenders to offer small-
dollar loans.
In contrast, other commenters stated that the 2017 Final Rule
correctly determined that lenders making payday loans without
determining that consumers have the ability to repay takes unreasonable
advantage of consumers. Some commenters generally argued that
consciously lending to consumers with damaged credit who are unlikely
to repay means that lenders are taking unreasonable advantage of
consumers.
Commenters also specifically addressed the 2019 NPRM's analysis of
the 2017 Final Rule's four-factor test for lenders taking unreasonable
advantage of consumers. With respect to the first factor, some
commenters argued that atypicality is an appropriate indicator of
unreasonable advantage-taking. A commenter stated that mainstream
consumer lending is based on ability to repay and atypicality is
relevant because the unusual nature of a product speaks to whether
consumers understand the product and can protect their interests.
Further, commenters stated that the examples cited by the 2019 NPRM of
consumer financial products offered without underwriting are misleading
as many of those products do incorporate ability-to-repay assessments.
Commenters suggested that Federal student loans have a back-end
ability-torepay requirement in the form of income-driven repayment
options and private student lenders do underwrite. Another commenter
stated that reverse mortgage providers evaluate a borrower's ability to
repay in the sense they evaluate a borrower's home equity. A commenter
noted that FHA-insured reverse mortgages and secured credit cards have
formal ability-to-repay requirements pursuant to 24 CFR 206.205 and 15
U.S.C. 1665e, respectively. Further, a commenter argued that some of
the 2019 NPRM's examples of other credit offered without an ability-to-
repay assessment are provided to consumers with little or no credit
history: according to this commenter this is not analogous to covered
loan users who typically have bad credit histories and significant
indicia of an inability to pay.
With respect to the second factor, some commenters disagreed with
the 2019 NPRM's preliminary determination that lenders do not take
advantage of particular consumer vulnerabilities. Commenters stated
that payday lenders may offer products to the general public on uniform
terms, but consumers in financial distress frequent covered lenders,
not the general public. Commenters also noted that the 2017 Final Rule
specifically found that covered lenders target particular consumers
through advertising and marketing.\323\ Commenters also cited studies
that they stated show higher densities of covered loan providers in
rural communities and communities with high concentrations of low-
income, minority, and elderly consumers.\324\ Commenters suggested that
veterans are particularly vulnerable to covered loans.\325\
---------------------------------------------------------------------------
\323\ 82 FR 54472, 54562 n.506.
\324\ See section VI of the Bates White Report; CRL, Power
Steering: Payday Lending Targeting Vulnerable Michigan Communities
(Aug. 2018), https://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/crl-michigan-paydaylending-aug2018_0.pdf; CRL, Perfect Storm: Payday Lenders Harm Florida
Consumers Despite State Law (Mar. 2016), https://www.responsiblelending.org/sites/default/files/nodes/files/research-publication/crl_perfect_storm_florida_mar2016_0.pdf; Fannie Mae
Foundation, Analysis of Alternative Financial Service Providers
(Feb. 2004); California Dep't of Bus. Oversight, The Demographics of
California Payday Lending: A Zip Code Analysis of Storefront
Locations (Dec. 2016), https://dbo.ca.gov/wp-content/uploads/sites/296/2019/02/The-Demographics-of-CA-Payday-Lending-A-Zip-Code-Analysis-of-Storefront-Locations.pdf.
\325\ Ann Baddour et al., Thank You For Your Service: The
Effects of Payday and Vehicle Title Loans on Texas Veterans (Mar.
2019), https://www.texasappleseed.org/sites/default/files/ThankYouForYourService_March%202019_0.pdf (noting that Texas
veterans are six times as likely as the general population to get
caught in a payday or vehicle title loan.).
---------------------------------------------------------------------------
With respect to the third factor, some commenters offered few
comments on whether inconsistencies between a company's business model
and its marketing of a product or service are pertinent. An academic
commenter stated that consumers expect a lender to conduct underwriting
and a lender's failure to do so can lull a consumer into thinking that
they can repay the loan according to its original terms. Another
commenter stated that the finding that lenders take unreasonable
advantage of consumers does not depend on their understanding this
disconnect--it only requires that the mismatch exist and that lenders
take advantage of consumer's lack of understanding that many consumers
are unable to repay their loan.
With respect to the fourth factor and whether a lender's decision
not to offer feasible conditions to reduce harm has significant
probative value toward finding unreasonable advantage-taking, one
commenter stated that the 2019 NPRM did not cite examples of State laws
that would constrain lenders from amortizing loans or offering longer
terms. Another commenter also noted the 2019 NPRM's determination that
amortizing products would require lenders to assume more credit risk is
merely another way of pointing out that covered lenders shift a
disproportionate share of credit risk onto borrowers.
Final Rule
After reviewing the comments received, the Bureau concludes that
the practice of making covered short-term
[[Page 44420]]
loans without reasonably assessing the borrower's ability to repay the
loan according to its terms does not take unreasonable advantage of
consumers for purposes of section 1031(d)(2) of the Dodd-Frank Act.
As a preliminary matter, the Bureau declines to use this rulemaking
to articulate general standards addressing whether the conduct of
lenders or other financial services providers take unreasonable
advantage of consumers. Instead, the Bureau will articulate and apply
such standards, including the 2017 Final Rule's four-factor analysis,
to the extent necessary to decide the specific issue in this
rulemaking, namely, whether lenders take unreasonable advantage of
consumers if the lenders make covered loans without determining whether
borrowers have the ability to repay them. Further, some comments
suggested that lenders could never take unreasonable advantage of
consumers by providing covered loans because millions of consumers take
out such loans and a majority of State legislatures permit lenders to
make such loans to their citizens. However, the Bureau does not find
this general argument persuasive, because it addresses the product
rather than the practice and because FTC precedent suggests that an act
or practice can be an unfair, deceptive, or abusive even if it is
prevalent in the marketplace.\326\
---------------------------------------------------------------------------
\326\ See, e.g., AFSA, 767 F.2d at 976-77 (contract provisions
were found to be unfair even though they were industry-wide
boilerplate).
---------------------------------------------------------------------------
Turning to the four-factor analysis the 2017 Final Rule applied in
concluding that lenders take unreasonable advantage of consumers
through making loans without determining if they have the ability to
repay them, the Bureau focuses first on whether payday loan borrowers
were particularly vulnerable to being taken advantage of by payday
lenders. The Bureau concludes that record does not support the
conclusion that payday borrowers had any particular vulnerability or
that payday lenders took unreasonable advantage of that particular
vulnerability.
First, in the 2017 Final Rule, the Bureau noted that its ``primary
concern is for those longer-term borrowers who find themselves in
extended loan sequences.'' \327\ The Bureau, however, did not indicate
what characteristic of these borrowers made them more vulnerable to the
conduct of payday lenders than other payday loan borrowers. FTC
precedent has analyzed whether consumers are particularly vulnerable to
the acts and practices because the consumers are part of a group that
would respond differently to conduct than the general population, such
as cancer patients having a different take away than the general
population from cancer cure advertising claims for a product or
children having a different take away than adults from advertising
claims for products.\328\
---------------------------------------------------------------------------
\327\ Id.
\328\ See, e.g., FTC Unfairness Policy Statement, Int'l
Harvester, 104 F.T.C. at 1074 (unfair practices may include
exercising ``undue influence over highly susceptible classes of
purchasers, as by promoting fraudulent `cures' to seriously ill
cancer patients''); Ideal Toy, 64 F.T.C. at 310 (``False, misleading
and deceptive advertising claims beamed at children tend to exploit
unfairly a consumer group unqualified by age or experience to
anticipate or appreciate the possibility that representations may be
exaggerated or untrue.'').
---------------------------------------------------------------------------
Assuming for the sake of the argument that there are payday loan
borrowers who lenders can take unreasonable advantage of because of a
particular vulnerability, in practice the 2017 Final Rule applied to
all consumers (i.e., up to 12 million consumers annually) who take out
payday loans, not just borrowers who find themselves in extended loan
sequences. Indeed, the 2017 Final Rule's analysis and provisions apply
to all payday loan consumers, even consumers who successfully repaid
their loans without reborrowing--a group of consumers that the Bureau
itself in the 2017 Final Rule acknowledged benefitted from payday
loans.
In the 2017 Final Rule, the Bureau reasoned that lenders took
unreasonable advantage of payday loan borrowers by targeting
prospective borrowers through advertising, marketing, or store
placement. The Bureau emphasizes that businesses engaging in efforts to
identify and persuade prospective customers to purchase their products
is very common commercial conduct. Indeed, such efforts often are an
important form of competition among firms that results in lower prices
and innovation. The Bureau declines to conclude that the mere fact the
payday lenders advertised, marketed, selected store placement, or
otherwise generally promoted their loans to consumers who may be
interested in them indicates that the lenders were using such conduct
to take unreasonable advantage of consumers. Moreover, even if the
Bureau were to consider longer-term borrowers with extended sequences
to be particularly vulnerable to being taken advantage of, in the 2017
Final Rule the Bureau did not find that payday lenders targeted their
loans to these borrowers. In fact, payday lenders do not know which
prospective borrowers will become longer-term borrowers with extended
sequences at the time that lenders are advertising, marketing, placing,
or otherwise promoting initial payday loans to prospective customers.
Finally, even assuming payday loan borrowers who are longer-term
borrowers with extended sequences are particularly vulnerable and that
payday lenders had a vehicle through which they could take unreasonable
advantage of those vulnerabilities, there is no evidence in the 2017
Final Rule that supports the conclusion that lenders do so. Even
commenters who did not support the 2019 NPRM acknowledged that covered
lenders offer loans on uniform terms to the general public and treat
consumers substantially the same. Lenders do not increase prices or
offer unfavorable changes to contract terms to those consumers who
reborrow extensively. Thus, the Bureau concludes that the information
in the record does not support the conclusion that payday lenders take
advantage of particular consumer vulnerabilities if they make loans to
consumers without determining if they have the ability to repay them.
The Bureau in the 2017 Final Rule also determined that lenders
making payday loans without determining if borrowers had the ability to
repay was an atypical lending practice in the broader marketplace, and
that this was a factor indicating that lenders were taking unreasonable
advantage of consumers through not making this determination. At the
outset, the Bureau notes that whatever analysis covered lenders conduct
as to their likely return before making payday loans, most covered
lenders do not assess ability to repay similar to what the 2017 Final
Rule would require.\329\ But the Bureau disputes the characterization
of this practice of not assessing ability to repay as atypical among
markets for consumer financial products and services. In light of some
comments, the Bureau believes that the 2019 NPRM may have overstated
the extent to which providers of particular consumer financial products
extend credit without assessing ability to repay. Some of the consumer
financial products that the 2019 NPRM cited for not assessing ability
to repay may incorporate ability-to-repay assessments, including
private
[[Page 44421]]
student loans, secured credit cards, and reverse mortgages. However,
the examples of particular consumer financial products set out in the
2019 NPRM were illustrative. There are other alternative products that
do not require an ability-to-repay assessment, such as long-term
installment loans, as set out in the 2016 NPRM.\330\
---------------------------------------------------------------------------
\329\ The Bureau acknowledges that the Community Financial
Services of America, a trade association representing payday and
small-dollar lenders, revised its best practices to add that its
members should, before extending credit, ``undertake a reasonable,
good-faith effort to determine a customer's creditworthiness and
ability to repay the loan.'' This practice applies to other small-
dollar loans the member makes. See Cmty. Fin. Servs. of Am., Best
Practices for the Small-Dollar Loan Industry, https://www.cfsaa.com/files/files/CFSA-BestPractices.pdf (last visited Apr. 28, 2020).
However, this best practice is not detailed or prescriptive and
``reasonable'' and ``good faith'' are not defined.
\330\ 81 FR 47863, 47886 (``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.'').
---------------------------------------------------------------------------
Assuming for the sake of the argument that lenders making payday
loans without determining that consumers have the ability to repay them
is an atypical lending practice, it does not follow that lenders are
taking unreasonable advantage of consumers through this different
lending practice. Neither the 2017 Final Rule nor commenters have
explained why the atypicality of this practice shows that lenders use
it to take unreasonable advantage of consumers. A commenter argued that
atypicality is relevant because if a lender's practice is unusual, then
consumers may not expect the lender to engage in it, which, in turn,
could permit the lender to take unreasonable advantage of them. But
even if it was atypical in the experience of consumers with other
financial products for lenders not to make an ability-to-repay
determination before extending credit, millions of consumers take out
payday loans without providing lenders with the information or the
access to information that lenders would need to make traditional
credit underwriting decisions. The 2017 Final Rule offered no evidence
that consumers erroneously thought that payday lenders were making such
an ability-to-repay determination when they in fact were not. So, even
if payday lenders not conducting an ability-to-repay analysis was
atypical (which the Bureau does not determine is the case), there is no
evidence to support the conclusion that lenders used that atypicality
to take unreasonable advantage of consumers.
The Bureau emphasizes that an especially careful and close analysis
is needed before concluding that the acts and practices of firms take
unreasonable advantage of and abuse consumers simply because those acts
and practices are atypical. As the 2019 NPRM explained, innovators and
new entrants into product markets (for instance, in this context,
providers of wage access and fintech products) often engage in acts and
practices that deviate from established industry norms and conventions.
Such atypical acts and practices can be beneficial to consumers and
they can be an important form of competition among firms, which, in
turn, may also benefit consumers.
The 2017 Final Rule further concluded that the differences between
how payday lenders marketed their loans and their business model shows
that payday lenders took unreasonable advantage of consumers. The
Bureau received few comments that addressed this factor, but those
which did primarily focused on the potential for consumer
misunderstanding, arising in large part from lender advertising and
marketing, that would allow payday lenders to take unreasonable
advantage of them. However, this is not a concern resulting from a
mismatch between payday lending marketing and the payday lending
business model. Because there does not seem to be a viable theory
linking this mismatch to payday lenders taking unreasonable advantage
of consumers, much less evidence that the lenders are actually doing
so, the Bureau concludes that the record does not support the 2017
Final Rule's conclusion that this factor indicates that payday lenders
took unreasonable advantage of consumers through making loans to
consumers without determining their ability to repay those loans.
Finally, the 2019 NPRM preliminarily determined that, in contrast
to the 2017 Final Rule, a payday lender's decision not to offer
conditions that would eliminate or sharply limit feasible conditions
that would reduce harm for a substantial portion of consumers is not of
significant probative value concerning whether the identified practice
constitutes unreasonable advantage-taking.\331\ Several commenters
noted that the 2019 NPRM did not cite examples of State laws that
prevent lenders from offering products with features, such as longer
loan terms or amortization options, that would reduce potential harm
related to reborrowing and default. The Bureau is persuaded by these
comments and the real-world examples of lenders shifting to alternative
loan products (discussed above in the reasonable avoidability section)
and concludes that the majority of State laws may not constrain covered
lenders from designing covered loan products that would incorporate
such features.
---------------------------------------------------------------------------
\331\ The 2019 NPRM offered a lender's decision to offer longer-
term, amortizing products as an example of a condition that would
eliminate or reduce harm for a substantial population of consumers.
See 84 FR 4252, 4276.
---------------------------------------------------------------------------
However, the Bureau determines that a decision not to offer
products with such features may be reasonable given business
considerations, including a lender's desire not to assume credit risk
over a longer period of time. The 2017 Final Rule did not suggest that
the identified practice interfered with consumers taking steps on their
own to reduce or mitigate harm. Virtually every credit product presents
some risks to consumers that could potentially be limited, although
doing so likely would come at the cost of the lender's profits and
potentially its viability as an ongoing concern. If it were the case
that lenders in a systematic fashion offered an inferior, ``risky''
product to one group of consumers and a superior, ``safe'' product to
another, this could indicate that lenders were taking advantage of some
consumers through the offering of that risky product. But there is no
evidence that payday lenders are engaged in such conduct.
Accordingly, the Bureau finalizes the 2019 NPRM and concludes based
on an application of the factual cirumstances cited in the 2017 Final
Rule that payday lenders do not take unreasonable advantage of
consumers through engaging in the identified practice.
b. Consumer Lack of Understanding of Material Risks, Costs and
Conditions
(1) Legal
The Bureau's Proposal
Under section 1031(d)(2)(A) of the Dodd-Frank Act it is an abusive
practice to take unreasonable advantage of a lack of understanding on
the part of the consumer of the material risks, costs, or conditions of
a consumer financial product or service. In the Mandatory Underwriting
Provisions of the 2017 Final Rule, the Bureau took a similar approach
to interpreting this provision as it took with respect to the
reasonable avoidability element of unfairness. The Bureau in the 2017
Final Rule interpreted this statutory language to mean that consumers
lack understanding if they fail to understand either their personal
``likelihood of being exposed to the risks'' of the product or service
in question or ``the severity of the kinds of costs and harms that may
occur.'' \332\
---------------------------------------------------------------------------
\332\ 82 FR 54472, 54617.
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The 2019 NPRM stated that, unlike the elements of unfairness
specified in section 1031(c) of the Dodd-Frank Act, the elements of
abusiveness do not have a long history or governing precedents. Rather,
the Dodd-Frank Act marked the first time that Congress defined
``abusive acts or practices'' as generally
[[Page 44422]]
unlawful in the consumer financial services sphere. The Bureau
preliminarily determined in the 2019 NPRM that this element of the
abusiveness test should be treated as similar to reasonable
avoidability. That is, the Bureau preliminarily determined that the
approach taken in the 2017 Final Rule was problematic. As discussed
below, in the 2019 NPRM the Bureau applied an approach under which
``lack of understanding'' would not require payday borrowers to have a
specific understanding of their personal risks such that they can
accurately predict how long they will be in debt after taking out a
covered short-term or longer-term balloon-payment loan. Rather, the
Bureau preliminarily believed that consumers have a sufficient
understanding under section 1031(d)(2)(A) of the Dodd-Frank Act if they
understand the magnitude and likelihood of risk of harm associated with
covered loans sufficient for them to anticipate that harm and
understand the necessity of taking reasonable steps to prevent
resulting injury. The Bureau in the 2017 Final Rule did not offer
evidence that consumers lack such an understanding with respect to the
material risks, costs or conditions on covered short-term and longer-
term balloon-payment loans. In the absence of such evidence, the Bureau
preliminarily determined it should not have concluded in the 2017 Final
Rule that the identified practice was an abusive act or practice
pursuant to section 1031(d)(2)(A) of the Dodd-Frank Act.
For these reasons, which are set forth in more detail in part V.B.1
above regarding reasonable avoidability, the Bureau preliminarily
determined in the 2019 NPRM that its interpretation of ``lack of
understanding on the part of the consumer of the material risks, costs,
or conditions of the product or service'' in the 2017 Final Rule was
too broad. The Bureau sought comment on how the Bureau should interpret
section 1031(d)(2)(A) of the Dodd-Frank Act.
Comments Received
Some commenters stated that the 2019 NPRM properly links the ``lack
of understanding'' analysis pursuant to section 1031(d)(2)(A) of the
Dodd-Frank Act with whether a consumer's injury is reasonably
avoidable. At least one commenter stated that consumer
``understanding'' in this context has long been understood to mean a
general awareness of possible outcomes and that the 2019 NPRM correctly
determined that section 1031(d)(2)(A) does not require payday borrowers
to accurately predict how long they individually will be in debt after
taking out a loan. Commenters also stated that the 2017 Final Rule's
interpretation of this element was inconsistent with the statutory
language, which focuses on ``understanding'' the risks and costs of
``the product,'' not on predictions about the consequences of an
individual consumer's use of it.
Trade association commenters stated that the plain text of the
Dodd-Frank Act and its supplemental history, including legislative
history, indicate that the abusiveness standard as set forth in section
1031 is intended to be viewed on an individual, case-by-case basis.
In contrast, other commenters, including consumer groups, disagreed
with the proposal, stating that the 2017 Final Rule applied an
appropriate standard for section 1031(d)(2)(A) of the Dodd-Frank Act
and correctly determined that a significant population of consumers do
not understand the material risks and costs of unaffordable loans that
are made without reasonably assessing the borrower's ability to repay
the loan according to its terms. Commenters also cited behavioral
economics factors and other research to suggest that consumers do not
understand covered loan costs and terms.\333\
---------------------------------------------------------------------------
\333\ See section VI of Bates White Economic Consulting, Report
Reviewing Research on Payday, Vehicle Title, and High-Cost
Installment Loans (May 2019), https://lawyerscommittee.org/wp-content/uploads/2019/05/Report-reviewing-research-on-payday-vehicle-title-and-high-cost-installment-loans.pdf (providing an overview of
studies addressing consumer understanding); see also Martin study.
---------------------------------------------------------------------------
Some consumer groups and a group of 25 State attorneys general
argued that the 2019 NPRM erroneously conflated the unfairness and
abusiveness standards by treating the lack of understanding analysis as
similar to reasonable avoidability. Some commenters asserted that the
statutory standard requires understanding of ``material risks, costs,
or condition'' of a product--not the knowledge of lending generally.
Final Rule
After reviewing the comments received, while the statutory language
for reasonable avoidability and lack of understanding is different, the
Bureau determines that the lack of understanding element of abusiveness
pursuant to section 1031(d)(2)(A) of the Dodd-Frank Act should be
treated as similar to the requisite level of understanding for
reasonable avoidability. For the same reasons that the Bureau concluded
that there was an insufficient basis to support the 2017 Final Rule's
finding that substantial injury from the identified practice was not
reasonably avoidable, the Bureau now concludes that there is an
insufficient basis to conclude that consumers lack understanding of the
material risks, costs, or conditions of covered loans.
The Bureau declines to follow certain recommendations in comments
suggesting that the statutory language of Dodd-Frank Act section
1031(d)(2)(A) requires merely a general awareness of possible outcomes.
In finalizing the 2019 NPRM's preliminary determination, the Bureau
concludes that the 2017 Final Rule should have applied a different
interpretation and incorrectly determined that consumers lack requisite
understanding. As discussed in the reasonable avoidability section, the
2017 Final Rule did not offer specific evidence on what consumers
specifically understand with respect to material risks, costs, or
conditions of covered loans. Although the 2017 Final Rule concluded
that a significant population of consumers do not understand the
material risks and costs of covered loans, the 2017 Final Rule
extrapolated or inferred this conclusion from the Bureau's
interpretation of limited data from the Mann study, which examined the
different question of whether consumers are unable to predict how long
they would be in debt. The limited data from the Mann study does not
address whether consumers lack an understanding of the material risks,
costs, or conditions of covered loans. For instance, the 2017 Final
Rule did not consider evidence that directly addressed whether
consumers are aware of the particular risks flowing from extended loan
sequences or understand that a significant portion of consumers end up
in extended loan sequences. Commenters point to evidence that the
Bureau had considered in the 2016 NPRM preceding the 2017 Final Rule,
which suggests a lack of understanding about particular terms of
covered loans--principally, the Martin study \334\--but this evidence
has limitations as described below in part VI.C.2.b, and does not offer
support for the 2017 Final Rule's findings as to consumer understanding
of covered loan risks, costs, or conditions more broadly.
---------------------------------------------------------------------------
\334\ See Martin, 52 Ariz. L. Rev. at 563.
---------------------------------------------------------------------------
In addition, the Bureau disagrees with comments that the 2019 NPRM
erroneously conflates unfairness and abusiveness in analyzing the
``lack of understanding'' element. Although the
[[Page 44423]]
2019 NPRM proposed to evaluate understanding in the unfairness and
abusiveness analyses in a similar manner, reasonable avoidability has a
``means to avoid'' requirement that is absent from the abusiveness
standard. Thus, in certain circumstances, abusiveness could prohibit
some conduct that unfairness would permit. But in light of the Bureau's
proposal, and an analysis of the comments received, the Bureau
determines that it is appropriate to treat reasonable avoidability and
``lack of understanding'' as similar but distinct.
Accordingly, the Bureau concludes that the 2017 Final Rule failed
to show that consumers lack understanding of the material risks, costs,
or conditions of the practice of making covered short-term loans
without reasonably assessing the borrower's ability to repay the loan
according to its terms.
(2) Reconsidering the Evidence for the Factual Analysis of Consumer
Lack of Understanding in Light of the Impacts of the Mandatory
Underwriting Provisions
In the 2019 NPRM, the Bureau preliminarily believed that the Mann
study was not sufficiently robust and reliable, in light of the Rule's
dramatic impacts in restricting consumer access to payday loans, to be
the linchpin for a finding that consumers lack understanding of the
material risks, costs, or conditions of such loans. The 2019 NPRM also
proposed that other findings and evidence were not sufficiently robust
and reliable to support the Bureau's finding in the 2017 Final Rule
that consumers lacked an understanding of the possible risks and
consequences associated with taking out payday loans.
The Bureau finds that the analysis of the factual underpinnings of
consumer lack of understanding is the same as it is for the reasonable
avoidability analysis. The same factual underpinnings supported, in the
2017 Final Rule, the finding that consumers lacked understanding for
purposes of abusiveness and unfairness. Similarly, the 2019 NPRM
addressed the same set of shared facts in reconsidering the 2017 Final
Rule's analysis of lack of understanding and reasonable avoidability.
The consideration of comments and additional analysis, addressed above
in parts V.B.2.a through V.B.2.d, therefore apply equally here to the
factual underpinnings of consumer lack of understanding.
For the reasons set out above in parts V.B.2.a through V.B.2.d and
VI.C.1.b(1), the Bureau concludes that the available evidence does not
provide a sufficiently robust and reliable basis to conclude that
consumers who use covered short-term or longer-term balloon-payment
loans lack understanding of the material risks, costs and conditions of
payday loans.
2. Takes Unreasonable Advantage of Consumers' Inability To Protect
Themselves
a. Takes Unreasonable Advantage
For the reasons set out above in part VI.C.1.a, the Bureau
finalizes the 2019 NPRM and concludes that the factors cited in the
2017 Final Rule do not constitute unreasonable advantage-taking of
consumers' inability to protect themselves. The Bureau withdraws its
determination in the 2017 Final Rule that the four factors it
identified--atypicality, taking advantage of particular
vulnerabilities, reliance on a business model inconsistent with the
manner in which the product is marketed to consumers, and limitations
on means of reducing or mitigating harm for many consumers--constituted
unreasonable advantage taking of consumers' inability to protect
themselves, assumed for purposes of this analysis.
b. Consumers' Inability To Protect Themselves--Factual Reconsideration
(1) The Pew Study and the Finding Based On It
The Bureau's Proposal
In part V.B.3 of the 2019 NPRM, the Bureau preliminarily found that
a survey of payday borrowers conducted by the Pew Charitable Trusts
(Pew study) \335\ does not provide a sufficiently robust and reliable
basis for the Bureau's finding in the 2017 Final Rule that consumers
who use covered short-term or longer-term balloon-payment loans lack
the ability to protect themselves in selecting or using these products.
In the study, 37 percent of borrowers answered in the affirmative to
the question ``Have you ever felt you were in such a difficult
situation that you would take [a payday loan] on pretty much any terms
offered?''
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\335\ Pew Charitable Trusts, How Borrowers Choose and Repay
Payday Loans (2013), https://www.pewtrusts.org/~/media/assets/2013/
02/20/pew_choosing_borrowing_payday_feb2013-(1).pdf.
---------------------------------------------------------------------------
The 2019 NPRM stated that the Pew study asked respondents about
their feelings, not about their actions; and, that respondents were not
asked whether they had in fact taken out a payday loan at a time when
they would have done so on any terms. The 2019 NPRM also stated that
the Pew study contains a number of other findings that cast doubt on
whether payday borrowers cannot explore available alternatives that
would protect their interests. For example, the Pew study found that 58
percent of respondents had trouble meeting their regular monthly bills
half the time or more, suggesting that these borrowers are, in fact,
accustomed to exploring alternatives to payday loans to deal with cash
shortfalls.
The 2019 NPRM also cited to other evidence that it preliminarily
determined casts doubt on the robustness and reliability of the Pew
study.\336\
---------------------------------------------------------------------------
\336\ 84 FR 4252, 4267-68.
---------------------------------------------------------------------------
Comments Received
Industry commenters and others stated that the Pew study provided
an inadequate basis for the 2017 Final Rule to have drawn broad
conclusions about consumers' ability to protect their own interests.
Industry commenters stated that the inverse of the Pew study's 37
percent is that 63 percent of consumers would seek alternatives if they
perceived the payday loans as harmful. Industry commenters further
stated that consumers generally act in a utility-enhancing way when
opting for and using a payday loan. They also stated that payday loan
consumers have numerous alternatives to obtain short-term financial
assistance, including through check cashing and pawn broking as well as
through loans from personal finance companies and financial
institutions.
Consumer group commenters and others noted that the Pew study was
limited to payday loans borrowers. That sample set, they stated,
indicates that respondents were speaking about actual payday loan
experience. Moreover, in their view a reasonable reading of the study's
survey question is that it asks for respondents to recall a situation
in the past when they took out a payday loan. They stated that the 2019
NPRM provides no basis for assuming that respondents were not answering
in the affirmative based on an actual experience with payday loans.
Further, they stated, the survey responses about regular difficulty
paying bills does not indicate that borrowers are accustomed to
exploring alternatives. The more straightforward interpretation, they
said, is that many payday borrowers often find themselves in situations
where payday loans appear to be the only alternative.
Consumer group commenters stated that the other evidence cited by
the 2019 NPRM as casting doubt on the Pew study was itself dubious or
not applicable to payday borrowers. These
[[Page 44424]]
commenters also sought to rebut the other evidence the 2019 NPRM cited.
They argued that, even if its validity were accepted, in the view of
these commenters this other evidence does not undermine the 2017 Final
Rule's finding of consumer inability to protect interests.
Final Rule
For the reasons set out in the 2019 NPRM and reiterated here, the
Bureau determines that the Pew study does not provide a sufficiently
robust and reliable basis for the Bureau's finding in the 2017 Final
Rule that consumers who use covered short-term or longer-term balloon-
payment loans lack the ability to protect themselves in selecting or
using these products. Consumer group commenters' observations--that the
Pew study surveyed actual payday loan borrowers and that those surveyed
could have understood the question to be asking about their actual
payday loan experience--do not change the fact, as preliminarily set
forth in the 2019 NPRM, that the question posed was not the question
directly relevant to the issue at hand (whether consumers take out
payday loans because they have no alternative). The question asked was
hypothetical (``would you have'' taken out a loan on any terms offered)
and did not ask directly about the actual experience of those surveyed.
Further, the Bureau concludes, as was stated in the 2019 NPRM, that the
Pew study does not establish--whether robustly or otherwise--that
consumers lack access to alternative sources of credit before consumers
take out the first loan in a sequence of payday loans. Indeed, the
Bureau concludes that payday loan consumers do have access to
alternative sources of credit. As noted above, consumers who live in
States where covered loans are restricted are able to find credit
alternatives without turning to illegal loans or harmful alternatives.
Newly available alternatives include credit offered by fintechs, credit
unions, and other mainstream financial institutions. Further, as was
stated in the 2019 NPRM,\337\ in a report issued by the Federal Reserve
Board regarding the economic well-being of U.S. households, consumers
who reported that they would have difficulty covering a $400 emergency
expense were asked how they would cope were such an emergency to arise.
These consumers pointed to a variety of potential mechanisms including
borrowing from a friend or family member (26 percent) or selling
something (19 percent). Only 5 percent reported that they would use a
payday loan or similar product.\338\
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\337\ 84 FR 4252, 4267.
\338\ Bd. of Governors of the Fed. Reserve Sys., Report on the
Economic Well-Being of U.S. Households in 2017, at 21 (2018),
https://www.federalreserve.gov/publications/files/2017-report-economic-well-being-us-households-201805.pdf.
---------------------------------------------------------------------------
Finally, regarding consumer group commenters' criticisms of the
other evidence cited by the 2019 NPRM as casting doubt on the Pew
study, the 2019 NPRM cited this evidence merely to corroborate the
Bureau's concerns about the Pew study. The Bureau's determination that
the Pew study does not provide a sufficiently robust and reliable basis
for the 2017 Final Rule's finding that payday loan consumers lack the
ability to protect themselves is not dependent upon the other evidence
cited by the 2019 NPRM.
(2) Other Evidence Pertaining to Inability To Protect
The Bureau's Proposal
In part V.B.4 of the 2019 NPRM, the Bureau preliminarily found that
the evidence other than the Pew study cited by the 2017 Final Rule for
consumer inability to protect interests was insufficient to sustain a
determination that consumers are not able to protect their own
interests. That is, the Bureau preliminarily found that the evidence
other than the Pew study cited by the 2017 Final Rule for consumer
inability to protect interests did not suffice to compensate for the
insufficient robustness and reliability of the Pew study.
Comments Received
Industry commenters and others stated that many of the studies,
other than the Pew study, cited by the 2017 Final Rule did not support
the Rule or, even if in part supportive of aspects of the Rule (e.g.,
substantial injury), the studies also contained other relevant findings
that suggest that payday loan consumers are able to protect their
interests. They also stated that payday loan consumers have
alternatives to payday loans, with which payday loans compete, and that
the availability of these alternatives suggests that consumers are able
to protect themselves in selecting and using payday loans. They also
stated that there is no evidence of market failure in the competition
among these various alternative forms of credit, including payday
loans, for the business of consumers.
In addition, these commenters noted, the rate of consumer
complaints about payday loans is low relative to other consumer
financial products, which indicates that consumers do not see
themselves as being harmed by the products. Further, of the payday loan
complaints that are submitted, according to commenters, many are about
unregulated offshore lenders and illegal operators, and others do not
actually relate to payday lenders but are in fact about debt collection
or other issues. Finally, these commenters noted, the Bureau has
acknowledged that consumer complaints related to payday loans have been
declining for the past several years.
Consumer group commenters and others stated that there was a
substantial amount of robust and reliable evidence, other than the Pew
study, that the 2017 Final Rule pointed to as showing consumer
inability to protect interests. And, they said, the 2019 NPRM did not
address or consider this evidence. Specifically, the evidence in the
2017 Final Rule record that consumer group commenters asserted that the
2019 NPRM did not address, and which they said robustly shows consumer
inability to protect interests, is the same evidence listed above in
part V.C.4 of the 2019 NPRM (and numbered (1) to (5)) regarding whether
consumer injury is not reasonably avoidable due to consumers' lack of
specific understanding of their personal risks.
Since publication of the NPRM in February 2019, two relevant
studies have become available: The Carvalho study and the Allcott
study, which are described in part V.B.2 above.
Final Rule
The Bureau has considered all of the applicable evidence, including
all of the evidence raised by commenters. For the following reasons,
the Bureau determines that the evidence does not provide a sufficiently
robust and reliable basis to conclude that consumers who use covered
short-term or longer-term balloon-payment loans are unable to protect
their interests in selecting or using the loans.
Evidence of Repeated Reborrowing Prior to Default
With respect to the evidence showing that substantial numbers of
payday loan consumers reborrow repeatedly prior to defaulting on their
loans, the Bureau determines that that evidence does not suggest--
whether robustly and reliably or otherwise--that consumers are unable
to protect themselves before they take out the first loan in a
sequence. The evidence of reborrowing prior to default does not, for
example, suggest that consumers have inadequate information about or do
not have alternatives to payday loans. Further, as noted above,
[[Page 44425]]
the Bureau does not believe that whenever a consumer makes a choice
that turns out to have been suboptimal it follows that the consumer
lacked understanding, or was unable to protect his or her interests, at
the time the choice was made. Consumers often make decisions in
conditions of uncertainty--uncertainty of which the consumers are
aware--and those decisions sometimes turn out to be suboptimal, but it
does not follow that the consumers at the time of their decisions were
unable to protect their own interests.
Analyzing that same evidence of repeated reborrowing prior to
default, consumer group commenters argued, as noted above, that the
2019 NPRM ignored the 2017 Final Rule's point that the evidence shows
that consumers cannot protect themselves after they have taken out the
first loan in a sequence. However, the requirement in the 2017 Final
Rule that lenders assess consumers' ability to repay applies to all
consumers of payday loans, not just those consumers who are already
engaged in a sequence of short-term payday loans. That is, the 2017
Final Rule's requirement to assess consumers' ability to repay applies
to all consumers who take out a payday loan and it applies before a
consumer takes out the first loan in a sequence. The Bureau further
responds that the focus of Dodd-Frank Act section 1031(d)(2)(B) is on
whether consumers are unable to protect their own interests. In the
context of the 2017 Final Rule's finding that the practice of failing
to assess ability to repay takes unreasonable advantage of consumers
who take out covered loans, if the consumers can protect their
interests before they take out the first loan in a sequence of covered
loans, they do not lack the ability to protect their own interests. In
other words, because the 2017 Final Rule's requirement to assess
consumers' ability to repay applies before a consumer takes out the
first loan in a sequence, the Bureau determines that the Bureau must
find that consumers are unable to protect themselves both (i) before
they take out the first loan in a sequence and (ii) after they take out
the first loan, in order for the Bureau to find that the practice of
making a payday loan without assessing ability to repay takes
unreasonable advantage of consumers' inability to protect themselves
(pursuant to Dodd-Frank Act section 1031(d)(2)(B)).\339\ And, as stated
above, the Bureau has determined that the evidence indicating that
consumers reborrow repeatedly prior to defaulting does not suggest,
whether robustly and reliably or otherwise, that consumers are unable
to protect themselves before they take out the first loan. The Bureau
therefore determines that that evidence does not suggest that consumers
are unable to protect themselves in selecting or using payday loans.
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\339\ The 2017 Final Rule, 82 FR 54472, 54619-21, explained its
view that consumers can protect their interests neither before they
take out the initial payday loan nor after. This is because it was
necessary for the 2017 Final Rule to show that there was no time
when consumers could protect their interests. That is, because the
2017 Final Rule's ability-to-repay requirement applies before a
consumer takes out the first loan in a sequence, if the consumer
were able to protect his or her interests before she takes out the
initial payday loan, there would be no ``inability to protect,''
even if the consumer has less ability or even no ability to protect
their interests afterward.
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Evidence of Harmed Consumers Initiating Payday-Loan Sequences
Recurringly
Regarding the evidence that consumer group commenters asserted
shows that some consumers harmed by payday loans enter into loan
sequences recurringly, the Bureau determines that that evidence does
not indicate that consumers do not have alternatives to payday loans,
nor that consumers are unable to protect themselves before they take
out the first loan in a sequence. The evidence does not suggest that
consumers have inadequate information about or do not have alternatives
to payday loans. Indeed, the Bureau determines that the evidence is
reasonably viewed as indicating that the consumers, making their own
choices, have decided that payday loans are the best option among the
alternatives available to them. That is, this evidence does not suggest
that consumers are unable to decide for themselves among the options
available to them. The evidence therefore does not suggest that
consumers are unable to protect their own interests.
Other Studies Mentioned by the 2017 Final Rule
In addition, the Bureau has determined that the other studies--
e.g., the ``150 studies'' pointed to by consumer group commenters--
mentioned by the 2017 Final Rule are not relevant to the specific issue
at hand here. Instead of considering the number of studies that may be
relevant to an issue, the Bureau considers the relevance, rigor, and
consistency of findings across studies in determining the probative
value of research on that issue. The large set of studies discussed in
the 2017 Final Rule concerned the experiences of low-income consumers,
State reports on payday and vehicle-title lending, and responses to
changes in State regulations for small-dollar lending, all of which
provide useful context and evidence on how the market functions and how
consumers engage with these products. But these studies do not
constitute robust and reliable evidence regarding the specific factual
finding the Bureau would have to make to conclude that the identified
practice was abusive, namely, that consumers are unable to protect
their interests before they take out a payday loan.
Other Miscellaneous Sources of Evidence Cited by Commenters
The other miscellaneous evidence pointed to by consumer group
commenters (see part VI.C.2.b(2) above) does not robustly and reliably
indicate that consumers are unable to protect their own interests in
selecting or using payday loans. Some of these sources of information
were cited by the 2017 Final Rule for various purposes, but they were
not the basis for the 2017 Final Rule's determination that consumers
are unable to protect their own interests. This is because these
sources are even less probative of this issue than the Pew study that
the Bureau focused on in the 2017 Final Rule.
The Martin Study
The Bureau did not rely on the Martin study in the 2017 Final Rule
and does not rely upon it in this rulemaking. The Bureau does not
believe that commenters' arguments regarding the Martin study suggest
that consumers are unable to protect their own interests in selecting
or using payday loans.
The Martin study reported that 60 percent of payday loan borrowers
did not know the APR of their loans. Even were the Bureau to grant that
this study suggests that some consumers might not know the exact price
of their payday loans (i.e., in APR terms), the Bureau believes that
such lack of knowledge does not indicate that consumers are unable to
protect their interests before they take out a payday loan. A consumer
can have access to other alternative sources of credit, and be familiar
with payday loans and understand that they are a relatively expensive
source of credit,\340\ even if the
[[Page 44426]]
consumer does not know the APR of a payday loan. For example, the
consumer might have prior experience using payday loans or might have
family, friends, or neighbors who have used payday loans and other
forms of credit and from whom the consumer might have developed a
reasonable sense of how payday loans compare to other forms of credit,
even if the consumer does not know the specific APR of the payday loan
the consumer received. The Bureau therefore determines that the Martin
study does not show that consumers are unable to protect their
interests in selecting or using payday loans.
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\340\ As noted above, evidence is mixed as to whether consumers
understand the price of their loans in dollar-cost terms (e.g., $15
for $100 for 2 weeks), even if they might not remember or understand
the loans' APR. For example, the Elliehausen study, at 36-37, found
that most payday loan consumers said they were aware of the finance
charge of their payday loans and noted most borrowers reported what
the study considered plausible finance charges for their loans.
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Evidence Available Subsequent to Publication of the 2019 NPRM
Finally, the Bureau turns to the two studies--the Carvalho study
and the Allcott study--that became available since publication of the
2019 NPRM. The Bureau is not relying upon these studies in this
rulemaking because they do not show that consumers are unable to
protect their own interests in selecting or using payday loans.
The Carvalho study, as noted above, pertained to Icelandic
consumers and found that about half of payday loan dollars go to
consumers in the bottom 20 percent of decision-making ability. The data
from the study primarily concerns Icelandic consumers, which makes its
usefulness unclear when considering a regulatory intervention for
payday loan borrowers in the United States. In any event, the Bureau
concludes that this study does not demonstrate, let alone robustly and
reliably demonstrate, that payday loan consumers are unable to protect
their own interests in selecting or using payday loans. While consumers
with low decision-making ability may have more difficulty than other
consumers in selecting or using any credit, financial, or other
product, these consumers (like all other consumers) choose among
available credit and financial products as well as a myriad of other
products. In other words, consumers being in the bottom 20 percent of
the population in terms of decision-making ability does not necessarily
mean they are incapable of protecting their own interests in financial
transactions. Moreover, the 2017 Final Rule's identified practice and
corresponding Rule provisions apply to all payday loan borrowers, not
just those who are in the bottom 20 percent of the population in terms
of decision-making ability. The Carvalho study does not suggest that
the consumers in question do not have access to the same credit product
alternatives to payday loans that are available to the general public.
For all of the reasons discussed above, the Bureau is not relying on
the Carvalho study to support conclusions in this rulemaking about
inability to protect interests.
The Allcott study, as described above, finds that many payday loan
borrowers have a desire to be incentivized not to take out the loans in
the future. Most surveyed borrowers said they would ``very much'' like
to give themselves extra motivation to avoid payday loan debt and a
supermajority (about 90 percent) would at least somewhat like to give
themselves extra motivation. The study finds that borrowers in their
sample do put more weight on near-term payoffs, but that they are also
aware of this. Moreover, the borrowers' self-control issues, if
present, would likely be present irrespective of which credit or
financial products they chose to use. That is, the study does not
suggest that consumers have inadequate information about, or do not
have alternatives to, payday loans. Indeed, the study would be entirely
consistent with consumers making their own choices and deciding that
payday loans are the best option among the alternatives available to
them. The Bureau believes that this study does not indicate that
consumers are unable to protect their own interests in selecting or
using payday loans. As an additional reason, the study involves a
single lender in a single State (Indiana). The Bureau therefore
believes that the study is not sufficiently representative to serve as
the basis for making findings applicable nationwide about all lenders
making payday loans to borrowers in all States. For these reasons, the
Bureau is not relying on the Allcott study to support any conclusions
in this rulemaking about inability to protect interests.
For the reasons described above, the Bureau determines that the
available evidence does not provide a sufficiently robust and reliable
basis to conclude that consumers who use covered short-term or longer-
term balloon-payment loans are unable to protect their interests in
selecting or using the loans. Accordingly, the Bureau determines to
revoke the 2017 Final Rule's finding that consumers are unable to
protect themselves in selecting or using payday loans.
D. Conclusion on Abusiveness Theories
As set out in part VI.C above, the Bureau determines that there are
insufficient factual and legal bases for the 2017 Final Rule to
identify the practice as abusive. As to the lack of understanding
theory of abusiveness, there are three discrete and independent grounds
that justify revoking the identification of an abusive practice: (1)
That there is no taking unreasonable advantage of consumers in that
context; (2) that the 2017 Final Rule should have applied a different
interpretation of the lack of understanding element of abusiveness
under section 1031(d)(2)(A) of the Dodd-Frank Act; and (3) that the
evidence was insufficiently robust and reliable in support of a factual
determination that consumers lack understanding.
As to the inability to protect theory of abusiveness, there are two
independent grounds that justify revoking the identification of an
abusive practice: (1) That there is no unreasonable advantage-taking of
consumers; and (2) there are insufficient legal or factual grounds to
support the identification of consumer vulnerabilities, specifically a
lack of understanding and an inability to protect consumer interests.
In the aggregate, the Bureau concludes that there are independent
legal and factual conclusions sufficient to finalize revocation of the
Bureau's identification of abusive practices under both the consumer
lack of understanding and the consumer inability to protect theories.
VII. Consideration of Alternatives and Conclusion
A. Consideration of Alternatives
The Bureau generally considers alternatives in its rulemakings.
Here, the context for the consideration of alternatives is that the
Bureau, for the reasons set forth above, is revoking the Mandatory
Underwriting Provisions of the 2017 Final Rule, which were based on the
Bureau's discretionary authority, not a specific statutory
directive.\341\ The 2017 Final Rule would eliminate most covered short-
term and longer-term balloon-payment loans.
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\341\ 12 U.S.C. 5531(b) (``The Bureau may prescribe rules
applicable to a covered person or service provider identifying as
unlawful unfair, deceptive, or abusive acts or practices.'')
(emphasis added).
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The Bureau's Proposal
In part V.D of the 2019 NPRM, the Bureau set forth its preliminary
consideration of alternatives. The Bureau stated that, in light of the
fact that the Bureau is revoking the Mandatory Underwriting Provisions
of the 2017 Final Rule, the Bureau does not believe that the
alternative interventions to the Mandatory Underwriting Provisions
considered in the 2017 Final Rule are viable alternatives to the
Bureau's proposed revocation of the Mandatory Underwriting Provisions,
because the
[[Page 44427]]
Bureau is proposing to revoke the underlying findings concerning the
existence of an unfair and abusive practice.\342\ The Bureau stated
that it also does not believe that the expenditure of substantial
Bureau resources on the development of possible alternative theories of
unfair or abusive practices and corollary preventative remedies is
warranted given the likely complexity of such an endeavor.
Additionally, the Bureau stated that it is not choosing to exercise its
rulemaking discretion in order to pursue new mandated disclosure
requirements pursuant to section 1032 of the Dodd-Frank Act.
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\342\ This includes, for instance, the payment-to-income
alternative, limits on the number of loans in a sequence, the
various State law regulatory approaches such as loan caps, and other
interventions. See 82 FR 54472, 54636-40.
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In parts V.B.1 and V.B.3 of the 2019 NPRM, the Bureau stated its
preliminary view that it cannot in a timely and cost-effective manner
develop evidence that might corroborate the 2017 Final Rule's
interpretation of the limited data from a portion of the Mann study and
the results of the Pew study that the 2017 Final Rule relied on to
support its key findings.
Comments Received
Consumer groups and others stated that one viable alternative would
be for the Bureau to withdraw the 2019 NPRM, allow implementation of
the 2017 Final Rule to proceed, and analyze the effects of the
Mandatory Underwriting Provisions after implementation. Another
alternative, they said, would be additional research, which would not
be too complex or costly, because the Bureau has a Congressionally
mandated Office of Research with extensive research capabilities, as
well as a new office focused on cost-benefit analysis, and available
budget authority that it is not using. Further, they said, timeliness
is not a concern here, because there is no deadline or requirement for
the Bureau to reconsider its own rule. Thus, they stated, the Bureau
declining to conduct new research would appear to be nothing more than
a pretext to justify its chosen result. Finally, consumer groups
stated, a Bureau declination of conducting additional research in this
area would conflict with the Bureau's stated commitment to encourage
consumer savings and to ensure that the market for liquidity-bridge
loan products is fair, because if such loan products are expensive,
misleadingly offered, or difficult to use safely, it can be harder for
consumers to build savings.
Industry commenters and others stated that the 2019 NPRM properly
did not adopt any of the alternative approaches that it considered.
These commenters stated that mandating new disclosures would change
little. They also stated that the alternatives considered in the 2017
Final Rule rest on the same insufficient findings as the Mandatory
Underwriting Provisions and it would not be a good use of the Bureau's
limited resources to develop new evidence to support such alternatives;
instead, those resources would be better spent on Office of Innovation
initiatives. Some industry commenters noted that the 2017 Final Rule
acknowledged that short-duration sequences of short-term payday loans
can be welfare enhancing for consumers. And, they stated, to the extent
any problem was identified by the 2017 Final Rule, it was short-term
loan sequences of long duration. At least one industry commenter stated
that the appropriate remedy for such harm if it exists would be to
address loan sequence duration directly rather than apply Mandatory
Underwriting Provisions to all covered loans at the time a consumer
initially takes out a loan. This commenter stated that the mismatch
between the injurious practice asserted by the Bureau and the Bureau's
chosen remedy of the Mandatory Underwriting Provisions means that the
2017 Final Rule's Mandatory Underwriting Provisions are arbitrary and
capricious.
One commenter that is one of the three nationwide credit bureaus
stated that it sees its short-term lender customers using a combination
of traditional and alternative credit data, and that traditional
lenders also use traditional and alternative credit data. As a result,
it said, the previously different underwriting policies and credit data
requirements of short-term and traditional lenders are becoming quite
similar. The commenter further stated that short-term lending appears
to be undergoing a shift in the type of loans being requested by
consumers and therefore provided by lenders. Specifically, the credit
bureau stated, its data shows that the number of single-payment loans
reported to it in 2018 grew 17 percent, while the number of short-term
installment loans grew 82 percent. The commenter also cited to industry
data showing that single-payment loans declined 4 percent in 2018 while
installment loans grew by 18 percent. This commenter concluded that
these market changes offer benefits to consumers and obviate the need
for the specific underwriting requirements in the 2017 Final Rule.
Final Rule
For the reasons set forth above, the Bureau has determined that it
should not have identified an unfair and abusive practice as set out in
Sec. 1041.4 of the 2017 Final Rule and the Bureau has therefore
determined to revoke Sec. 1041.4 and its related provisions. Because
the Bureau has determined that it should not have identified an unfair
and abusive practice in Sec. 1041.4, the Bureau determines that it
would not be proper to allow implementation of the Mandatory
Underwriting Provisions of the 2017 Final Rule to proceed.
Absent an identified unfair or abusive practice, the Bureau does
not have the authority to implement alternatives to the 2017 Final
Rule's Mandatory Underwriting Provisions that are based in the Bureau's
UDAAP authority in section 1031 of the Dodd-Frank Act. Moreover, the
Bureau is not exercising its discretion to undertake additional
research in an attempt to support the unfairness and abusiveness
identifications of the 2017 Final Rule, or to do so with respect to any
of the alternatives based in the Bureau's UDAAP authority that the
Bureau considered and dismissed in the course of issuing the 2017 Final
Rule. The Bureau believes that innovation is occurring rapidly in the
small-dollar lending market and that some lenders are underwriting
small-dollar loans in new ways that better meet both lenders' and
consumers' needs. These new methods do not appear to meet or be likely
to meet the specific ability-to-repay requirements that were set forth
in the Mandatory Underwriting Provisions of the 2017 Final Rule, and,
therefore, consumers might not be able to choose these products if such
requirements were applicable. But even independent of that
consideration, the Bureau does not view as promising the prospect that
additional Bureau research would seek to develop the necessary support
for UDAAP findings such as that consumers lack the requisite
understanding of the risk of substantial injury where they take out
payday loans where lenders have not determined that they have the
ability to repay them, that consumers are unable to protect their own
interests before they take out payday loans, or that lenders' common
business practices take unreasonable advantage of consumers.\343\
Moreover,
[[Page 44428]]
any Bureau research effort in this area pursuant to a possible UDAAP
rulemaking would require significant resources and a substantial but
uncertain amount of time. The Bureau has a busy rulemaking agenda with
many other rulemakings that the Bureau views as more promising to
prioritize in order to achieve the Bureau's mission of preventing
consumer harm.\344\ Finally, the Bureau does not believe it would be
sensible to further delay the compliance date of the Mandatory
Underwriting Provisions based solely on the uncertain prospect that
additional Bureau research might develop further support for the
unfairness and abusiveness identifications in the 2017 Final Rule.
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\343\ Consumer protection issues have arisen and will continue
to arise in the payday market, as in other markets, as a result of a
given lender's specific practices, and the Bureau is prepared to
address those issues (for example, through supervision and
enforcement against deceptive claims in advertising or marketing for
payday loans).
\344\ E.g., Semiannual Regulatory Agenda, 84 FR 71231 (Dec. 26,
2019). With respect to comments on the Bureau's general budget, the
Bureau notes that it exercises its discretion to make budgetary
decisions based on policy considerations that are well beyond the
scope of this rulemaking.
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On the other hand, the Bureau believes that disclosures constitute
a more promising avenue for research. This research would not be
focused on developing mandated disclosures under section 1031 of the
Dodd-Frank Act to prevent UDAAPs, but rather would be focused on
developing potential disclosures under section 1032 of the Dodd-Frank
Act to provide consumers with information to help them understand
better certain features of payday loans. The Bureau believes that
payday loans can provide benefits to certain consumers. At the same
time, the Bureau believes that improved disclosures could be helpful to
consumers and therefore expects to consider them further. The Bureau
views disclosures as a more promising investment of resources than the
other alternatives discussed above, for the following reasons.
There have been two disclosure interventions in the payday loan
market evaluated so far. The first was a randomized controlled trial
testing three different disclosures in a short-run experiment across 11
States.\345\ The three disclosures were presented on the envelope
containing the borrower's loan proceeds and included information on
either (a) the APR of payday loans and other products, (b) the dollar
cost of charges on a payday loan and credit card for different lengths
of time, or (c) the share of people who will borrow a payday loan for
different sequence lengths. The authors found that the dollar cost
disclosure reduced reborrowing by about 11 percent, while the APR
disclosure had a more modest effect. The disclosure highlighting
reborrowing length had an insignificant effect.
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\345\ Marianne Bertrand & Adair Morse, Information Disclosure,
Cognitive Biases and Payday Borrowing, 66 J. of Fin. 1865, 1865-93
(Dec. 2011) (Bertrand & Morse).
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Following this study, in 2012 Texas began requiring a disclosure
that incorporates elements of the study's dollar and APR disclosures in
addition to other information for all payday and vehicle title loans.
Bureau researchers examined the effects of this policy change and found
a reduction in payday loan volume of 13 percent, similar to what was
found in the aforementioned randomized controlled trial.\346\
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\346\ Bureau of Consumer Fin. Prot., Supplemental Findings on
Payday, Payday Installment, and Vehicle Title Loans, and Deposit
Advance Products (June 2016), https://files.consumerfinance.gov/f/documents/Supplemental_Report_060116.pdf.
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The 2019 NPRM noted that the Texas disclosures discussed above had
``limited'' effects and suggested this might be because payday loan
users were already aware that such loans can result in extended loan
sequences. However, as noted above, the reduction in payday loan
borrowing was 11 to 13 percent, which suggests that a non-trivial share
of consumers in the payday market may have responded to the additional
information and/or to changes in how the information is presented by
changing their borrowing behavior.\347\
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\347\ Bertrand & Morse also argue ``it is important to cast the
11% reduction in borrowing in light of the low cost and benign
nature of information disclosure, relative to other policy
alternatives'' and note that other interventions may have larger
effects but may also negatively affect consumers who are not the
intended target of those interventions. Bertrand & Morse at 1891.
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The Bureau believes that the existing research in this area is
promising but sparse. The Bureau will soon begin conducting research to
better understand what information about payday loans consumers want to
know as well as how consumers process, comprehend, and use that
information in their decisions about payday loan use. In designing and
testing disclosure forms, Bureau researchers plan to consider existing
but limited research on payday disclosures, States' experiences in this
market, Bureau researchers' subject-matter expertise, and the
information and views consumers, consumer advocates, industry
participants, and other stakeholders have shared with the Bureau.
Measurable data from Bureau disclosure research will enable the Bureau
to make stronger and more reliable inferences about the potential
impact of model disclosures on the payday loan market than is possible
with current data.
Conclusion
The Bureau believes that each of the concerns raised and finalized
above are sufficiently serious in their own right to merit
reconsideration of the 2017 Final Rule, and even more so when
considered in combination. The Bureau now concludes that the 2017 Final
Rule should have used an alternate approach in applying section 1031 of
the Dodd-Frank Act in determining what kind of consumer understanding
is necessary to make the findings on reasonable avoidability and lack
of understanding required to support a determination that the
identified practice was unfair or abusive; and in evaluating whether
the factors set forth in the 2017 Final Rule are the appropriate
standard for taking unreasonable advantage of consumers and, if so,
whether the Bureau properly applied that standard. The Bureau also
believes that the 2017 Final Rule provided an insufficient basis for
finding that consumers cannot protect their interests. The Bureau
concludes that it is appropriate to revoke Sec. 1041.4 and that it is
also appropriate to revoke the remainder of the Mandatory Underwriting
Provisions of the 2017 Final Rule.
The technical aspects of this revocation and additional, more
specific questions with regard to the specific amendments to the 2017
Final Rule are discussed in more detail in part VIII below.
VIII. Section-by-Section Analysis
As described in greater detail in parts V, VI and VII above, the
Bureau is revoking Sec. Sec. 1041.4 and 1041.5 and related provisions
of the 2017 Final Rule, which respectively identify the failure to
reasonably determine whether consumers have the ability to repay
certain covered loans as an unfair and abusive practice and establish
certain underwriting requirements to prevent that practice. The Bureau
is also revoking certain derivative provisions that are premised on
these two core sections, including a principal step-down exemption for
certain loans in Sec. 1041.6, two provisions (Sec. Sec. 1041.10 and
1041.11) that facilitate lenders' ability to obtain certain information
about consumers' past borrowing history from information systems that
have registered with the Bureau, and certain recordkeeping requirements
in Sec. 1041.12. The Bureau concludes that, because Sec. Sec. 1041.4
and 1041.5 are being revoked, these derivative provisions no longer
serve the purposes for which
[[Page 44429]]
they were included in the 2017 Final Rule and are now revoked as well.
This part VIII describes the particular modifications the Bureau is
making in order to implement the revocation of these various Mandatory
Underwriting Provisions. Specifically, as discussed in more detail
below, the Bureau is removing in their entirety the regulatory text and
associated commentary for subpart B of the Rule (Sec. Sec. 1041.4
through 1041.6) and certain provisions of subpart D (Sec. Sec. 1041.10
and 1041.11, and parts of Sec. 1041.12). The Bureau is also amending
other portions of regulatory text and commentary in the 2017 Final Rule
that refer to the Mandatory Underwriting Provisions or the requirements
therein.
As this part VIII is describing the specific modifications to
regulatory text and commentary that the Bureau is making, it refers to
``removing'' text rather than ``revoking'' it, consistent with the
language agencies use to instruct the Office of the Federal Register as
to changes to be made in the Code of Federal Regulations.\348\ In order
to avoid confusion, the Bureau is not renumbering the sections or
paragraphs that it is not removing; rather, the Bureau now marks the
removed section and paragraph numbers as ``[Reserved]'' so that the
remaining provisions will continue with the same numbering as they have
currently.
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\348\ As noted previously, while most of the 2017 Final Rule has
a compliance date of August 19, 2019, the Rule became effective on
January 16, 2018.
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Due to changes in requirements by the Office of the Federal
Register, when amending commentary the Bureau is now required to
reprint certain subsections being amended in their entirety rather than
providing more targeted amendatory instructions. The sections of
commentary included in this document show the language of those
sections now that the Bureau is adopting its changes as proposed. The
Bureau is releasing an unofficial, informal redline to assist industry
and other stakeholders in reviewing the changes that it is making to
the regulatory text and commentary of the 2017 Final Rule.\349\
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\349\ This redline can be found on the Bureau's regulatory
implementation page for the Rule at https://www.consumerfinance.gov/policy-compliance/guidance/payday-lending-rule/. If any conflicts
exist between the redline and the text of the 2017 Final Rule or
this final rule revoking the Mandatory Underwriting Provisions, the
documents published in the Federal Register are the controlling
documents.
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The Bureau did not receive comments on these proposed
modifications. The sections below describe the Bureau's final actions
regarding these provisions.
Subpart A--General
Section 1041.1 Authority and Purpose
1(b) Purpose
Section 1041.1 sets forth the Rule's authority and purpose. The
Bureau is removing the last sentence of Sec. 1041.1(b), which
currently provides that part 1041 also prescribes processes and
criteria for registration of information systems. The Bureau is making
this change for consistency with the removal of Sec. Sec. 1041.10 and
1041.11 discussed below.
Section 1041.2 Definitions
2(a) Definitions
2(a)(5) Consummation
Section 1041.2(a)(5) defines the term consummation. Comment (a)(5)-
2 describes what types of loan modifications trigger underwriting
requirements pursuant to Sec. 1041.5. The Bureau is removing comment
2(a)(5)-1 for consistency with the removal of Sec. 1041.5 discussed
below.
2(a)(14) Loan Sequence or Sequence
Section 1041.2(a)(14) defines the terms loan sequence and sequence
to mean a series of consecutive or concurrent covered short-term loans,
or covered longer-term balloon loans, or a combination thereof, in
which each of the loans (other than the first loan) is made during the
period in which the consumer has a covered short-term or longer-term
balloon-payment loan outstanding and for 30 days thereafter. These
terms are used in Sec. Sec. 1041.5, 1041.6, and 1041.12(b)(3), and
related commentary. The Bureau is removing and reserving Sec.
1041.2(a)(14) for consistency with the removal of the provisions in
which these terms appear, as discussed below.
2(a)(19) Vehicle Security
Section 1041.2(a)(19) defines the term vehicle security to
generally mean an interest in a consumer's motor vehicle obtained by
the lender or service provider as a condition of the credit. This term
is used in Sec. Sec. 1041.6 and 1041.12(b)(3) and in commentary
accompanying Sec. Sec. 1041.5(a)(8) and 1041.6. The Bureau is removing
and reserving Sec. 1041.2(a)(19) for consistency with the removal of
the provisions in which this term appears, as discussed below.
The Bureau requested comment on whether there are any other
definitional terms or portions thereof, in addition to the terms loan
sequence or sequence and vehicle security, that it should similarly
remove for consistency with the proposed revocation of the Mandatory
Underwriting Provisions. The Bureau received no such comments and
finalizes this provision as proposed.
Section 1041.3 Scope of Coverage; Exclusions; Exemptions
3(e) Alternative Loan
Section 1041.3(e) provides a conditional exemption for alternative
loans from the requirements of 12 CFR part 1041, which are covered
loans that satisfy the conditions and requirements set forth in Sec.
1041.3(e). The Bureau is revising two comments accompanying Sec.
1041.3(e) that reference the Mandatory Underwriting Provisions, as
described below.
3(e)(2) Borrowing History Condition
Section 1041.3(e)(2) addresses a consumer's borrowing history on
other alternative loans. Comment 3(e)(2)-1 describes the relevant
records a lender may use to determine that the consumer's borrowing
history on alternative covered loans meets the criteria set forth in
Sec. 1041.3(e)(2). The Bureau is revising the second sentence of this
comment to remove language that refers to consumer reports obtained
from information systems registered with the Bureau. The Bureau is
changing this for consistency with the removal of Sec. 1041.11
discussed below.
3(e)(3) Income Documentation Condition
Section 1041.3(e)(3) requires a lender to maintain and comply with
policies and procedures for documenting proof of recurring income.
Comment 3(e)(3)-1 generally describes the income documentation policies
and procedures that a lender must maintain to satisfy the income
documentation condition of the conditional exemption. The Bureau is
removing the second sentence of the comment, which distinguishes the
income document condition of Sec. 1041.3(e)(3) from the income
documentation procedures required by Sec. 1041.5(c)(2). The Bureau is
revising this comment for consistency with the removal of Sec. 1041.5
discussed below.
Subpart B--Underwriting
Subpart B sets forth the rule's underwriting requirements in
Sec. Sec. 1041.4 through 1041.6. The Bureau is removing and reserving
the heading for subpart B; the removal of its contents is discussed
below.
Section 1041.4 Identification of Unfair and Abusive Practice
Section 1041.4 provides that it is an unfair and abusive practice
for a lender to make covered short-term or longer-term balloon-payment
loans without
[[Page 44430]]
reasonably determining that the consumers will have the ability to
repay the loans according to their terms. For the reasons set forth
above, the Bureau is removing and reserving Sec. 1041.4 and removing
the commentary accompanying Sec. 1041.4.
Section 1041.5 Ability-to-Repay Determination Required
Section 1041.5 generally requires a lender to make a reasonable
determination that a consumer has the ability to repay a covered short-
term or a longer-term balloon-payment loan before making such a loan or
increasing the credit available under such a loan. It also sets forth
certain minimum requirements for how a lender may reasonably determine
that a consumer has the ability to repay such a loan. For the reasons
set forth above, the Bureau is removing and reserving Sec. 1041.5 and
removing the commentary accompanying Sec. 1041.5.
Section 1041.6 Principal Step-Down Exemption for Certain Covered Short-
Term Loans
Section 1041.6 provides a principal step-down exemption for covered
short-term loans that satisfy requirements set forth in Sec. 1041.6(b)
through (e); Sec. Sec. 1041.4 and 1041.5 do not apply to such
conditionally exempt loans. For the reasons set forth above and for
consistency with the removal of Sec. Sec. 1041.4 and 1041.5, the
Bureau is removing and reserving Sec. 1041.6 and removing the
commentary accompanying Sec. 1041.6.
Subpart D--Information Furnishing, Recordkeeping, Anti-Evasion,
Severability, and Dates
Subpart D contains the rule's requirements regarding information
furnishing (Sec. 1041.10), registered information systems (Sec.
1041.11), and compliance programs and record retention (Sec. 1041.12);
sets forth a prohibition against evasion (Sec. 1041.13); addresses
severability (Sec. 1041.14); and sets forth effective and compliance
dates (Sec. 1041.15). The Bureau is removing the portion of the
subpart's heading that refers to information furnishing for consistency
with the removal of Sec. Sec. 1041.10 and 1041.11. Specific amendments
to this subpart's contents are discussed below.
Section 1041.10 Information Furnishing Requirements
Among other things Sec. Sec. 1041.5 and 1041.6, discussed above,
require lenders when making covered short-term and longer-term balloon-
payment loans to obtain consumer reports from information systems
registered with the Bureau pursuant to Sec. 1041.11. Section 1041.10,
in turn, requires lenders to furnish certain information about each
covered short-term and longer-term balloon-payment loan to each
registered information system. For the reasons set forth above and for
consistency with the other changes announced herein, the Bureau is
removing and reserving Sec. 1041.10 and removing the commentary
accompanying Sec. 1041.10.
Section 1041.11 Registered Information Systems
Section 1041.11 sets forth processes for information systems to
register with the Bureau, describes the conditions that an entity must
satisfy in order to become a registered information system, addresses
notices of material change, suspension and revocation of a
registration, and administrative appeals. For the reasons set forth
above and for consistency with the other changes announced herein, the
Bureau is removing and reserving Sec. 1041.11 and removing the
commentary accompanying Sec. 1041.11.
Section 1041.12 Compliance Program and Record Retention
12(a) Compliance Program
Section 1041.12 provides that a lender making a covered loan must
develop and follow written policies and procedures that are reasonably
designed to ensure compliance with the requirements of part 1041.
Comment 12(a)-1, in part, lists the various sections of the rule that
must be addressed in the compliance program. The Bureau is removing
from that comment the references to the ability-to-repay requirements
in Sec. 1041.5, the alternative requirements in Sec. 1041.6, and the
requirements on furnishing loan information to registered and
preliminarily registered information systems in Sec. 1041.10.
Comment 12(a)-2 explains that the written policies and procedures a
lender must develop and follow under Sec. 1041.12(a) depend on the
types of covered loans that the lender makes, and provides certain
examples. The Bureau is removing this comment as its examples are
largely focused on compliance with Sec. Sec. 1041.5, 1041.6, and
1041.10. The Bureau does not believe that it is useful to retain the
remaining portion of this comment focusing solely on disclosures
related to Sec. 1041.9, although of course it remains true pursuant to
Sec. 1041.12(a) itself that a lender that makes a covered loan subject
to the requirements of Sec. 1041.9 must develop and follow written
policies and procedures to provide the required disclosures to
consumers.
The Bureau is making these changes for consistency with the removal
of Sec. Sec. 1041.5, 1041.6, and 1041.10 discussed above.
12(b) Record Retention
Section 1041.12(b) provides that a lender must retain evidence of
compliance with part 1041 for 36 months after the date on which a
covered loan ceases to be an outstanding loan. Section 1041.12(b)(1)
through (5) sets forth particular requirements for retaining specific
records, including: Retention of the loan agreement and documentation
obtained in connection with originating a covered short-term or longer-
term balloon-payment loan (Sec. 1041.12(b)(1)); retention of
electronic records in tabular format for covered short-term or longer-
term balloon-payment loans regarding origination calculations and
determinations under Sec. 1041.5 (Sec. 1041.12(b)(2)) as well as loan
type, terms, and performance (Sec. 1041.12(b)(3)); and retention of
records relating to payment practices for covered loans (Sec.
1041.12(b)(4) and (5)). Revisions to the regulatory text of Sec.
1041.12(b)(1) through (5), and related commentary, are discussed in
turn further below.
Comment 12(b)-1 addresses record retention requirements generally.
The Bureau is removing the portion of this comment explaining that a
lender is required to retain various categories of documentation and
information specifically in connection with the underwriting and
performance of covered short-term and longer-term balloon-payment
loans, while retaining (with minor revisions for clarity) the reference
to records concerning payment practices in connection with covered
loans. The comment also explains that the items listed in Sec.
1041.12(b) are non-exhaustive as to the records that may need to be
retained as evidence of compliance with part 1041. The Bureau is
removing the remainder of this sentence, which specifically refers to
loan origination and underwriting, terms and performance, and payment
practices (the specific mention of which is no longer necessary if the
other references are removed). The Bureau is making these changes for
consistency with the removal of Sec. Sec. 1041.4 through 1041.6
discussed above as well as the changes to Sec. 1041.12(b)(1) discussed
below.
[[Page 44431]]
12(b)(1) Retention of Loan Agreement and Documentation Obtained in
Connection With Originating a Covered Short-Term or Covered Longer-Term
Balloon-Payment Loan
Section 1041.12(b)(1) requires that, in order to comply with the
requirements in Sec. 1041.12(b), a lender must retain or be able to
reproduce an image of the loan agreement and certain documentation
obtained in connection with the origination of a covered short-term or
longer-term balloon-payment loan. The Bureau is removing the language
in the heading and in the introductory text for Sec. 1041.12(b)(1)
that refers to certain documentation obtained in connection with a
covered short-term or longer-term balloon-payment loan, as well as the
entirety of Sec. 1041.12(b)(1)(i) through (iii) that specifies
particular categories of such documentation. As proposed, the remainder
of this provision requires a lender to retain or be able to reproduce
an image of the loan agreement for each covered loan. Retaining a copy
of the loan agreement is necessary for all lenders, pursuant to the
requirement in Sec. 1041.12(b) that lenders retain evidence of
compliance for covered loans, in order to determine covered loan status
for purposes of determining compliance with the Payment Provisions; the
Bureau explicitly is retaining this requirement in Sec. 1041.12(b)(1),
for all covered loans, to avoid potential confusion. The Bureau is also
removing the commentary accompanying Sec. 1041.12(b)(1). The Bureau is
making these changes for consistency with the other changes announced
herein.
12(b)(2) Electronic Records in Tabular Format Regarding Origination
Calculations and Determinations for a Covered Short-Term or Covered
Longer-Term Balloon-Payment Loan Under Sec. 1041.5
Section 1041.12(b)(2) requires lenders to retain records regarding
origination calculations and determinations for a covered short-term or
longer-term balloon-payment loan, including specific required
information listed in Sec. 1041.12(b)(2)(i) through (v). It requires
lenders to retain these records in an electronic, tabular format. For
consistency with the removal of Sec. 1041.5, the Bureau is removing
and reserving Sec. 1041.12(b)(2) and removing the commentary
accompanying Sec. 1041.12(b)(2).
12(b)(3) Electronic Records in Tabular Format Regarding Type, Terms,
and Performance for Covered Short-Term or Covered Longer-Term Balloon-
Payment Loans
Section 1041.12(b)(3) requires lenders to retain records regarding
the type, terms, and performance of a covered short-term or longer-term
balloon-payment loan, including specific required information listed in
Sec. 1041.12(b)(3)(i) through (vii). It requires lenders to retain
these records in an electronic, tabular format. The Bureau is removing
and reserving Sec. 1041.12(b)(3) and removing the commentary
accompanying Sec. 1041.12(b)(3), for consistency with the removal of
Sec. Sec. 1041.5 and 1041.6 discussed above.
12(b)(5) Electronic Records in Tabular Format Regarding Payment
Practices for Covered Loans
Section 1041.12(b)(5) requires lenders to retain records regarding
the payment practices for covered loans, including specific required
information listed in Sec. 1041.12(b)(5)(i) and (ii). It requires
lenders to retain these records in an electronic, tabular format. For
consistency with the other changes announced herein, the Bureau is
revising comment 12(b)(5)-1 by removing most of its content, which
focuses on compliance with Sec. 1041.12(b)(2) and (3) in conjunction
with Sec. 1041.12(b)(5), and in its place the Bureau is incorporating
the description of how a lender complies with the requirement to retain
records in a tabular format, which is currently set forth in comment
12(b)(2)-1.
Section 1041.15 Effective and Compliance Dates
15(d) November 19, 2020 Compliance Date
Section 1041.15 states the effective and compliance dates for
various aspects of 12 CFR part 1041. In Sec. 1041.15, for the reasons
set forth above and for consistency with the other changes announced
herein, the Bureau is removing paragraph (d), which provides that the
compliance date for Sec. Sec. 1041.4 through 1041.6, 1041.10, and
1041.12(b)(1) through (3) is November 19, 2020.
Appendix A to Part 1041--Model Forms
A-1 Model Form for First Sec. 1041.6 Loan
Section 1041.6(e)(2)(i) requires a lender that makes a first loan
in sequence of loans under the principal step-down exemption in Sec.
1041.6 to provide a consumer with a notice that includes certain
information and statements, using language that is substantially
similar to the language set forth in Model Form A-1. For the reasons
sets forth above and for consistency with the removal of Sec. 1041.6,
the Bureau is removing and reserving Model Form A-1.
A-2 Model Form for Third Sec. 1041.6 Loan
Section 1041.6(e)(2)(ii) requires a lender that makes a third loan
in sequence of loans under the principal step-down exemption in Sec.
1041.6 to provide a consumer with a notice that includes certain
information and statements, using language that is substantially
similar to the language set forth in Model Form A-2. For the reasons
sets forth above and for consistency with the removal of Sec. 1041.6,
the Bureau is removing and reserving Model Form A-2.
IX. Compliance and Effective Dates
The Bureau proposed that this final rule take effect 60 days after
publication in the Federal Register.\350\ As discussed above, the
current compliance date for the Mandatory Underwriting Provisions of
the 2017 Final Rule was changed from August 19, 2019, as originally set
out in the 2017 Final Rule, to November 19, 2020, as set out in the
final rule delaying this compliance date.
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\350\ Section 553(d) of the APA generally requires that the
effective date of a final rule be at least 30 days after publication
of that final rule, except for (1) a substantive rule which grants
or recognizes an exemption or relieves a restriction; (2)
interpretive rules or statements of policy; or (3) as otherwise
provided by the agency for good cause found and published with the
rule. 5 U.S.C. 553(d). This final rule does not establish any
requirements; instead, it revokes the relevant provisions of the
2017 Final Rule. Accordingly, this final rule is a substantive rule
which relieves a restriction that is exempt from section 553(d) of
the APA.
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The Bureau sought comment on this aspect of the proposal. The
Bureau received none. However, in order to ensure sufficient time to
comply with procedures for submitting the rule to Congress under the
Congressional Review Act, the Bureau has determined that the effective
date for this revocation will be 90 days after publication in the
Federal Register.
X. Dodd-Frank Act Section 1022(b)(2) Analysis
A. Overview
In developing this rule, the Bureau considered the potential
benefits, costs, and impacts as required by section 1022(b)(2)(A) of
the Dodd-Frank Act.\351\ Specifically, section 1022(b)(2)(A) of the
Dodd-Frank Act calls for the Bureau to consider the potential benefits
and costs
[[Page 44432]]
of a regulation to consumers and covered persons, including the
potential reduction of access by consumers to consumer financial
products or services, the impact on depository institutions and credit
unions with $10 billion or less in total assets as described in section
1026 of the Dodd-Frank Act, and the impact on consumers in rural areas.
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\351\ 12 U.S.C. 5512(b)(2)(A).
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In advance of issuing this rule, the Bureau has consulted with the
prudential regulators and the FTC, including consultation regarding
consistency with any prudential, market, or systemic objectives
administered by such agencies.
1. The Need for Federal Regulatory Action
As explained above, the Bureau now believes that, in light of the
2017 Final Rule's dramatic market impacts as detailed in the section
1022(b)(2) analysis accompanying the 2017 Final Rule, its evidence is
insufficient to support the findings that are necessary to conclude
that the identified practices were unfair and abusive. The Bureau also
now believes that the finding of an unfair and abusive practice as
identified in Sec. 1041.4 of the 2017 Final Rule rested on
applications of section 1031(c) and (d) of the Dodd-Frank Act that the
Bureau should no longer use given the identification of better
interpretations of these statutory provisions. The Bureau therefore is
revoking the Mandatory Underwriting Provisions of the 2017 Final Rule
because it believes the facts and the law do not adequately support the
conclusion that the identified practice meets the standard for
unfairness or abusiveness under section 1031(c) and (d) of the Dodd-
Frank Act.\352\
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\352\ The 2017 Final Rule stated that the existence of a market
failure supported the need for Federal regulatory action. As the
Bureau now believes that there is not a need for the Federal
regulatory action described in the 2017 Final Rule, it is not
necessary for the Bureau here in the section 1022(b)(2) analysis to
identify or address a market failure.
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2. Data and Evidence
In this section 1022(b)(2) analysis, the Bureau endeavors to
consider comprehensively the economic benefits and costs that are
likely to result from revoking the Mandatory Underwriting Provisions of
the 2017 Final Rule, possibly including some indirect effects.
Since the issuance of the 2017 Final Rule, the body of evidence
bearing on benefits and costs has only slightly expanded. As such, with
the exception of the new studies discussed below and in the proposal
for this final rule,\353\ the Bureau has considered the same
information as it considered in the section 1022(b)(2) analysis of the
2017 Final Rule, although as discussed in parts V and VI of this final
rule, the Bureau has determined that the key evidence is insufficient
to support finding an unfair and abusive act or practice as well as
warranting regulatory intervention.\354\ The new research that has
become available after the drafting of the 2017 Final Rule has
relatively little impact on the Bureau's analysis compared to the
evidence cited in the 2017 Final Rule, as the implications of this new
evidence for total surplus and consumer welfare are less clear or
probative than previously considered evidence.
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\353\ 84 FR 4252, 4291-94.
\354\ The same evidence may be evaluated differently for
purposes of legal and economic analyses.
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The Bureau invited submission of additional data and studies that
could supplement those relied on in the 2017 Final Rule's analysis
which form the predicate for the estimates here as well as comments on
the analyses of benefits and costs contained in the 2017 Final Rule and
relied on here. While commenters did note some new studies that they
believe are relevant to this final rule, the Bureau still lacks
representative data that could be used to analyze all effects of this
final rule. Absent these data, portions of the analysis rely, at least
in part, on qualitative evidence provided to the Bureau in previous
comments, responses to RFIs, and academic papers; general economic
principles; and the Bureau's experience and expertise in consumer
financial markets. As such, many of the benefits, costs, and impacts of
this final rule are presented in general terms or ranges (as they were
in the section 1022(b)(2) analysis of the 2017 Final Rule), rather than
as point estimates. Additional details underlying this analysis can be
found in the 2017 Final Rule and the 2019 NPRM.
3. Major Provisions and Coverage of the Rule
In this analysis, the Bureau focuses on the benefits, costs, and
impacts of the three major elements of the final rule: (1) The
amendment of the 2017 Final Rule to eliminate the requirement that
lenders reasonably determine borrowers' ability to repay covered short-
term and longer-term balloon-payment loans according to their terms
(along with the principal step-down exemption allowing for a principal
step-down approach to issuing a limited number of short-term loans);
(2) the amendment of the 2017 Final Rule to eliminate the recordkeeping
requirements associated with (1); and (3) the amendment of the 2017
Final Rule to eliminate requirements concerning lenders furnishing
information to registered information systems as well as associated
requirements.
As discussed in the 2017 Final Rule, there are two major classes of
short-term lenders that would be affected by the Mandatory Underwriting
Provisions: Payday/unsecured short-term lenders, both storefront and
online, and short-term vehicle title lenders.\355\ Any depository
institution offering a deposit advance product would also be likely to
be affected by the 2017 Final Rule's provisions.\356\ Similarly, any
depository institution that might have considered offering a deposit
advance product would likely be affected by the 2017 Final Rule's
provisions.\357\
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\355\ 82 FR 54472, 54814.
\356\ See id.
\357\ Id. at 54815. Notably, a May 23, 2018 OCC bulletin
encourages banks to offer responsible short-term, small-dollar
installment loans, which would likely compete with the loans covered
by this final rule. Bulletin, Office of the Comptroller of the
Currency, Core Lending Principles for Short-Term, Small-Dollar
Installment Lending (OCC Bulletin 2018-14, May 23, 2018), https://www.occ.treas.gov/news-issuances/bulletins/2018/bulletin-2018-14.html. See also 83 FR 58566, 58567 (Nov. 20, 2018). Given these
changes, it is likely that these firms will more seriously consider
offering these products under this rule.
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In addition to short-term lenders, lenders making longer-term
balloon-payment loans (either vehicle title or unsecured) are also
covered by the 2017 Final Rule's requirements concerning underwriting
and RISes. It follows that the elimination of the mandatory
underwriting and RIS requirements for lenders of each of these types
have similar effects as to those for short-term lenders.
The amendment of the 2017 Final Rule to eliminate its mandatory
underwriting and RIS requirements carries implications relating to
recordkeeping requirements that apply to any lender making covered
short-term or longer-term balloon-payment loans. The elimination of the
RIS provisions relates to the application process and operational
requirements for entities who otherwise would have sought to become
RISes.\358\
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\358\ In this part, the Bureau's references to RISes generally
include firms in any stage of becoming an RIS, whether they would
have been preliminarily approved, provisionally registered, or would
have completed the process at the time this rule will go into
effect.
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4. Description of the Baseline
The major impact of this final rule would be to eliminate the
Federal regulations requiring underwriting of covered short-term and
longer-term
[[Page 44433]]
balloon-payment loans. No lenders are required to comply with the 2017
Final Rule until the compliance date (which currently is November 19,
2020) and until the court in litigation challenging the 2017 Final Rule
lifts its stay of the compliance date. Accordingly, since the Bureau is
finalizing this Rule before lenders have to comply with the Mandatory
Underwriting Provisions in the 2017 Final Rule, no lenders have had to
comply with them. As a practical matter, imposing regulatory
requirements and eliminating them before covered entities have had to
actually comply with them means there is little real-world effect on
stakeholders from the combined effect of the imposition and the
elimination of the requirements, that is, the combined effect is
returning to the status quo prior to the Bureau issuing the 2017 Final
Rule.\359\
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\359\ For this section 1022(b)(2) analysis, only the costs of
eliminating the requirements are relevant, but the Bureau notes that
lenders are under no obligation to reverse any changes made to their
processes and procedures to comply with the 2017 Final Rule, and so
any lender that would incur costs to do so could simply not reverse
the modifications to avoid incurring them. Additionally, the Bureau
does not have any evidence that any lenders making covered loans
made any such modifications to fully comply with the 2017 Final
Rule.
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Nevertheless, the Bureau is considering the Bureau's two regulatory
actions (i.e., issuing the 2017 Final Rule and eliminating the
Mandatory Underwriting Provisions of the 2017 Final Rule prior to its
compliance date) separately for section 1022(b)(2) analysis purposes.
The effects of these provisions were evaluated in a section 1022(b)(2)
analysis when the Bureau issued the 2017 Final Rule. The elimination of
these same provisions is evaluated in this section 1022(b)(2) analysis.
The Bureau takes the 2017 Final Rule as the baseline, and considers
economic attributes of the relevant markets as the Bureau projected
them to be under the 2017 Final Rule and the existing legal and
regulatory structures (i.e., those that have been adopted or enacted,
even if compliance is not yet required) applicable to providers.\360\
This approach assumes that any actions already undertaken and those
that will be necessary to take in anticipation of the compliance date
would also be reversed following elimination of the provisions.\361\
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\360\ The Bureau has discretion in each rulemaking to choose the
relevant provisions to discuss and to choose the most appropriate
baseline for that particular rulemaking in its analysis under
section 1022(b)(2)(A) of the Dodd-Frank Act.
\361\ The Bureau also notes that compliance readiness is
ongoing, and lenders may or may not continue to incur costs in
anticipation of needing to comply unless and until uncertainty
around the Mandatory Underwriting Provisions is resolved.
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The Bureau has considered the same information as it considered in
the section 1022(b)(2) analysis of the 2017 Final Rule and has chosen
not to revisit the specific methodologies in that analysis given the
lack of new evidence that would suggest a change to that analysis. As
such, the expected impacts articulated in those analyses are assumed to
be features of the baseline here.
The baseline specifically recognizes regulatory differences across
States and consumers in the data simulations discussed below as
detailed in the proposal.\362\ In general, the Bureau believes that the
State laws have become more restrictive over the past seven years, so
that in this respect the simulations here are more likely to overstate
than understate the effects of the final rule.\363\
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\362\ 84 FR 4252, 4823.
\363\ Another possible change that could affect the baseline is
the June 2018 Community Financial Services of America (a trade
association representing payday and small-dollar lenders) revision
of its best practices to add that its members should, before
extending credit, ``undertake a reasonable, good-faith effort to
determine a customer's creditworthiness and ability to repay the
loan.'' This practice applies to other small-dollar loans the member
makes. See Cmty. Fin. Servs. of Am., Best Practices for the Small-
Dollar Loan Industry, https://www.cfsaa.com/files/files/CFSA-BestPractices.pdf (last visited Apr. 28, 2020).
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5. Major Impacts of the Rule
The primary impact of this final rule relative to the baseline in
which compliance with the Mandatory Underwriting Provisions of the 2017
Final Rule becomes mandatory will be a substantial increase in the
volume of short-term payday and vehicle title loans (measured in both
number and total dollar value), and a corresponding increase in the
revenues lenders realize from these loans. The simulations set forth in
the section 1022(b)(2) analysis accompanying the 2017 Final Rule based
on the Bureau's data indicate that relative to the chosen baseline
payday loan volumes will increase by 104 percent to 108 percent, with
an increase in revenue for payday lenders between 204 percent and 213
percent.\364\ Simulations of the impact on short-term vehicle title
lending predict an increase in loan volumes of 809 percent to 1,329
percent relative to the chosen baseline, with an approximately
equivalent increase in revenues.
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\364\ These calculations are based on the same simulations the
Bureau described in the 2017 Final Rule. The Bureau ran a number of
simulations based on different market structures that may occur as a
result of the Rule. The estimates cited here come from the
specifications where lenders would make loans under both the
mandatory underwriting and principal step-down approaches. See the
2017 Final Rule for descriptions of all the simulations conducted by
the Bureau, and their results. 82 FR 54472, 54824.
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The Bureau expects, again relative to the chosen baseline, that
these increases will result in an increase in the number of storefronts
relative to the market projected to exist under the 2017 Final Rule
based on the changes in storefronts in States which adopted restrictive
regulations.\365\ This might in turn improve physical access to credit
for consumers, especially for consumers in rural areas. Additionally,
the increase in storefronts is likely to impact small lenders and
lenders in rural areas more than larger lenders and those in areas of
greater population density. However, the practical improvements in
consumer physical access to payday loans are not likely to be as
substantial as the increase in storefronts may imply, as explained in
the 2017 Final Rule.\366\ The Bureau also anticipates that online
options would be available to the vast majority of current payday
borrowers, including those in rural areas.\367\ Therefore, the improved
physical access to payday storefronts will likely have the largest
impact on a small set of rural consumers who would have needed to
travel substantially longer to reach a storefront, and who lack access
to online payday loans (or strongly prefer loans initiated at a
storefront to those initiated online).
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\365\ Supplemental Findings, chapter 3 part B.
\366\ In States with substantial regulatory changes that led to
substantial decreases in payday storefronts, over 90 percent of
borrowers had to travel an additional five miles or less. 82 FR
54472, 54842.
\367\ This geographic impact on borrowers was discussed
specifically in the 2017 Final Rule's section on Reduced Geographic
Availability of Covered Short-Term Loans in part VII.F.2.b.v which
relies heavily on chapter 3 of the Bureau's Supplemental Findings.
82 FR 54472, 54842.
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Increased revenues (more precisely, increased profits) relative to
the chosen baseline are expected to lead many current firms that would
have exited the market under the Rule to remain in the market.
Additionally, many of the restrictions imposed by the 2017 Final Rule
could have been voluntarily adopted by lenders absent the 2017 Final
Rule, but the Bureau has no evidence that they were. That lenders did
not voluntarily adopt these provisions implies the 2017 Final Rule's
impacts are welfare-decreasing for lenders. Reversing these
restrictions should therefore be welfare-enhancing for lenders.
As for the overall effects on consumers, as the Bureau noted in the
2017 Final Rule, the evidence on the impacts of the availability of
payday
[[Page 44434]]
loans on consumer welfare varies.\368\ The Bureau stated that ``access
to payday loans may well be beneficial for those borrowers with
discrete, short-term needs, but only if they are able to successfully
avoid long sequences of loans.'' \369\ Given the available evidence,
the Bureau concluded that the overall impacts of the decreased loan
volumes resulting from the 2017 Final Rule's Mandatory Underwriting
Provisions on consumers would be positive,\370\ and it follows that the
inverse effects would ensue, relative to the chosen baseline, from
eliminating the requirements in the 2017 Final Rule.
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\368\ See, e.g., id. at 54818, 54842-46.
\369\ Id. at 54846.
\370\ Id. at 54835, 54842.
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The Bureau has also considered new and additional evidence that was
not available at the time of the 2017 Final Rule. There are few such
studies that deal with the pecuniary effects of payday loans on
consumers, and none that specifically deal with the effects of the
loans that would be eliminated by the 2017 Final Rule (e.g., those
beyond the fourth loan in a sequence or the seventh non-underwritten
loan in a year). As a result, the new studies do not affect the
Bureau's analysis as set forth above.
Relative to the considerations above, the remaining benefits and
costs of this final rule--again relative to the baseline in which
compliance with the 2017 Final Rule will become mandatory--are much
smaller in their magnitudes and economic importance. Most of these
impacts manifest as reductions in administrative, compliance, or time
costs that compliance with the 2017 Final Rule would entail; or as
potential costs from revoking aspects of the 2017 Final Rule that could
have decreased fraud or increased transparency. The Bureau expects most
of these impacts to be fairly small on a per loan/consumer/lender
basis. These impacts include, among other things, those applicable to
the RISes under the 2017 Final Rule; those associated with reduced
furnishing requirements on lenders and consumers (e.g., avoiding the
costs to establish connection with RISes, forgone benefits from reduced
fraud); those associated with making an ability-to-repay determination
for loans that require one (e.g., avoiding the cost to obtain all
necessary consumer reports, forgoing the benefit of decreased
defaults); those associated with avoiding the 2017 Final Rule's record
retention obligations that are specific to the Mandatory Underwriting
Provisions; those associated with eliminating the need for disclosures
regarding principal step-down loans; and the additional impacts
associated with increased loan volumes (e.g., changes in defaults or
account closures, non-pecuniary changes to consumer welfare). Each of
these benefits and costs, broken down by type of market participant,
was discussed in detail in the proposal for this rule and the Bureau
received no new evidence to change that analysis.\371\
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\371\ 84 FR 4252, 4286-95.
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B. Potential Benefits and Costs of the Final Rule to Consumers and
Covered Persons--Provisions Relating Specifically to Ability-To-Repay
Determinations for Covered Short-Term and Longer-Term Balloon-Payment
Loans
Eliminating the Mandatory Underwriting Provisions, and the
associated restrictions on reborrowing, is likely to have a substantial
impact on the markets for these products relative to the markets that
would exist under the Mandatory Underwriting Provisions in the 2017
Final Rule. In order to present a clear analysis of the benefits and
costs of this final rule, this section first describes the benefits and
costs of this final rule to covered persons relative to the baseline if
compliance with the Mandatory Underwriting Provisions in the 2017 Final
Rule were required and then discusses the implications of this
compliance for the markets for these products.\372\ The benefits and
costs to consumers are then described.
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\372\ The range of credit options available to borrowers with
short-term credit needs is likely to continue to evolve, and if the
2017 Final Rule were to become effective it would affect that
evolution along with other factors, such as changes to State laws
and regulations, technological changes, and general economic trends.
The Bureau is not in a position to estimate the specific impact the
2017 Final Rule would have on the offering of substitute products.
Therefore the Bureau does not attempt to assess here any strategic
de-evolution of the market that will result if compliance with the
2017 Final Rule becomes mandatory. Likewise, the Bureau stated that
the potential evolution of lender offerings that may arise in
response to the 2017 Final Rule was beyond the scope of the section
1022(b)(2) analysis in the 2017 Final Rule. See 82 FR 54472, 54818,
54835.
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1. Benefits and Costs to Covered Persons
As this final rule removes restrictions on the operational
requirements for lenders, allowing them to not incur the costs
associated with complying with the Mandatory Underwriting Provisions in
the 2017 Final Rule, this section discusses the overall benefits and
costs to lenders associated with not having to comply with the
Mandatory Underwriting Provisions in the 2017 Final Rule rather than
having to do so.
a. Elimination of the Operational Requirements Associated With
Mandatory Underwriting and Principal Step-Down Approach
Under this amendment to the 2017 Final Rule, lenders will not need
to consult their own records and the records of their affiliates to
determine whether the borrower has taken out any prior covered short-
term or longer-term balloon-payment loans that were still outstanding
or were repaid within the prior 30 days. Lenders will not need to
maintain the ability-to-repay-related records required under the 2017
Final Rule's Mandatory Underwriting Provisions. Lenders will not need
to obtain a consumer report from an RIS (if available) in order to
obtain information about the consumer's borrowing history across
lenders. Lenders also will no longer be required to furnish information
regarding covered short-term and longer-term balloon-payment loans they
originate to all RISes. Lenders will also be freed from the obligation
imposed by the 2017 Final Rule to obtain and verify information about
the amount of an applicant's income (unless not reasonably available)
and major financial obligations.
The amendment to the 2017 Final Rule's elimination of each of these
operational requirements reduces costs that lenders would have incurred
under the 2017 Final Rule for loan applications (not just for loans
that are originated). Additionally, under the amendment, lenders will
not be required to develop or adhere to procedures to comply with each
of these operational requirements and train their staff in them. The
Bureau believes that many lenders use automated systems when
originating loans, and would modify those systems, or purchase upgrades
to those systems, to address many of the operational requirements
associated with the Mandatory Underwriting Provisions of the 2017 Final
Rule. As further discussed in the 2019 NPRM's proposal to amend the
Mandatory Underwriting Provisions in the 2017 Final Rule, reversing the
obligation to incur operational costs should be of relatively minimal
benefit to lenders. Reversing the obligation in fact could result in
small costs for any lenders who changed their processes and procedures
in anticipation of having to comply with the Rule; however, lenders are
under no obligation to reverse these modifications, and so any lender
that would incur costs to do so could simply not reverse the
modifications to avoid incurring them. Additionally, most lenders
making covered loans
[[Page 44435]]
apparently have not changed their processes and procedures to fully
comply with the Mandatory Underwriting Provisions in the 2017 Final
Rule.
Each of the costs lenders would not incur as a result of amending
the 2017 Final Rule to eliminate its Mandatory Underwriting Provisions
is discussed in the 2017 Final Rule 1022(b)(2) analysis at part X.F.
b. Effect on Loan Volumes and Revenue From Eliminating Underwriting
Requirements and Restrictions on Certain Reborrowing
In order to simulate the effects of the 2017 Final Rule on lender
revenue, it was necessary to impose an analytic structure and make
certain assumptions about the impacts of the Rule and apply them to the
data. The results of the simulations are reviewed here; the structure,
assumptions, and data used by the Bureau were described in detail in
the 2017 Final Rule.\373\ None of the underlying data, assumptions, or
structures have changed in the Bureau's analysis of the impacts of this
rule. As such, the description in the 2017 Final Rule also describes
the simulations used here.\374\
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\373\ 82 FR 54472, 54824.
\374\ The numbers cited here are simply the reverse of the
numbers cited in the 2017 Final Rule as being the most likely.
There, the Bureau estimated a decrease in loan volumes of 51 to 52
percent and a decrease in revenues of 67 percent to 68 percent for
payday loans, and a decrease in both loan volumes and revenues of 89
to 93 percent for vehicle title loans. Id. at 54827, 54834. Taking
the decreased values as the baseline and reintroducing the reduced
loan volumes and revenues yields the numbers cited here.
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The Bureau's simulations suggest that storefront payday loan
volumes will increase between 104 percent and 108 percent under this
final rule relative to the 2017 Final Rule baseline. The Bureau
estimates that revenues of storefront payday lenders will be between
204 percent and 213 percent higher if they do not have to comply with
the requirements in the 2017 Final Rule.\375\ For vehicle title
lending, the simulated impacts are larger. The Bureau's simulations
suggest that relative to the 2017 Final Rule baseline vehicle title
loan volumes will increase under the final rule by between 809 percent
and 1,329 percent, with a corresponding increase in revenues for
vehicle title lenders.\376\ Using CFSI's most recent estimated revenues
for vehicle title lenders, this would mean the elimination of the
Mandatory Underwriting Provisions of the 2017 Final Rule will translate
into an increase in annual revenues for these lenders of approximately
$3.9 billion to $4.1 billion.\377\
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\375\ The loan volume and revenue estimates differ for payday
loans as the 2017 Final Rule imposed limits on the sizes of loans
issued under the principal step-down approach, as well as limits on
the sizes of reborrowed loans. In the 2017 Final Rule, the Bureau
estimated that approximately 40 percent of the reduction in revenues
resulted from limits on loan sizes, while the remaining 60 percent
was the result of decreased loan volumes. Id. at 54827. The
increases in revenues presented here are estimated to stem from the
same sources, in the same proportions (i.e., approximately 40
percent from larger loans, and approximately 60 percent from
additional loans).
\376\ As vehicle title loans are ineligible for the principal
step-down approach under the 2017 Final Rule, there was no binding
limit on the size of these loans. This resulted in a larger decrease
in volumes for vehicle title loans relative to payday (as loans
could only be issued under the mandatory underwriting approach) but
ensured the corresponding decrease in revenues was more similar to
the decrease in loan volumes (since all issued loans were
unrestricted in their amounts relative to the Rule's baseline). The
increases cited here follow a similar pattern, for similar reasons.
\377\ Based on pre-2017 Final Rule estimated revenues for
vehicle title lenders of approximately $4.4 billion, reported in
Eric Wilson & Eva Wolkowitz, 2017 Financially Underserved Market
Size Study, at 46 (Ctr. for Fin. Servs. Innovation (Dec. 2017)),
https://s3.amazonaws.com/cfsi-innovation-files-2018/wp-content/uploads/2017/04/27001546/2017-Market-Size-Report_FINAL_4.pdf, with
medium confidence.
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A notable impact of this increase in loan volumes and revenues is
that many storefronts will likely exist under this final rule that
would not if they had to comply with the Mandatory Underwriting
Provisions of the 2017 Final Rule. A pattern of contractions in
storefronts has played out in States that have imposed laws or
regulations that resulted in similar reductions in volume as those
projected under the 2017 Final Rule. To the extent that lenders cannot
replace reductions in revenue by adapting their products and practices,
it follows that such a contraction--or, in the case of vehicle title,
an elimination--would be a likely (perhaps inevitable) response to
complying with the Mandatory Underwriting Provisions of the 2017 Final
Rule. It likewise follows that, under this amendment to the 2017 Final
Rule to eliminate its Mandatory Underwriting Provisions, there will be
a corresponding increase in the number of storefronts relative to the
number of them that would exist if they had to comply with the
Mandatory Underwriting Provisions in the 2017 Final Rule.
The Bureau notes that in recent years there has been a gradual
shift in the market towards longer-term loans where permitted by State
law. The Bureau does not have sufficient data to assess whether that
trend has accelerated since the issuance of the 2017 Final Rule in
anticipation of the compliance date.\378\ This trend was considered in
the 2017 Final Rule as well.\379\ To the extent these lenders have
already made these adaptations, and would not shift their business
practices back following adoption of this amendment to the 2017 Final
Rule to eliminate its Mandatory Underwriting Provisions, the loan
volume and revenue estimates above may be somewhat overstated.
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\378\ Since the issuance of the 2017 Final Rule, Florida has
amended its laws to open the door to longer-term loans at interest
rates above the standard usury limit. See Fla. Stat. Ann. Sec.
560.404. On the other hand, a voter referendum in Colorado has
resulted in a law, effective February 1, 2019, that capped interest
rates on certain longer-term loans. See Colo. Legislative Council
Staff, Initiative #126 Initial Fiscal Impact Statement, https://www.sos.state.co.us/pubs/elections/Initiatives/titleBoard/filings/2017-2018/126FiscalImpact.pdf; see also Colo. Sec'y of State,
Official Certified Result--State Offices & Questions, https://results.enr.clarityelections.com/CO/91808/Web02-state.220747/#/c/C_2
(Proposition 111).
\379\ 82 FR 54472, 54835.
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Several industry commenters stated in response to the 2019 NPRM
that either all lenders would close unless the Mandatory Underwriting
Provisions were eliminated or that these particular lenders would not
offer any products covered by the 2017 Final Rule. They further argued
that, as a result, the estimates based on the simulations understate
the true change in lending. The Bureau does not agree that all payday
lenders would close if the Bureau did not amend the 2017 Final Rule to
eliminate its Mandatory Underwriting Provisions. While many storefronts
would close without this intervention and some lenders may stop
offering covered products or continuing to operate, evidence from
States that have implemented restrictions on lending suggest that the
industry would not disappear entirely under the 2017 Final Rule
baseline and commenters did not offer any specific evidence to the
contrary. As a result, the Bureau does not believe the estimated
benefits to payday lenders are larger than stated in the 2019 NPRM.
One credit reporting company suggested in response to the 2019 NPRM
that lenders are increasingly underwriting covered loans and reporting
these loans to an information system thereby negating any need for the
Bureau to mandate lenders do so. While the Bureau does not have and did
not receive data to verify whether lenders have moved toward increased
underwriting and reporting of loans, the Bureau did offer the
possibility that some lenders may have already made changes in response
to the Mandatory Underwriting Provisions of the 2017 Final Rule. As a
result, amending the 2017 Final Rule to eliminate its Mandatory
Underwriting Provisions
[[Page 44436]]
might increase costs for these lenders if they chose to undo those
changes, but they would not be required to do so. To the extent that
any lenders have increased their underwriting of covered loans for
reasons unrelated to the 2017 Final Rule, some of the effects of this
amendment to the 2017 Final Rule to eliminate its Mandatory
Underwriting Provisions would be overstated.
One advocacy group argued the Bureau should net out from the
benefits from amending the 2017 Final Rule to eliminate its Mandatory
Underwriting Provisions the transfers between consumers and lenders
which would reduce the benefit to lenders in the analysis. The Bureau
does not net out transfers between different groups in its analyses and
instead delineates costs and benefits for covered persons and consumers
separately. It is not double-counting to describe increased revenues as
a benefit to lenders and increased fees as a cost to consumers.\380\
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\380\ Given that the Bureau counts fees consumers pay as a cost
to consumers, subtracting out those fees from lenders' revenues in
its consideration of benefits to covered persons would double-count
those fees. Likewise, subtracting fees from lenders' revenues and
not including them as costs to consumers would obfuscate the effect
on consumers. To clearly identify the costs and benefits for each
group, the Bureau considers them separately.
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2. Benefits and Costs to Consumers
a. Benefits to Consumers and Access to Credit
Borrowers would likely have experienced reduced access to new
loans--i.e., loans that are not part of an existing loan sequence--from
the restrictions and operational requirements of the Mandatory
Underwriting Provisions of the 2017 Final Rule. Some borrowers also
would have been prevented from rolling loans over or reborrowing
shortly after repaying a prior loan under the 2017 Final Rule. Some
borrowers might still have been able to borrow, but for smaller amounts
or with different loan structures, and might have found this less
preferable to them than the terms they would have received absent the
2017 Final Rule. This amendment to eliminate the 2017 Final Rule's
Mandatory Underwriting Provisions reverses each of the effects that
would otherwise result from the 2017 Final Rule, decreasing the time
and effort consumers would need to expend to obtain a covered short-
term or longer-term balloon-payment loan, and improving their access to
credit, which may carry pecuniary and non-pecuniary benefits.
The Bureau's simulations (discussed above) suggest that the 2017
Final Rule's requirements (again including the principal step-down
exemption) would have prevented between 5.9 and 6.2 percent of payday
borrowers from initiating a sequence of loans that they would have
initiated absent the Rule.\381\ That is, since most consumers take out
six or fewer loans each year, and are not engaged in long sequences of
borrowing, the 2017 Final Rule as a whole would not have limited their
borrowing. However, under this final rule, consumers will be able to
extend their sequences beyond three loans and will not be required to
repay one-third of the loan each time they reborrow. As a result, many
loans will be taken out beyond the sequence limitations imposed by the
2017 Final Rule (e.g., fourth and subsequent loans within 30 days of
the prior loan); these loans account for the vast majority of the
additional volume in the Bureau's simulations.
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\381\ See id. at 54599-601. The simulation did not attempt to
estimate which type(s) of consumers would be prevented from
initiating a sequence of loans under the 2017 Final Rule or which
type(s) of consumer would be able to obtain loans under the
principal step-down exemption.
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Elimination of Operational Requirements
The Bureau is amending the 2017 Final Rule to eliminate its
Mandatory Underwriting Provisions, which removes the operational
requirements associated with underwriting loans originated under the
Mandatory Underwriting Provisions, and the various recordkeeping
procedures associated with the principal step-down approach. As such,
under the amendment consumers should obtain funds faster than under the
2017 Final Rule. Consumers obtaining loans that would have been subject
to the 2017 Final Rule's Mandatory Underwriting Provisions will
experience the most significant gains from the amendment of the 2017
Final Rule to eliminate its Mandatory Underwriting Provisions.
Estimates of the time required to manually process an application
suggest that eliminating the Mandatory Underwriting Provisions will
make the borrowing process 15 to 45 minutes faster, a consideration
many of these consumers may find important given than convenience is an
important product feature on which payday lenders compete for
customers.\382\ Additionally, borrowers will not need to obtain and
provide to the lender certain documentation required under the
Mandatory Underwriting Provisions of the 2017 Final Rule; amending the
2017 Final Rule to eliminate these Mandatory Underwriting Provisions
will minimize the complexity of the process, and obviate the need for
repeat trips to the lender if the borrower did not bring all the
required documents initially, thereby making the payday loan process
more convenient for consumers seeking loans that would otherwise have
been subject to the Mandatory Underwriting Provisions.
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\382\ The Bureau noted in the 2017 Final Rule that it
anticipated that most lenders would use automation to make the
ability-to-repay determination, which would take substantially less
time to process. See 82 FR 54472, 54631, 54632 n.767. To the extent
that lenders would have used automation, the time savings under this
rule will be substantially smaller.
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Industry commenters stated in comments submitted in response to the
2019 NPRM that eliminating the Mandatory Underwriting Provisions of the
2017 Final Rule would save consumers both time and money as they would
not pursue marginally faster, but more expensive options. The Bureau
agrees consumers would save time and effort as a result of this final
rule.
Improved Access to Initial Loans
Because the Bureau's amendment of the 2017 Final Rule to eliminate
its Mandatory Underwriting Provisions would remove the restrictions on
obtaining loans, consumers will have increased access to loans. Initial
covered short-term loans--i.e., those taken out by borrowers who have
not recently had a covered short-term loan--are presumably taken out
because of a need for credit that is not the result of prior borrowing
of covered short-term loans. Consumers newly able to access these loans
may experience a variety of benefits as detailed below.
Based on the simulations discussed in the 2017 Final Rule, the
Bureau estimates that amending the 2017 Final Rule to eliminate its
Mandatory Underwriting Provisions would result in lenders making about
5 percent more initial payday loans (i.e., those that are not part of
an existing sequence) due to the elimination of the annual loan limits,
and roughly 6 percent more borrowers will be able to initiate a new
sequence of loans that they could not start under the 2017 Final Rule.
That is, amending the 2017 Final Rule to eliminate its Mandatory
Underwriting Provisions would result in lenders being able to make 5
percent more payday loans to satisfy a likely new need for credit
(based on the removal of the annual limits on borrowing) and 6 percent
of payday borrowers will have access to new sequences of loans. Vehicle
title borrowers are likely to
[[Page 44437]]
realize greater increases in access to loans relative to payday
borrowers since a greater share of vehicle title borrowers were
expected to lose access under the 2017 Final Rule. As discussed in the
section 1022(b)(2) analysis for the 2017 Final Rule, this difference in
the change in access was in part because the 2017 Final Rule's
principal step-down approach did not provide for vehicle title loans
and borrowers may not have been able to substitute to payday loans for
several reasons.\383\
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\383\ 82 FR 54472, 54840-41.
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Consumers who would be able to obtain a new loan because of the
elimination of the Mandatory Underwriting Provisions in the 2017 Final
Rule will not be subject to some of the costs of those provisions,
including not being forced to forgo certain purchases, incur high costs
from delayed payment of existing obligations, or incur high costs and
other negative impacts by simply defaulting on bills; nor will they
face the need to borrow from sources that may be more expensive or
otherwise less desirable than payday or vehicle title loans. These
borrowers may avoid overdrafting their checking accounts, which may be
more expensive than taking out a payday or single-payment vehicle title
loan. Similarly, they may avoid ``borrowing'' by paying a bill late,
which can lead to late fees (which may or may not be more expensive
than a payday or vehicle title loan) or other negative consequences
like the loss of utility service. The section 1022(b)(2) analysis in
the 2019 NPRM discussed survey evidence which provides some information
about what borrowers are likely to do if they do not have access to
these loans.\384\
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\384\ 84 FR 4252, 4289.
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Industry commenters stated in comments in response to the 2019 NPRM
that there are no good alternatives for some payday loan borrowers,
often stating the alternatives are expensive (overdraft, non-sufficient
funds (NSF), pawn). Some further stated that an ability-to-repay
requirement would limit access for those who most need payday loans,
such as those with no short-term income, those with high income
volatility, and gig economy workers. The Bureau discussed these
alternatives in the 2017 Final Rule taking their relative costs into
account there and in the analysis for this amendment to the 2017 Final
Rule to eliminate its Mandatory Underwriting Provisions.\385\
---------------------------------------------------------------------------
\385\ 82 FR 54472, 54842-46.
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Several consumer groups and State attorneys general stated in
comments in response to the 2019 NPRM that the increase in credit
access is smaller than stated in the 2019 NPRM because consumers
increasingly have access to other alternatives such as installment
loans which they willingly take up. These groups cited the experiences
of consumers in several States such as Texas. Many of these commenters
stated these alternatives were better for consumers than payday or
title loans and supported this by noting that other products can help
to build credit for borrowers or are used to finish repaying payday
loans. Consumer groups also commented that the Bureau overstated costs
in the 2017 Final Rule to be conservative (by not accounting for
product changes when considering access to credit) and since this
analysis reverses those effects, benefits to consumers were overstated
in the 2019 NPRM. As stated in this analysis and that of the 2017 Final
Rule, the Bureau does not consider changes in lenders' product
offerings (including newly offering installment loans) in response to
the 2017 Final Rule or more generally. The Bureau noted in the proposal
that changes in industry structure likely cause the Bureau's estimates
of increased revenues and benefits of access to be upper bounds as some
lenders were already shifting to installment loans in some areas prior
to this amendment to the 2017 Final Rule to eliminate its Mandatory
Underwriting Provisions.
Elimination of Limits on Loan Size
The 2017 Final Rule placed limits on the size of loans lenders may
issue via the principal step-down approach, which, as discussed above,
is one of the requirements for the principal step-down exemption from
the Mandatory Underwriting Provisions for covered short-term loans.
Eliminating the Mandatory Underwriting Provisions from the 2017 Final
Rule will allow borrowers (specifically, borrowers who cannot satisfy
the Mandatory Underwriting Provisions for covered short-term loans and
thus who can only borrow under the principal step-down approach) to
take out larger initial loans (where allowed by State law), and
reborrow these loans in their full amount. In the simulation that the
2017 Final Rule stated best approximates the market as it would exist
under the 2017 Final Rule,\386\ around 40 percent of the increase in
payday loan revenues described in part VIII.B.1.c above will be the
result of eliminating the $500 cap on initial loans and step-down
requirements on loans issued via the principal step-down approach.
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\386\ In the 2017 Final Rule, the Bureau describes the results
from simulations under three sets of assumptions. This rule presents
results from the simulation approach preferred by the Bureau in the
2017 Final Rule as the one most likely to reflect the effects of the
Rule, wherein borrowers are assumed to: Take principal step-down
loans initially, apply for loans subject to an ability-to-repay
determination only after exhausting the principal step-down loans,
and be approved for each loan under the mandatory underwriting
approach with a probability informed by industry estimates.
---------------------------------------------------------------------------
Some commenters stated in response to the 2019 NPRM that because
loan size caps are a price ceiling, they reduce the supply of loans so
that eliminating the Mandatory Underwriting Provisions would increase
access to more than 1 million consumers. The Bureau agrees that price
ceilings generally reduce supply in competitive markets, but notes that
a cap on the loan amount (as opposed to a cap on the interest rate) is
not a price ceiling.\387\ Further, it is not clear that borrowers who
would otherwise choose a loan amount above the cap would not still use
a payday loan in the presence of a cap and instead borrow a smaller
amount. Meanwhile, other comments stated that loan size caps cause
consumers to take more loans than they otherwise would, either
simultaneously or sequentially, and that loan prices do not always rise
to State caps. The Bureau notes consumers may take a greater number of
loans as a result of a cap on loan sizes, at least in States without a
state-mandated tracking database, but the Bureau does not have evidence
that this necessarily occurs. Additionally, recent research discussed
below provides additional evidence that lenders do charge the
prevailing cap in each State.\388\
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\387\ As discussed below, new research also provides evidence
that a price cap on the interest rate of payday loans does not
necessarily reduce the supply of loans. See Amir Fekrazad, Impacts
of Interest Rate Caps on the Payday Loan Market: Evidence from Rhode
Island, J. Banking & Fin. (2020).
\388\ Id.
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Elimination of Limits on Reborrowing
For storefront payday borrowers, most of the increase in the
availability of credit as a result of amending the 2017 Final Rule to
eliminate its Mandatory Underwriting Provisions will be due to
borrowers who have recently taken out loans being able to roll over
their loans or borrow again within a shorter period of time as compared
to the baseline of the 2017 Final Rule. This is because the Mandatory
Underwriting Provisions (including the principal step-down provision)
in the 2017 Final Rule impose limits on the frequency, timing, and
amount of reborrowing and eliminating the Mandatory
[[Page 44438]]
Underwriting Provisions lifts these limitations.
The lessened constraints on reborrowing will additionally benefit
consumers who wish to reborrow loans that would have been made via the
principal step-down approach under the 2017 Final Rule but are unable
to decrease the principal of their loans. This improved access to
credit could result in numerous benefits for consumers, including
avoiding delinquencies on the loan and the potential NSF fees
associated with such delinquencies, or avoiding the negative
consequences of being compelled to make unaffordable amortizing
payments on the loan. However, the Bureau's simulations suggest that
the majority of the increased access to credit as a result of
elimination of the Mandatory Underwriting Provisions will result from
lifting of the reborrowing restrictions, rather than removing of the
initial loan size cap and the forced step-down features of loans made
via the principal step-down approach.
The Bureau does not believe eliminating the Mandatory Underwriting
Provisions in the 2017 Final Rule will lead to a substantial decrease
in instances of borrowers defaulting on payday loans. The Bureau
believes the 2017 Final Rule's principal step-down provisions would
likely encourage many consumers to reduce their debt over subsequent
loans rather than to default, and eliminating this provision will
reverse this effect. It is necessarily true, however, that some
borrowers may avoid a default that would have occurred under the 2017
Final Rule because they are able to reborrow the full amount of the
initial loan with the elimination of the Mandatory Underwriting
Provisions in the Rule.
Increased Geographic Availability of Covered Short-Term Loans
Consumers will also have somewhat greater physical access to payday
storefront locations with the elimination of the Mandatory Underwriting
Provisions in the 2017 Final Rule. Using the loan volume impacts
previously calculated above for storefront lenders, the Bureau
forecasts that a large number of storefronts will remain open with the
elimination of the Mandatory Underwriting Provisions that would have
closed had the lenders been required to comply with these Provisions.
However, that consumers' geographic access to stores will not be
substantially increased in most areas as a result of eliminating the
Mandatory Underwriting Provisions in the 2017 Final Rule. As discussed
in the 2017 Final Rule, evidence from States that have enacted laws or
regulations that led to a substantial decrease in the number of stores
suggest that there is usually a store that remains open near one that
closes.\389\ Consequently, the Bureau believes that the increase in the
number of storefront locations will not substantially increase access
for most consumers and the Bureau received no evidence to the contrary.
The Bureau noted, however, that for consumers seeking single-payment
vehicle title loans, the benefits would be far larger as the 2017 Final
Rule's estimated impacts would lead to an 89 to 93 percent reduction in
revenue which could affect the viability of the industry.\390\
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\389\ 82 FR 54472, 54487. There may also be benefits to
consumers from other ``convenience factors'' associated with
increased competition. However, the Bureau lacks data or evidence
that would allow for a conclusion that such benefits would result
from this rule.
\390\ See id. at 54817, 54834-35.
---------------------------------------------------------------------------
Several industry commenters and think tank groups stated in
comments in response to the 2019 NPRM that competition would increase
with the elimination of the Mandatory Underwriting Provisions in the
2017 Final Rule, which, in turn, would lower costs or provide other
benefits to consumers. By contrast, a consumer group stated there is no
evidence of effects on non-price competition in this market and noted
that the same lender typically offers the same product at different
rates in different States based on the regulatory caps they face. In
the 2019 NPRM, the Bureau discussed benefits to consumers from
increased competition via additional storefront locations and shorter
wait times. However, based on pricing differences across different
State regulatory regimes and over time and the lack of evidence offered
by commenters to the contrary, the Bureau concludes that this increased
competition is unlikely to decrease prices for consumers, as discussed
in the 2017 Final Rule's 1022(b) analysis.\391\ Some industry
commenters stated that innovation by banks and lenders would be higher
if the Bureau eliminated the Mandatory Underwriting Provisions of the
2017 Final Rule, and this innovation would further increase access and
other benefits for consumers. The Bureau agrees that some lenders that
would have ceased operations if the Bureau had not eliminated the
Mandatory Underwriting Provisions, as suggested by some industry
commenters in response to the 2016 NPRM. Such lenders may make changes
to their product offerings or procedures and such changes may increase
access for consumers, though the Bureau has no evidence that these
lenders will do so.
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\391\ See id. at 54834. See also Fekrazad, supra.
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b. Costs to Consumers
Relative to the 2017 Final Rule baseline, the available evidence
suggests that amending the 2017 Final Rule to eliminate its Mandatory
Underwriting Provisions would impose potential costs on consumers by
increasing the risks of: experiencing costs associated with extended
sequences of payday loans and single-payment vehicle title loans;
experiencing the effects (pecuniary and non-pecuniary) of delinquency
and default on these loans; defaulting on other major financial
obligations; and/or being unable to cover basic living expenses in
order to pay off covered short-term and longer-term balloon-payment
loans.\392\ These costs are detailed below as well as in the section
1022(b)(2) analysis in the 2019 NPRM.\393\ The Bureau received no new
evidence that changed this analysis.
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\392\ As mentioned previously, the effects associated with
longer-term balloon-payment loans are likely to be small relative to
the effects associated with payday and vehicle title loans. This is
because longer-term balloon-payment loans are uncommon in the
baseline against which costs are measured.
\393\ 84 FR 4252, 4290-92.
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Extended Loan Sequences
Eliminating the 2017 Final Rule's limitations on making loans to
borrowers who have recently had relevant covered short-term and longer-
term balloon-payment loans will enable borrowers to continue to borrow
in these longer sequences of loans. Studies have suggested that
potential consequences from such reborrowing include increases in the
delays in payments on other financial obligations, involuntary checking
account closures, NSF and overdraft fees, financial instability, stress
and related health measures, and decreases in consumption.\394\ (The
elimination of the step-down structure imposed by the 2017 Final Rule's
Mandatory Underwriting Provisions may have similar effects; however,
the Bureau is not aware of any studies that address this possibility.)
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\394\ The studies describing these results are discussed in the
section 1022(b)(2) analysis of the 2017 Final Rule (82 FR 54472,
54842-46) and below. As described therein, some of these studies
differentiate between shorter and longer loan sequences. The
majority of studies, however, rely on access to loans as their
source of variation, and cannot make such distinctions. Similarly,
few of these studies distinguish between the effects of loan amount
independent of sequence length.
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The Bureau's synopsis of the available evidence is that access to
payday loans may well be beneficial for those borrowers with discrete,
short-term
[[Page 44439]]
needs, but only if they are able to successfully avoid unanticipated
long sequences of loans. As the Bureau concluded in the 2017 Final
Rule, the available evidence, primarily the data from the Mann study,
suggests that, while many consumers accurately predict their borrowing
sequence length, consumers who end up engaging in long sequences of
reborrowing generally do not anticipate those outcomes ex ante \395\
and that the 2017 Final Rule, on average (and taking into account
potential alternatives to which consumers might turn if long sequences
were proscribed), is welfare enhancing for such consumers.\396\
Moreover, new research discussed further below that has become
available since the 2017 Final Rule provides some additional support
for this conclusion.\397\
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\395\ See id. at 54568-70, 54816-17 (discussing the Bureau's
analysis of certain data from the Mann study including statistical
evidence showing, in Professor Mann's words, ``that there is no
significant relationship between the predicted number of days and
the days to clearance''); see also Email from Ronald Mann,
Professor, Columbia Law School to Jialian Wang and Jesse Leary,
Bureau of Consumer Fin. Prot. (Sept. 24, 2013) (on file).
\396\ For a discussion of alternative sources of credit, see 82
FR 54472, 54609-11, 54841.
\397\ Carvalho et al., NBER Working Paper No. 26328, supra.
---------------------------------------------------------------------------
The increase in access to credit due to the elimination of the
Mandatory Underwriting Provisions in the 2017 Final Rule is
concentrated in long durations of indebtedness. The evidence concerning
the welfare impacts on consumers who take out loans in these long
sequences is limited, but suggests the welfare impacts are negative on
average, meaning that the estimated effect on average consumer surplus
from these extended loan sequences would be negative relative to the
chosen baseline.
Several consumer groups stated in their comments in response to the
2019 NPRM that there is evidence outside of the data the Bureau cited
from the Mann study showing that many consumers are not informed about
the full costs of extended loan sequences and that access to extended
loan sequences is not a benefit, but a cost to consumers. Another group
similarly stated that the lack of effect of new disclosures in one
State (Texas) does not mean consumers are well-informed about payday
loans. Many industry commenters stated there is no empirical evidence
that consumers are not well-informed, and several of these commenters
cited the Mann study data as evidence that most borrowers are aware of
the consequences of payday loans. Other industry commenters criticized
the Mann study data as unrepresentative or limited and argued it could
not be used to show that consumers are not well informed about payday
loan borrowing. The Bureau notes that the evidence cited by commenters
had been considered by the Bureau in developing the proposal, and no
new data or evidence was offered to support a change in how the costs
to consumers of extended loan sequences is characterized. The Bureau
therefore has not changed its interpretation of the evidence as to the
effect of eliminating the Mandatory Underwriting Provisions in the 2017
Final Rule for consumers in extended loan sequences.
Increased Defaults and Delinquencies
Default rates on payday loans prior to the 2017 Final Rule were
fairly low when calculated on a per loan basis (2 percent in the data
the Bureau analyzed).\398\ A potentially more meaningful measure of the
frequency with which consumers experience default is therefore the
share of loan sequences that end in default--including single-loan
sequences where the consumer immediately defaults and multi-loan
sequences which end in default after one or more instances of
reborrowing. The Bureau's data show that, using a 30-day sequence
definition (i.e., a loan taken within 30 days of paying off a prior
loan is considered part of a sequence of borrowing), 20 percent of loan
sequences ended in default prior to the 2017 Final Rule. Other
researchers have found similarly high levels of default. A study of
payday borrowers in Texas found that 4.7 percent of loans were charged
off, but 30 percent of borrowers had a loan charged off in their first
year of borrowing.\399\ It is reasonable to assume a return to these
market conditions under this final rule.
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\398\ 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 is later.
\399\ See Paige Marta Skiba & Jeremy Tobacman, Payday Loans,
Uncertainty, and Discounting: Explaining Patterns of Borrowing,
Repayment, and Default (Vand. Law Sch. L. & Econ. Working Paper No.
08-33 (2008)). Note that it may not be the case that all defaulted
loans were charged off.
---------------------------------------------------------------------------
As previously discussed, the Bureau believes that, with the
elimination of the Mandatory Underwriting Provision, some borrowers who
would be able to reborrow the full amount of the initial loan may avoid
a default that would have occurred if lenders had to comply with the
Mandatory Underwriting Provisions. However, the Bureau believes that
some borrowers taking out payday loans may experience additional
defaults under this final rule than they would under the 2017 Final
Rule. If eliminating the Mandatory Underwriting Provisions in the 2017
Final Rule were to increase defaults on net, this will represent a
potential cost to consumers.\400\ However, the Bureau does not know the
prevalence of the possible increased defaults nor can it provide an
estimate of the total potential cost per default to consumers.\401\
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\400\ For a more detailed discussion of the costs of defaults
and delinquencies, as well as the reasoning behind their likely
increased prevalence under this final rule, see 82 FR 54472, 54838.
\401\ See Skiba & Tobacman, supra, for a structural model
examining reborrowing behavior including potential default costs.
---------------------------------------------------------------------------
In addition to default costs resulting from lenders' access to
consumers' checking accounts, as noted in the 2017 Final Rule,
borrowers who default may be subject to collection efforts which can
take aggressive forms, including repeated phone calls, in-person visits
to the consumer's home or workplace, and calls or visits to consumers'
friends or relatives.\402\
---------------------------------------------------------------------------
\402\ For purposes of the section 1022(b)(2) analysis, the
Bureau considers any consequences that consumers perceive as harmful
to be a cost to consumers, regardless of whether collection efforts
violate applicable law. 82 FR 54472, 54574.
---------------------------------------------------------------------------
Additionally, both the loss of the option value of future borrowing
and non-pecuniary costs of failing to pay may add to the consumer's
perception of the cost of default. The option value refers to the
opportunity to borrow again in the future, at least from the specific
lender, which is decreased after a default. This results in additional
costs to the consumer in terms of decreased access to credit, or
additional search beyond their preferred lender, that may, or may not,
be accurately understood by the consumer at the time of initial
borrowing. Default may also impose non-pecuniary costs, such as the
loss of access to the borrower's preferred lender. In the 2019 NPRM,
the Bureau sought additional information on the expected change in the
prevalence of default and the costs associated therewith but did not
receive any comments addressing this.
For borrowers who will take out short-term vehicle title loans
under this final rule, the impacts will be greater. The range of
potential ancillary impacts on a borrower from losing a vehicle to
repossession depends on the transportation needs of the borrower's
household and the available transportation alternatives. The Bureau
received no new information in response to the 2019 NPRM on the
prevalence and costs of the possible ancillary effects of repossession.
Similarly, to the extent eliminating the Mandatory Underwriting
Provisions will increase the number of payday and vehicle title loans
and length of loan sequences relative to the 2017 Final Rule, doing so
likely will increase the
[[Page 44440]]
frequency of delinquencies and lead consumers to incur costs associated
with those delinquencies.\403\ In response to the 2019 NPRM, the Bureau
did not receive additional information on the total potential cost of
any increased delinquencies.
---------------------------------------------------------------------------
\403\ 84 FR 4252, 4292.
---------------------------------------------------------------------------
One consumer group stated the Bureau understated the consequences
of default (bank account closure, negative credit reporting, inability
to open a new account, and vehicle repossession). The Bureau discussed
these costs to consumers in its analysis and in reference to the 2017
Final Rule, while noting that it did not have data or know of any
research that would allow it to quantify these effects for this
analysis.\404\ One think tank stated that the Bureau misstated some
costs in this analysis and claimed that the repossession rates cited by
the Bureau are too high. The Bureau disagrees with the argument that
the repossession rates cited from prior Bureau work are incorrect. The
only evidence the commenter cited regarding this claim uses a more
restricted time frame for analysis, which is the likely source of the
discrepancy.
---------------------------------------------------------------------------
\404\ Id. at 4290-92.
---------------------------------------------------------------------------
c. New Evidence on the Benefits and Costs to Consumers of Access to
Payday and Other Covered Short-Term and Longer-Term Balloon-Payment
Loans
There have been several studies made available since the 2017 Final
Rule that address the welfare effects of payday loans. The 2019 NPRM
discussed several such studies.\405\ Three further studies which became
available since the proposal are discussed below. As noted earlier, and
as discussed in the 2019 NPRM, the evidence in these studies does not
alter the Bureau's views based on earlier evidence; however, it is
important to include these in the discussion of the evidence that bears
on the benefits and costs. The Bureau sought comment on any additional
relevant research, information, or data that has arisen since the 2017
Final Rule was published.\406\
---------------------------------------------------------------------------
\405\ Id. at 4292-94.
\406\ The Bureau received comments discussing in-progress,
potentially relevant research, but these projects had only
preliminary results, none of which had direct implications for the
costs and benefits discussed in this analysis.
---------------------------------------------------------------------------
Studies of the Direct Effects of Payday Loans and Small Dollar Loan
Regulations
Fekrazad (2020) evaluates changes in the payday market in Rhode
Island following a decrease in the State's interest rate cap from 15 to
10 percent.\407\ The author finds payday loan use increased as measured
by the number of borrowers, number of loans, average loan amounts, and
loan sequence lengths. While there was no change in the loan default
rate, he also finds an increase in loan sequence defaults. Under some
assumptions, the author also computes the welfare gain for consumers in
Rhode Island due to this change and notes it is an upper bound to the
extent that the some of the increase in borrowing may be driven by
overborrowing due to present bias. The author also finds no change in
the number of storefronts or lenders in Rhode Island after the decrease
and argues this suggests lenders had market power prior to the change.
The Bureau notes the consistency of the alignment between the charged
and state-allowed maximum for interest rates and lack of change in
lenders supports the argument that changes in physical access as a
result of this final rule are unlikely to change prices consumers face
for these loans.
---------------------------------------------------------------------------
\407\ Fekrazad, supra.
---------------------------------------------------------------------------
Studies Describing the Circumstances and Decision-making of Consumers
A recent study of consumers in Iceland shows that payday users are
especially financially constrained when they take out a payday loan,
though a quarter of borrowers have access to a few hundred dollars of
cheaper credit.\408\ They also assess the decision-making ability of
consumers by characterizing how consistent their choices on
incentivized survey questions are with utility maximization. They show
that more than half of payday loan dollars go to borrowers who are in
the bottom quintile of the decision-making ability distribution.
Consumers with lower decision-making ability are also much more likely
to make ``financial mistakes'' such as incurring NSF fees, but the
study does not directly evaluate these consumers' decisions regarding
the use of payday loans. Finally, the authors offer evidence that their
Icelandic data align well with survey data from the U.S. to suggest
that their results hold for U.S. consumers, as well.
---------------------------------------------------------------------------
\408\ Carvalho et al., NBER Working Paper No. 26328, supra.
---------------------------------------------------------------------------
The Allcott study surveyed borrowers at a lender in Indiana to
evaluate their borrowing expectations and attitudes toward restrictions
on payday lending. After exiting a payday storefront, borrowers were
asked survey questions about their expected probability of borrowing
another loan within the next eight weeks. On average, borrowers
predicted they had a 70 percent chance of reborrowing, not far from the
actual 74 percent reborrowing rate for the sample, but those who used
payday loans less frequently in the six months prior to the survey were
much more likely to underestimate their likelihood of reborrowing.
Most surveyed borrowers said they would ``very much'' like to give
themselves extra motivation to avoid payday loan debt and a
supermajority (about 90 percent) would at least somewhat like to give
themselves extra motivation. Consistent with this response, borrowers
were also willing to pay a large premium for an incentive to avoid
reborrowing. Finally, the authors use the survey responses as inputs to
a model to estimate borrower awareness of present bias and consumer
welfare responses to potential policy interventions. They find
borrowers in their sample do put more weight on near-term payoffs, but
that they are also aware of this. They use simulations to predict the
effect of different restrictions on payday lending, finding that
consumer welfare decreases under full payday loan bans or under caps on
loan sizes, but consumer welfare slightly increases in many scenarios
under a three-loan rollover restriction.
The Bureau notes that this study uses a subsample of survey
respondents meeting a set of pre-registered restrictions.\409\ While
these conditions are mostly standard, and in most cases necessary for
the main analysis in the study, at least some of the omitted borrowers
would likely be classified as low decision-making ability types as in
the Carvalho study.
---------------------------------------------------------------------------
\409\ The resulting analysis subsample is 62 percent of the
borrowers who completed the survey and could be matched to
administrative data. The Allcott study does not provide information
on how the omitted borrowers compare to the study's analysis sample,
so the extent to which the study's results hold for the broader
payday borrower population cannot be determined.
---------------------------------------------------------------------------
Summary of Research Findings on the Welfare Effects of Consumers of
Payday Loan Use
The Bureau believes the new research described here and in the
proposal for this final rule supplements, and does not contradict, the
research described in the 2017 Final Rule so the analysis presented
here and in the 2019 NPRM, which is based on the assumptions detailed
in the 2017 Final Rule, is unchanged.
[[Page 44441]]
C. Potential Benefits and Costs of the Final Rule to Consumers and
Covered Persons--Recordkeeping Requirements
The 2017 Final Rule requires lenders to maintain sufficient records
to demonstrate compliance with the Rule. Those requirements include,
among other records to be kept, loan records; materials collected
during the process of originating loans, including the information used
to determine whether a borrower had the ability to repay the loan, if
applicable; records of reporting loan information to RISes, as
required; and records of attempts to withdraw payments from borrowers'
accounts, and the outcomes of those attempts. The Bureau's amending the
2017 Final Rule to eliminate the Mandatory Underwriting Provisions will
eliminate the recordkeeping requirements set forth in the 2017 Final
Rule that are not related to payment withdrawal attempts, and therefore
lenders will benefit from not having to bear these costs.
1. Benefits and Costs to Covered Persons
The Bureau estimated in the 2017 Final Rule that the costs
associated with electronic storage of records was small. As such, the
Bureau estimates the benefits from avoiding these costs with the
elimination of the Mandatory Underwriting Provisions to be small as
well, as detailed in the 2019 NPRM.\410\ Lenders will also avoid the
need to develop procedures and train staff to retain records in the
absence of the Mandatory Underwriting Provisions; these benefits are
included in earlier estimates of the benefits of no longer needing to
develop procedures, upgrade systems, and train staff.
---------------------------------------------------------------------------
\410\ 84 FR 4252, 4294.
---------------------------------------------------------------------------
2. Benefits and Costs to Consumers
Consumers will be minimally affected by the elimination of the
recordkeeping requirements in the Mandatory Underwriting Provisions.
D. Potential Benefits and Costs of the Final Rule to Consumers and
Covered Persons--Requirements Related to Information Furnishing and
Registered Information Systems
As discussed above, the 2017 Final Rule requires lenders to report
covered short-term and longer-term balloon-payment loans to every RIS.
This requirement will be eliminated as part of the elimination of the
Mandatory Underwriting Provisions, as will the potential benefits and
costs from the existence of, and reporting to, every RIS.
1. Benefits and Costs to Covered Persons
Eliminating the Mandatory Underwriting Provisions of the 2017 Final
Rule will eliminate the requirement on lenders to furnish information
regarding covered short-term and longer-term balloon-payment loans to
every RIS and to obtain a consumer report from at least one RIS before
originating such loans. This, in turn, will eliminate the benefits,
described in the 2017 Final Rule, that are afforded to firms that apply
to become RISes.
Eliminating the Mandatory Underwriting Provisions of the 2017 Final
Rule will also eliminate the benefits to lenders from access to RISes.
Most of these benefits would result from decreased fraud and increased
transparency. These benefits include, inter alia, easier identification
of borrowers with past defaults on payday loans issued by other
lenders, avoiding issuing loans to borrowers who currently have
outstanding loans from other lenders, etc. This represents a cost to
lenders from eliminating the Mandatory Underwriting Provisions of the
2017 Final Rule.
2. Benefits and Costs to Consumers
The elimination of the RIS-related requirements will have minimal
impact on consumers. The largest benefit for consumers from the RIS-
related provisions, as noted in the 2017 Final Rule, was compliance by
lenders with the Rule's Mandatory Underwriting Provisions. This benefit
is moot, given the elimination of the Rule's Mandatory Underwriting
Provisions. The remaining benefits and costs from eliminating the
Mandatory Underwriting Provisions are small.
E. Other Unquantified Benefits and Costs
Some of these impacts noted above associated with eliminating the
Mandatory Underwriting Provisions in the 2017 Final Rule are difficult
if not impossible to quantify, because their magnitudes or values are
unknown or unknowable as described in the 2019 NPRM.\411\ Additionally,
there are other, less direct effects of this final rule that are also
left unquantified. These impacts include (but are not limited to):
intrinsic utility (``warm glow'') from access to loans that are not
available under the 2017 Final Rule; innovative regulatory approaches
by States that would have been discouraged by the 2017 Final Rule;
public and private health costs that may (or may not) result from
payday loan use; suicide-related costs that may (or may not) result
from increased access to loans; changes to the profitability and
industry structure in response to the 2017 Final Rule (e.g., industry
consolidation that may create scale efficiencies, movement to
installment product offerings) that will not occur under this final
rule; concerns about regulatory uncertainty and/or inconsistent
regulatory regimes across markets; benefits or costs to outside parties
associated with the change in access to payday loans (e.g., revenues of
providers of payday substitutes like pawnshops, overdraft fees paid by
consumers and received by financial institutions, the cost of late fees
and unpaid bills, etc.); indirect costs arising from increased
repossessions of vehicles in response to non-payment of title loans;
non-pecuniary effects associated with financial stress that may be
alleviated or exacerbated by increased access to/use of payday loans;
and any impacts on lenders of fraud and opacity related to a lack of
industry-wide RISes (e.g., borrowers circumventing lender policies
against taking multiple concurrent payday loans, lenders having more
difficulty identifying chronic defaulters, etc.). In the 2019 NPRM, the
Bureau asked for comments providing credible quantitative estimates of
the impacts discussed above in this paragraph, but commenters did not
provide such estimates or data from which the Bureau could calculate
such estimates.
---------------------------------------------------------------------------
\411\ Id. at 4294-95.
---------------------------------------------------------------------------
Consumer groups stated that the costs to consumers from eliminating
the Mandatory Underwriting Provisions will be higher than stated due to
health effects of payday loan use. The Bureau noted these potential
health effects in the discussion of costs to consumers above in the
discussion of other unquantified benefits and costs. Further, much of
the same literature noted by commenters was cited in the discussion of
new research in the 2019 NPRM.\412\ These costs are already considered
in this analysis, though the Bureau notes that much of the research on
the relationship between payday loan use and health outcomes show
correlations and not causal links. Some consumer groups also stated
there would additional costs due to decreased financial stability for
low income families and reduced economic activity. In the 2019 NPRM,
the Bureau also noted many indirect costs of payday loans in its
discussion of unquantified benefits and costs.
---------------------------------------------------------------------------
\412\ Id. at 4293.
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[[Page 44442]]
F. Potential Impact on Depository Creditors With $10 Billion or Less in
Total Assets
The Bureau believes that depository institutions and credit unions
with less than $10 billion in assets are minimally constrained by the
2017 Final Rule's Mandatory Underwriting Provisions. To the limited
extent depository institutions and credit unions did make loans in this
market, many of those loans were conditionally exempted from the 2017
Final Rule under Sec. 1041.3(e) or (f) as alternative or accommodation
loans. As such, this final rule will have minimal impact on these
institutions.
However, it is possible that the removal of the 2017 Final Rule's
restrictions will allow depository institutions and credit unions with
less than $10 billion in assets to develop products that are not viable
under the 2017 Final Rule (subject to applicable Federal and State laws
and under the supervision of their prudential regulators).\413\ To the
extent these products are developed and successfully marketed, they
will represent a benefit for these institutions from the elimination of
the Mandatory Underwriting Provisions in the 2017 Final Rule.
---------------------------------------------------------------------------
\413\ As discussed previously, this may be even more likely than
it would have been at the time the 2017 Final Rule was drafted. The
OCC not only rescinded guidance on deposit advance products but has
also encouraged banks to explore additional small-dollar installment
lending products. Additionally, the FDIC is seeking comment on
small-dollar products that its banks could offer. These factors
might allow for additional lending if not for the 2017 Final Rule
(e.g., some additional product offerings may result from this final
rule that would have been inviable under the 2017 Final Rule).
---------------------------------------------------------------------------
Some industry commenters stated that innovation by banks and
lenders would be higher in the absence of the Mandatory Underwriting
Provisions of the 2017 Final Rule. The Bureau discussed the potential
benefits to small depository institutions and credit unions from
increased flexibility to develop new products in the absence of the
Mandatory Underwriting Provisions. Meanwhile, a few credit union
commenters stated that eliminating the Mandatory Underwriting
Provisions will increase relative costs for small credit unions and
banks that this final rule does not cover, because they will have to
continue to use tougher underwriting standards that covered lenders
will no longer be required to use. Credit unions also stated they would
face additional costs of competing with covered lenders since the
presentation of and lack of underwriting for these covered loans makes
their characteristics less transparent, making it less likely consumers
will realize that installment loans offered by other lenders (such as
credit unions) are potential substitutes. They also stated costs would
increase for them due to account closures resulting from their members'
use of covered loans. The Bureau agrees that lenders that offer
competing products not covered by this final rule will face increased
competition as a result of the changes made by amending the 2017 Final
Rule to eliminate its Mandatory Underwriting Provisions. The Bureau
also noted there would be changes in benefits and costs to outside
parties due to changes in access to payday loans, specifically noting
both changes in revenues for competing products and costs related to
fees. The Bureau does not, however, have evidence to suggest this will
have differential costs to smaller institutions.
G. Potential Impact on Consumers in Rural Areas
With the elimination of the Mandatory Underwriting Provisions,
consumers in rural areas will have a greater increase in the
availability of covered short-term and longer-term balloon-payment
loans originated through storefronts relative to consumers living in
non-rural areas. As described above, the Bureau estimates that removing
the restrictions in the 2017 Final Rule on making these loans will
likely lead to a substantial increase in the markets for storefront
payday loans and storefront single-payment vehicle title loans.\414\
While many borrowers who live outside of Metropolitan Statistical Areas
do travel somewhat far to take out a payday loan, many do not. As such,
the expected increase in brick-and-mortar stores that would result from
eliminating the Mandatory Underwriting Provisions should improve access
to storefront payday loans for those borrowers unwilling or unable to
travel greater distances for these loans. While rural borrowers for
whom visiting a storefront payday lender is impracticable under the
2017 Final Rule retain the option to seek covered short-term or longer-
term balloon-payment loans from online lenders, restrictions imposed by
State and local law may not allow this in some jurisdictions.
Additionally, not all of these would-be borrowers necessarily have
access to the internet, a necessity in order to originate online
loans.\415\ For those consumers who are unable or unwilling to seek
loans from an online lender, amending the 2017 Final Rule to eliminate
its Mandatory Underwriting Provisions will provide more, and
potentially more desirable, borrowing options.
---------------------------------------------------------------------------
\414\ 82 FR 54472, 54853.
\415\ In considering this in the 2017 Final Rule, the Bureau
noted that ``rural populations are less likely to have access to
high-speed broadband compared to the overall population,'' but that
``the bandwidth and speed required to access an online payday lender
is minimal,'' and that ``most potential borrowers in rural
communities will likely be able to access the internet by some means
(e.g., dial up, or access at the public library or school).'' 82 FR
54472, 54853. However, there are likely to be at least some rural
borrowers that were displaced from the market by the 2017 Final
Rule.
---------------------------------------------------------------------------
The Bureau expects that the relative impacts on rural and non-rural
consumers of vehicle title loans will be similar to what would occur in
the payday market. That is, rural consumers will be likely to
experience a greater increase in the physical availability of single-
payment vehicle title loans made through storefronts than borrowers
living in non-rural areas.
Finally, the Bureau notes that it received a number of comments on
the 2016 NPRM indicating that some online payday lenders operate in
rural areas and comprise large shares of their local economies. Given
that eliminating the Mandatory Underwriting Provisions in the 2017
Final Rule will allow these lenders to avoid decreases in loan volume
and revenues, it is likely to substantially and positively affect some
rural lenders, thereby benefiting their local economies.
Given the available evidence, the Bureau believes that, other than
the relatively greater increase in the physical availability of covered
short-term loans made through storefronts, consumers living in rural
areas will not experience substantially different effects of this final
rule than other consumers.\416\
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\416\ In the 2017 Final Rule, the Bureau noted the potential for
small effects on a few local labor markets in which online lenders
comprise a significant share of employment. Id. Corresponding
effects may result from this final rule as well. However, the
specifics of these impacts would depend on the competitive
characteristics of these labor markets (both as they currently exist
and in the counterfactual) that are not easily discernable or
generalizable and are of a second-order concern relative to the more
direct impacts noted above.
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Some industry commenters stated that the increase in access for
rural consumers would be larger than the Bureau stated in the 2019 NPRM
since rural borrowers have fewer alternatives and higher income
volatility. Consumer groups similarly stated that rural borrowers have
fewer alternatives due to less access to depository institutions and
therefore these borrowers are more susceptible to payday lenders and
suggested increased access was not a benefit. Another group stated
vehicle access is especially important for rural
[[Page 44443]]
consumers and suggested increased access to title loans was not a
benefit for these consumers due to the risk of repossession. To the
extent that rural payday and title borrowers have higher income
volatility than other consumers, they may have fewer alternatives to
these products. However, the Bureau does not have data on the income
volatility of payday and title borrowers generally or by geography that
it could use to evaluate this claim.
XI. Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act (RFA) \417\ as amended by the Small
Business Regulatory Enforcement Fairness Act of 1996 \418\ requires
each agency to consider the potential impact of its regulations on
small entities, including small businesses, small governmental units,
and small not-for-profit organizations.\419\ The RFA defines a ``small
business'' as a business that meets the size standard developed by the
SBA pursuant to the Small Business Act.\420\
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\417\ Public Law 96-354, 94 Stat. 1164 (1980).
\418\ Public Law 104-21, sec. 241, 110 Stat. 847, 864 (1996).
\419\ 5 U.S.C. 601 through 612. The term `` `small organization'
means any not-for-profit enterprise which is independently owned and
operated and is not dominant in its field, unless an agency
establishes [an alternative definition under notice and comment].''
5 U.S.C. 601(4). The term ```small governmental jurisdiction' means
governments of cities, counties, towns, townships, villages, school
districts, or special districts, with a population of less than
fifty thousand, unless an agency establishes [an alternative
definition after notice and comment].'' 5 U.S.C. 601(5).
\420\ 5 U.S.C. 601(3). The Bureau may establish an alternative
definition after consulting with the SBA and providing an
opportunity for public comment. Id.
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The RFA generally requires an agency to conduct an initial
regulatory flexibility analysis (IRFA) and a final regulatory
flexibility analysis (FRFA) of any rule subject to notice-and-comment
rulemaking requirements, unless the agency certifies that the rule will
not have a significant economic impact on a substantial number of small
entities.\421\ The Bureau also is subject to certain additional
procedures under the RFA involving the convening of a panel to consult
with small business representatives prior to proposing a rule for which
an IRFA is required.\422\
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\421\ 5 U.S.C. 601 through 612.
\422\ 5 U.S.C. 609.
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As discussed above, this final rule will revoke the Mandatory
Underwriting Provisions of the 2017 Final Rule. The section 1022(b)(2)
analysis above describes how this final rule will reduce the costs and
burdens on covered persons, including small entities, relative to a
baseline where compliance with the 2017 Final Rule becomes mandatory.
Additionally, the 2017 Final Rule's FRFA contains a discussion of the
specific costs and burdens imposed by the 2017 Final Rule on small
entities, including those imposed by the Mandatory Underwriting
Provisions that this final rule will reverse.\423\ In addition to the
removal of costs and burdens, all operations under current law, as well
as those that would be adopted if compliance with the Mandatory
Underwriting Provisions becomes mandatory, will remain available to
small entities under this final rule. Thus, a small entity that is in
compliance with the law will not need to take any additional action to
remain in compliance. Based on these considerations, this final rule
will not have a significant economic impact on any small entities.
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\423\ 82 FR 54472, 54853.
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In the 2019 NPRM, the Bureau's Director certified that the 2019
NPRM would not have a significant economic impact on a substantial
number of small entities. Thus, neither an IRFA nor a small business
review panel was required for the 2019 NPRM. The Bureau requested
comments on its analysis and any relevant data.
Some consumer group commenters asserted that the benefits to
lenders from the revocation of the Mandatory Underwriting Provisions
mean that this rule has a significant economic impact. The Bureau does
not agree that the benefits to small entities of this rule are capable
of qualifying as a ``significant economic impact'' on a substantial
number of small entities such that an IRFA and FRFA are required under
the RFA.\424\ That specific phrase is used several times in the RFA,
and under accepted principles of statutory interpretation there is a
presumption that a specific phrase bears the same meaning throughout a
statutory text. Other uses of the phrase make clear that it refers to
adverse effects on small entities, not benefits. For example, an IRFA
must discuss alternatives considered by the agency that ``minimize any
significant economic impact'' on small entities, and a FRFA must
discuss steps taken by the agency to ``minimize the significant
economic impact'' on small entities.\425\ Congress could not have
intended through the RFA to minimize benefits to small entities, and
accordingly the Bureau does not believe that the benefits of this rule
qualify as a significant economic impact. Further reinforcing this
conclusion, the other required elements of an IRFA and FRFA generally
focus on adverse effects on small entities, and none specifically
focuses on benefits to small entities.\426\ Thus, performing an IRFA or
FRFA for a rule as a result of its benefits to small entities and not
based on significant adverse effects on them would serve little
purpose.
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\424\ 5 U.S.C. 605(b).
\425\ 5 U.S.C. 603(c), 604(a)(6). See also 5 U.S.C. 610(a)
(periodic review of rules); Public Law 96-354, sec. 2(a)(7), 94
Stat. 1164 (congressional findings).
\426\ See 5 U.S.C. 603, 604.
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Several commenters that offer competing products not covered by the
2017 Final Rule argued this final rule will raise costs for them by
increasing competition via reduced transparency for payday lenders.
They further claimed that small banks and credit unions will experience
increased costs due to closed deposit accounts. The Bureau believes
that small entities not offering products directly covered by the 2017
Final Rule are outside of the scope of the RFA analysis for this final
rule.
A few groups also offered comments related to RISes and the RFA
analysis. Specifically, some consumer groups stated that payday lenders
will face increased costs due to fraud in the absence of RISes. The
Bureau agrees that there will be increased risk of costs due to fraud
under this final rule due to the absence of the RIS requirement for all
lenders, including small lenders. However, the Bureau does not believe
this increased cost will be significant. Some of these consumer groups
also argued that any small RISes will be negatively affected by the
proposal because lenders would no longer be required to use their
services. It is true that RISes, if any had come into existence, would
have experienced significantly less business as a result of this final
rule relative to the baseline of the 2017 Final Rule since lenders will
no longer be required to report to or use these RISes. However, the
Bureau believes that it is unlikely any small RISes would have existed
under the 2017 Final Rule as the scale involved in efficiently
collecting, maintaining, and sharing data would not be conducive to a
small business as seen in the market with other credit reporting
systems. Finally, several industry commenters and State legislators
supported the Bureau's proposed rule stating that the 2017 Final Rule
would have resulted in the closure of many small businesses due to
revenue decreases or increased costs related to training or the use of
RISes. The Bureau agrees that small lenders will experience a reduction
in costs and training related to the use of RISes which may avoid the
closure of some small lenders. The Bureau
[[Page 44444]]
generally agrees with these comments, but because these costs to small
entities are either not significant or do not apply to persons covered
by the 2017 Final Rule, the Bureau's certification still holds.
Accordingly, the Director of the Bureau hereby certifies that this
final rule will not have a significant economic impact on a substantial
number of small entities. Thus, a FRFA is not required for this final
rule.
XII. Paperwork Reduction Act
Under the Paperwork Reduction Act of 1995 (PRA),\427\ Federal
agencies are generally required to seek Office of Management and Budget
(OMB) approval for information collection requirements prior to
implementation. Under the PRA, the Bureau may not conduct or sponsor
and, notwithstanding any other provision of law, a person is not
required to respond to, an information collection, unless the
information collection displays a valid control number assigned by OMB.
This final rule revokes the mandatory underwriting requirements of 12
CFR part 1041; thereby removing the information collection requirements
previously contained in Sec. Sec. 1041.5, 1041.6, 1041.10, and
1041.11. The Bureau is continuing to seek OMB approval for the
information collection requirements remaining in 12 CFR part 1041
concerning the Payment Provisions as contained in Sec. Sec. 1041.8,
1041.9, and 1041.12. As noted in the 2019 NPRM, the collections of
information related to the 2017 Final Rule (concerning both the
Mandatory Underwriting Provisions and the Payment Provisions) were
submitted to OMB in 2017 in accordance with the PRA and assigned OMB
Control Number 3170-0065 for tracking purposes. That control number is
not active because OMB has not acted on those information collection
requests. The Bureau has submitted a revised information collection
request seeking a new OMB control number for the provisions of 12 CFR
part 1041 not affected by this final rule for OMB review under PRA
section 3507(d). This submission to OMB was made under OMB Control
Number 3170-0071, which OMB assigned for tracking purposes at the 2019
NPRM stage of this rulemaking. The Bureau will publish a separate
Federal Register notice once OMB concludes its review of this request.
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\427\ 44 U.S.C. 3501 et seq.
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When the 2019 NPRM was published, the Bureau invited comment on:
(a) Whether the collection of information is necessary for the proper
performance of the functions of the Bureau, including whether the
information will have practical utility; (b) the accuracy of the
Bureau's estimate of the burden of the collection of information,
including the validity of the methods and the assumptions used; (c)
ways to enhance the quality, utility, and clarity of the information to
be collected; and (d) ways to minimize the burden of the collection of
information on respondents, including through the use of automated
collection techniques or other forms of information technology. The
Bureau did not receive comments concerning these specific topics.
The Bureau did receive two other comments that addressed PRA
matters other than the four topics on which the Bureau requested
comment. First, consumer groups stated it was improper for the Bureau
to request comments on the PRA information collection request with
respect to the Payment Provisions since the proposal did not address
payments. The Bureau agrees with this comment.
In the second comment made by these groups, they stated that there
is implied OMB approval for the Payment Provisions data collections for
the 2017 Final Rule. Because the Payment Provisions are outside the
scope of this rulemaking, the extent to which the Bureau can infer OMB
approval by OMB's inaction on the information collection requirements
in the 2017 Final Rule is an issue that is beyond the scope of this
rulemaking.\428\
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\428\ The comments are correct that there is a provision in the
OMB regulations pertaining to information collection requests for an
agency to request that OMB issue a control number if OMB has not
acted on an information collection request within the time limits
that are established in the OMB regulations. The PRA does not,
however, provide for an ``inferred OMB approval.'' Rather, the PRA
generally provides that if OMB does not act on an information
collection request within 60 days, an agency may request that OMB
``assign an OMB control number.'' 5 CFR 1320.11(i). However, the
duration for the period during which the Bureau may collect
information is within OMB's discretion, and in the end, the Bureau
did not need to invoke this provision of the OMB regulations. The
Bureau will work with OMB when the information collections for the
Payment Provisions become operative in order to ensure compliance
with the PRA.
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XIII. Congressional Review Act
Pursuant to the Congressional Review Act,\429\ the Bureau will
submit a report containing this rule and other required information to
the U.S. Senate, the U.S. House of Representatives, and the Comptroller
General of the United States at least 60 days prior to the rule's
published effective date. The Office of Information and Regulatory
Affairs has designated this rule as a ``major rule'' as defined by 5
U.S.C. 804(2).
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\429\ 15 U.S.C. 801 et seq.
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XIV. Signing Authority
The Director of the Bureau, having reviewed and approved this
document, is delegating the authority to electronically sign this
document to Grace Feola, a Bureau Federal Register Liaison, for
purposes of publication in the Federal Register.
List of Subjects in 12 CFR Part 1041
Banks, Banking, Consumer protection, Credit, Credit unions,
National banks, Reporting and recordkeeping requirements, Savings
associations, Trade practices.
Authority and Issuance
For the reasons set forth above, the Bureau amends 12 CFR part 1041
as set forth below:
PART 1041--PAYDAY, VEHICLE TITLE, AND CERTAIN HIGH-COST INSTALLMENT
LOANS
0
1. The authority citation for part 1041 continues to read as follows:
Authority: 12 U.S.C. 5511, 5512, 5514(b), 5531(b), (c), and
(d), 5532.
Subpart A General
Sec. 1041.1 [Amended]
0
2. Amend Sec. 1041.1 by removing the last sentence of paragraph (b).
Sec. 1041.2 [Amended]
0
3. Amend Sec. 1041.2 by removing and reserving paragraphs (a)(14) and
(19).
Subpart B--[Removed and Reserved]
0
4. Remove and reserve subpart B, consisting of Sec. Sec. 1041.4
through 1041.6.
0
5. Revise the heading for subpart D to read as follows:
Subpart D--Recordkeeping, Anti-Evasion, Severability, and Dates
Sec. Sec. 1041.10 and 1041.11 [Removed and Reserved]
0
6. Remove and reserve Sec. Sec. 1041.10 and 1041.11.
0
7. Amend Sec. 1041.12 by revising paragraph (b)(1) and removing and
reserving paragraphs (b)(2) and (3) to read as follows:
Sec. 1041.12 Compliance program and record retention.
* * * * *
(b) * * *
(1) Retention of loan agreement for covered loans. To comply with
the requirements in this paragraph (b), a lender must retain or be able
to
[[Page 44445]]
reproduce an image of the loan agreement for each covered loan that the
lender originates.
* * * * *
Sec. 1041.15 [Amended]
0
8. Amend Sec. 1041.15 by removing paragraph (d).
Appendix A to Part 1041 [Amended]
0
9. In appendix A to part 1041, remove and reserve Model Forms A-1 and
A-2.
0
10. In supplement I to part 1041:
0
a. Under Section 1041.2--Definitions, revise 2(a)(5) Consummation and
remove 2(a)(19) Vehicle Security.
0
b. Under Section 1041.3--Scope of Coverage; Exclusions; Exemptions,
revise 3(e)(2) Borrowing History Condition and 3(e)(3) Income
Documentation Condition.
0
c. Remove Section 1041.4--Identification of Unfair and Abusive
Practice, Section 1041.5--Ability-to-Repay Determination Required,
Section 1041.6--Conditional Exemption for Certain Covered Short-Term
Loans, Section 1041.10--Furnishing Information to Registered
Information Systems, and Section 1041.11--Registered Information
Systems.
0
d. In Section 1041.12--Compliance Program and Record Retention:
0
i. Revise 12(a) Compliance Program and 12(b) Record Retention.
0
ii. Remove 12(b)(1) Retention of Loan Agreement and Documentation
Obtained in Connection With Originating a Covered Short-Term or Covered
Longer-Term Balloon-Payment Loan, 12(b)(2) Electronic Records in
Tabular Format Regarding Origination Calculations and Determinations
for a Covered Short-Term or Longer-Term Balloon-Payment Loan Under
Sec. 1041.5, 12(b)(3) Electronic Records in Tabular Format Regarding
Type, Terms, and Performance of Covered Short-Term or Covered Longer-
Term Balloon-Payment Loans, and Paragraph 12(b)(3)(iv).
0
iii. Revise 12(b)(5) Electronic Records in Tabular Format Regarding
Payment Practices for Covered Loans.
The revisions read as follows:
Supplement I to Part 1041--Official Interpretations
Section 1041.2--Definitions
* * * * *
2(a)(5) Consummation
1. New loan. When a contractual obligation on the consumer's part
is created is a matter to be determined under applicable law. A
contractual commitment agreement, for example, that under applicable
law binds the consumer to the loan terms would be consummation.
Consummation, however, does not occur merely because the consumer has
made some financial investment in the transaction (for example, by
paying a non-refundable fee) unless applicable law holds otherwise.
* * * * *
Section 1041.3--Scope of Coverage; Exclusions; Exemptions
* * * * *
3(e) Alternative Loans
* * * * *
3(e)(2) Borrowing History Condition
1. Relevant records. A lender may make an alternative covered loan
under Sec. 1041.3(e) only if the lender determines from its records
that the consumer's borrowing history on alternative covered loans made
under Sec. 1041.3(e) meets the criteria set forth in Sec.
1041.3(e)(2). The lender is not required to obtain information about a
consumer's borrowing history from other persons, such as by obtaining a
consumer report.
2. Determining 180-day period. For purposes of counting the number
of loans made under Sec. 1041.3(e)(2), the 180-day period begins on
the date that is 180 days prior to the consummation date of the loan to
be made under Sec. 1041.3(e) and ends on the consummation date of such
loan.
3. Total number of loans made under Sec. 1041.3(e)(2). Section
1041.3(e)(2) excludes loans from the conditional exemption in Sec.
1041.3(e) if the loan would result in the consumer being indebted on
more than three outstanding loans made under Sec. 1041.3(e) from the
lender in any consecutive 180-day period. See Sec. 1041.2(a)(17) for
the definition of outstanding loan. Under Sec. 1041.3(e)(2), the
lender is required to determine from its records the consumer's
borrowing history on alternative covered loans made under Sec.
1041.3(e) by the lender. The lender must use this information about
borrowing history to determine whether the loan would result in the
consumer being indebted on more than three outstanding loans made under
Sec. 1041.3(e) from the lender in a consecutive 180-day period,
determined in the manner described in comment 3(e)(2)-2. Section
1041.3(e) does not prevent lenders from making a covered loan subject
to the requirements of this part.
4. Example. For example, assume that a lender seeks to make an
alternative loan under Sec. 1041.3(e) to a consumer and the loan does
not qualify for the safe harbor under Sec. 1041.3(e)(4). The lender
checks its own records and determines that during the 180 days
preceding the consummation date of the prospective loan, the consumer
was indebted on two outstanding loans made under Sec. 1041.3(e) from
the lender. The loan, if made, would be the third loan made under Sec.
1041.3(e) on which the consumer would be indebted during the 180-day
period and, therefore, would be exempt from this part under Sec.
1041.3(e). If, however, the lender determined that the consumer was
indebted on three outstanding loans under Sec. 1041.3(e) from the
lender during the 180 days preceding the consummation date of the
prospective loan, the condition in Sec. 1041.3(e)(2) would not be
satisfied and the loan would not be an alternative loan subject to the
exemption under Sec. 1041.3(e) but would instead be a covered loan
subject to the requirements of this part.
3(e)(3) Income Documentation Condition
1. General. Section 1041.3(e)(3) requires lenders to maintain
policies and procedures for documenting proof of recurring income and
to comply with those policies and procedures when making alternative
loans under Sec. 1041.3(e). For the purposes of Sec. 1041.3(e)(3),
lenders may establish any procedure for documenting recurring income
that satisfies the lender's own underwriting obligations. For example,
lenders may choose to use the procedure contained in the National
Credit Union Administration's guidance at 12 CFR 701.21(c)(7)(iii) on
Payday Alternative Loan programs recommending that Federal credit
unions document consumer income by obtaining two recent paycheck stubs.
* * * * *
Section 1041.12--Compliance Program and Record Retention
12(a) Compliance Program
1. General. Section 1041.12(a) requires a lender making a covered
loan to develop and follow written policies and procedures that are
reasonably designed to ensure compliance with the applicable
requirements in this part. These written policies and procedures must
provide guidance to a lender's employees on how to comply with the
requirements in this part. In particular, under Sec. 1041.12(a), a
lender must develop and follow detailed written policies and procedures
reasonably designed to achieve compliance, as applicable, with the
payments requirements in Sec. Sec. 1041.8 and 1041.9. The provisions
and commentary in each
[[Page 44446]]
section listed above provide guidance on what specific directions and
other information a lender must include in its written policies and
procedures.
12(b) Record Retention
1. General. Section 1041.12(b) requires a lender to retain various
categories of documentation and information concerning payment
practices in connection with covered loans. The items listed are non-
exhaustive as to the records that may need to be retained as evidence
of compliance with this part.
* * * * *
12(b)(5) Electronic Records in Tabular Format Regarding Payment
Practices for Covered Loans
1. Electronic records in tabular format. Section 1041.12(b)(5)
requires a lender to retain records regarding payment practices in
electronic, tabular format. Tabular format means a format in which the
individual data elements comprising the record can be transmitted,
analyzed, and processed by a computer program, such as a widely used
spreadsheet or database program. Data formats for image reproductions,
such as PDF, and document formats used by word processing programs are
not tabular formats.
* * * * *
Dated: July 7, 2020.
Grace Feola,
Federal Register Liaison, Bureau of Consumer Financial Protection.
[FR Doc. 2020-14935 Filed 7-21-20; 8:45 am]
BILLING CODE 4810-AM-P