Letter to CFPB re: Small-Dollar Lending Rule Compliance Date

Dear Sir or Madam:

The American Bankers Association (ABA) appreciates the opportunity to comment on theBureau of Consumer Financial Protection’s (Bureau) proposal to extend by 15 months thecompliance date for the mandatory underwriting provisions of the 2017 final rule governingPayday, Vehicle Title, and Certain High-Cost Installment Loans (Final Rule).

I. Summary of Comment

ABA supports the Bureau’s decision to reconsider the Final Rule and its proposal to extend thecompliance date for the mandatory underwriting provisions in that Rule. (By separate proposal,the Bureau has proposed to rescind those provisions.) We agree that neither consumers, financialinstitutions, nor the public benefit when financial institutions must expend resources to complywith regulatory provisions that the Bureau has proposed to rescind or materially amend.

However, we urge the Bureau to extend immediately the compliance date for all provisions inthe Final Rule, including the provisions that impose restrictions and notice requirements inrelation to the withdrawal of payment from the borrower’s account for loans regulated by theRule (Payment Provisions). The Final Rule is intended to target short-term, small dollar, high-cost loans, but the language of the Final Rule in fact would regulate a much broader category ofloans (Covered Loans). Installment loans, single payment loans, and lines of credit of any dollaramount offered by banks (collectively, Traditional Consumer Loans) may be unintentionallyregulated by the Final Rule because it contains no maximum dollar amount or maximumduration for a loan to be designated a Covered Loan. Moreover, the Final Rule may apply notsolely to loans and lines of credit originated after the compliance date but also to existing ones.

Specifically, with limited exceptions, the Final Rule defines a “Covered Loan” to include allclosed-end loans and open-end lines of credit with a “balloon”-type payment due at maturity,among other loans covered by the Rule. As a result of this overly broad definition of CoveredLoan, the following illustrative examples of bank loans — each paid off with a balloon payment— could be subject to the same requirements as a two-week loan for $500 offered by a paydaylender:

• A $25 million loan secured by a collection of fine art;
• An unsecured “bridge” loan for $100,000 that allows the borrower to purchase a newhome before the borrower has sold his or her existing home; and
• An unsecured personal line of credit for $50,000 that allows the borrower to remodel hisor her home.

Presumably, the overbroad definition of a Covered Loan was unintended, since it is inconsistentwith the Bureau’s statutory objective to “reduce unwarranted regulatory burdens,” and it mayreduce the loans available to consumers without advancing any consumer protection purpose.

Moreover, this rulemaking represents the agency’s inaugural exercise of its authority undersection 1031 of the Dodd-Frank Act to designate a practice as unfair, deceptive, or abusive(UDAAP). The rulemaking may set fundamental precedent for the agency’s future exercise ofits authority under that section. Consequently, it is critical that, in any final rule, the Bureauidentify as unfair or abusive acts only those acts for which it has clear and convincing evidenceof the unfairness or abusiveness of the conduct to be regulated. Judged by this standard, theBureau cannot let stand the application of the Payment Provisions to Traditional ConsumerLoans. An immediate extension of the compliance date for all provisions in the Final Rule isneeded to provide the Bureau with sufficient time to address this critical failure of the Rule.

An extension in the compliance date is also necessary, because a cloud of uncertainty has hungover the Final Rule since it was published in the Federal Register in November 2017. Twomonths after publication, in January 2018, then-Acting Director Mulvaney announced that the Bureau “may reconsider” the Final Rule.In April 2018, two industry trade associations representing payday lenders filed a lawsuit in federal district court in Texas, seeking to overturnthe Final Rule. On November 6, 2018, a federal district court in Texas issued a stay of thecompliance date for all provisions in the Final Rule but, significantly, did not specify an end dateof the stay.10 That stay remains in force, but it could be lifted at any time.11 Moreover, theBureau has indicated that it may materially change the Payments Provision. The Bureau statedthat it “intends to examine” a petition for rulemaking it has received to exempt debit cardpayments and informal requests it received to “exempt certain types of lenders or loan productsfrom the Rule’s coverage . . . ."

An immediate extension of the compliance date for all provisions is needed so that banks do notexpend considerable time and resources to develop compliance systems for products that do notpresent consumer protection concerns and/or which may materially change under the Bureau’scurrent ongoing review. An immediate extension also would provide the Bureau with sufficienttime to address other deficiencies in the Final Rule that may be identified, avoiding the need forserial amendment of the Rule.

II. Background

In October 2017, the Bureau issued the Final Rule, which imposed restrictions on threecategories of loans:

• Closed-end loans and open-end lines of credit when the borrower is required to repaysubstantially the entire amount of the loan or advance within 45 days (Short-TermLoans);
• Closed-end loans and open-end lines of credit when the borrower is required to repaysubstantially the entire amount of the loan or advance in more than 45 days through asingle (balloon) payment or where any required payment on the loan is more than twiceas large as another payment (Longer-Term Balloon-Payment Loans); and
• Loans that have an annualized percentage rate (APR) that exceeds 36%, and for whichthe bank has obtained a “leveraged payment mechanism” over the account (Longer-Term Loans) (collectively, Covered Loans).

The Final Rule concluded that it is an unfair and abusive practice to make a Short-Term Loan orLonger-Term Balloon-Payment Loan without conducting a prescriptive “ability-to-repay”evaluation prior to making the loan (Underwriting Requirements). The Final Rule also concludedthat it is an unfair and abusive practice for a lender to initiate a withdrawal of payment on aCovered Loan from the borrower’s account after two consecutive unsuccessful withdrawalattempts, through the same or different payment channels, unless the lender obtains theborrower’s authorization for additional withdrawals from the account (Payment Provisions).These Provisions also require a lender to—

• Provide a “Payment Notice” prior to initiating the first payment withdrawal from thecustomer’s account;
• Provide an “Unusual Withdrawal Notice” prior to initiating a payment withdrawal whoseamount, timing, or payment channel differs from that of the regularly scheduledpayment; and
• Provide a “Consumer Rights Notice” after initiating two consecutive failed paymentwithdrawals from the customer’s account (which states that the lender is no longerpermitted to withdraw loan payments).

On February 6, 2019, the Bureau proposed to rescind the Underwriting Requirements. TheBureau did not address the Payment Provisions.

In addition, the Final Rule requires a bank or other lender to develop and follow written policiesand procedures that are “reasonably designed to ensure compliance” with the Final Rule’sprovisions. This provision would survive rescission of the Underwriting Requirements.

Also on February 6, 2019, the Bureau proposed to extend by 15 months (to November 19, 2020)the compliance date for the Underwriting Requirements of the Final Rule. The Bureau did notpropose to extend the compliance date for the other provisions of the Final Rule.

III. The Bureau Should Extend Immediately the Compliance Date for All Provisionsin the Final Rule

ABA supports the Bureau’s proposed extension of the compliance date for the Final Rule’sUnderwriting Requirements. However, we urge the Bureau to apply that extension to the entireFinal Rule, including the Payment Provisions.

a. An Extension of the Compliance Date for All Provisions in the Final RuleWill Allow the Bureau to Reconsider the Overbroad Definition of a CoveredLoan

An extension of all provisions of the Final Rule is necessary to give the Bureau time to revise thedefinition of a Covered Loan to exclude those loans that are not loans for which the Final Rulewas intended to apply, i.e. short-term, small dollar, high-cost loans. There is no evidenceassociated with this rulemaking that Traditional Consumer Loans raise consumer protectionconcerns or that they are made to vulnerable borrowers. These include, for example, thefollowing:

• “Bridge” loans, including those designed to assist with the purchase of the customer’snew home before the customer has sold his or her existing home. These loans are securedby collateral other than real estate or are unsecured. The loans typically have a term of 45days or less and nearly always have a balloon payment. As such, they may constitute aShort-Term Loan or, if longer than 45 days, a Longer-Term Balloon-Payment Loan.
• Demand lines of credit and other revolving lines, which are typically secured bysecurities held in a brokerage account or unsecured, with low periodic payments (such aspayments of interest only during the life of the loan). When these lines have a balloonpayment due at a fixed maturity date, they may constitute a Short-Term Loan or Longer-Term Balloon-Payment Loan within the language of the Final Rule. Even if a balloonpayment is not required, the line may nonetheless constitute a Short-Term Loan orLonger-Term Balloon-Payment Loan, depending on the borrower’s draw activity. Forexample, a borrower with a line of credit of $3,000 may make an initial draw of $300,resulting in a payment of interest only in the amount of $1.15. In the second month, theborrower could draw down the remaining $2,700, resulting in an interest payment of$15.53. Due to the higher balance, the required payment for the second month is morethan twice the amount due in the first month. As a result, the line would be a CoveredLoan under the language of the Final Rule, regardless of whether the loan is paid off witha balloon payment or on an installment basis, and regardless of the line’s APR.
• Loans secured by a Certificate of Deposit or other security. These loans typically requireinterest-only payments during the life of the loan, with the balance due at maturity.Because of the balloon payment, these loans would also constitute a Short-Term Loan orLonger-Term Balloon-Payment Loan under the Final Rule. One ABA member reports ithas approximately 32,000 lines of credit (secured by liquid assets or unsecured) and termloans (requiring the payment of interest only during the life of the loan), which would beunnecessarily subject to the Payment Provisions.
• Lines of credit. These lines could constitute a Longer-Term Loan if the bank assesses afinance charge in a billing cycle in which the principal balance is $0. Under the FinalRule, the line would become a Covered Loan for the duration of the extension of creditavailability (if other conditions are also met).
• To avoid imposing unwarranted regulation—which will reduce the credit products available tobank customers without advancing any consumer protection purpose—ABA urges the Bureau toextend the compliance date for the entire Final Rule and to request comment on the definition ofa Covered Loan. ABA recommends that the Bureau consider limitations to the overbroaddefinition of a Covered Loan to exclude loans over a certain dollar amount and beyond a certainterm. Notably, the Office of the Comptroller of the Currency’s (OCC) guidance on short-term,small dollar installment loans included references to both of these parameters.

i. The Payment Provisions will apply to Traditional Consumer Loans despitethe Bureau’s intention to exempt depository institutions.

In section 1041.8(a)(1)(ii) of the Final Rule, the Bureau sought to exempt lenders that are theborrower’s account-holding institution from the Payment Provisions. The “conditionalexclusion” applies if the institution, pursuant to its agreement with the borrower, (a) does notcharge the borrower a nonsufficient funds (NSF) or overdraft fee for the attempted withdrawal,and (b) does not close the borrower’s account in response to a negative balance that results froma transfer of funds initiated in connection with the loan.

ABA members report, however, that in practice the conditional exclusion will not allow the bankto avoid compliance with the Payment Provisions. For example, although most borrowers arealso depositors, many have accounts at other banks and may choose to make payment from thoseaccounts. If a check drawn on an account from another institution is returned twice forinsufficient funds, the bank would need to comply with the Payment Provisions. Thus, for eachCovered Loan, the lending bank must be prepared for the possibility that payment could be madefrom an account at another institution and that the lending bank is not exempt from the PaymentProvisions. Consequently, the conditional exclusion will not, in practice, allow the bank to avoidimplementing a system to comply with the Payment Provisions for Traditional Consumer Loans.

Second, if the bank receives payment on the loan by a paper check, and processing that paymentresults in a negative balance to the borrower’s account, the bank may not be able to determineimmediately that the action that led to the negative balance was payment on a Covered Loan, asopposed to an unrelated transaction. If the bank does not determine that the negative balance wascaused by payment on a Covered Loan and the bank charges an NSF or overdraft fee, then theexemption will not apply, and the bank will be subject to the Payment Provisions.

Our members report that these scenarios will require them to design compliance programs thatcomply with the Payment Provisions for all Traditional Consumer Loans. It simply would not befeasible operationally to establish monitoring systems (across multiple lines of business) toidentify payments from other accounts or to determine what transaction resulted in a negativebalance.

In addition, as stated above, the exemption protects withdrawals only if, pursuant to the financialinstitution’s loan or account agreement with the borrower, (a) the institution does not charge theborrower a nonsufficient funds (NSF) or overdraft fee for the attempted withdrawal, and (b) theinstitution does not close the borrower’s account in response to a negative balance that resultsfrom a transfer of funds initiated in connection with the loan.27 Few, if any, existing loan ordeposit agreements state that the bank will not charge an NSF or overdraft fee for anunsuccessful withdrawal attempt, regardless of whether the bank charges such a fee in thesecircumstances. Consequently, currently existing bank loans may not be exempt from thePayment Provisions.

The additional costs that banks will have to incur to comply with the Payment Provisions—across multiple lines of business and loan operating systems—may lead banks to exit the marketfor one or more Traditional Consumer Loan products. To avoid this result, which would beharmful to consumers, we urge the Bureau to clarify that the Payment Provisions do not apply tothese loans.

ii. There is no evidence offered in connection with the Final Rule that bankpayment withdrawal practices for Traditional Consumer Loans cause anyharm to borrowers.

To find that an act or practice is unfair, deceptive, or abusive under § 1031 of the Dodd-FrankAct, the Bureau must have evidence establishing the unfairness or abusiveness of the act. But therecord in this proceeding is devoid of evidence that borrowers are harmed by bank attempts towithdraw payment for Traditional Consumer Loans. The evidence that the Bureau relied on tosupport its UDAAP findings underpinning the Payment Provisions relates to repeated paymentwithdrawals made by non-banks to vulnerable borrowers who are already facing financialdistress. Based on its own research and enforcement experience, as well as publicly availabledata, the Bureau concluded that payments practices “among payday and payday installmentlenders . . . substantially increase [consumers’] financial distress.” The Bureau provided noevidence in this rulemaking that that Traditional Consumer Loans are made to vulnerableborrowers. Further distinguishing non-banks’ payment practices from banks’ practices, theBureau concluded that the non-bank “industry is an extreme outlier with regard to the rate ofreturned items.”

In sum, there is a lack of evidence in the record of the Final Rule that payment withdrawalpractices of banks cause harm to borrowers. It is impermissible for the Bureau to rely onevidence relating to non-banks as a justification for regulating bank products.

iii. The Bureau’s approach to assessing unfairness and abusiveness should beconsistent throughout its reconsideration of the Final Rule.

Because the Bureau has put forth no evidence that payment withdrawal practices for TraditionalConsumer Loans cause harm to borrowers, the Bureau is obligated to revise the definition of“Covered Loan” to exclude these loans from the Final Rule’s coverage. Such an exclusion wouldpreserve the ability of banks to continue to serve their customers’ credit needs with TraditionalConsumer Loans. However, an exclusion would not strengthen the weak foundation upon whichthe Bureau’s Payment Provisions rests. In its proposal to rescind the Underwriting Requirementsof the Final Rule, the Bureau has reassessed its approach to interpreting its authority to declarecertain acts or practices as “unfair” or “abusive.”32 Without explanation, however, the Bureauapplied this new approach only to the Underwriting Requirements and not to the PaymentProvisions. This is not good public policy. The inconsistent application of UDAAP standards—in particular, the failure to articulate clearly and apply consistently the elements of unfairnessand abusiveness—will generate confusion, which undermines competition and innovation. Weurge the Bureau to apply its new approach to the Final Rule in its entirety, including to thePayment Provisions.

Under the Dodd-Frank Act, to declare an act or practice “unfair,” the Bureau must have a“reasonable basis” to conclude, among other requirements, that “the act or practice causes or islikely to cause substantial injury to consumers which is not reasonably avoidable byconsumers.” In the Final Rule, the Bureau concluded that a consumer can “reasonably avoid[]”harm associated with the making of a covered Short-Term Loan or Longer-Term Balloon-Payment Loan only if the consumer has a specific understanding of the individualized risk ofentering into extended loan sequences or defaulting on the loan. However, in the proposal toreconsider the Underwriting Requirements, the Bureau concludes that “consumers need not have a specific understanding of their individualized likelihood and magnitude of harm such that theycould accurately predict how long they would be in debt after taking out a covered short-term orlonger-term balloon-payment loan for the injury to be reasonably avoidable.” Rather, theBureau concludes that consumers need have only a generalized understanding of their risk.

The Bureau appropriately applied similar analysis in its reassessment of whether certainunderwriting practices are “abusive.” Under 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 thematerial risks, costs, or conditions of the product or service . . . .” In the proposal to reconsiderthe Underwriting Requirements, the Bureau concludes that a consumer does not lackunderstanding of how a loan operates when the consumer lacks a “specific understanding of theirpersonal risks” of entering into extended loan sequences or defaulting on the loan. Rather,consumers have a “sufficient understanding” of the loan product “if they appreciate the generalrisks of harm associated with the products sufficient for them to consider taking reasonable stepsto avoid that harm.”

The Payment Provisions also rely on an interpretation of “understanding” that requires theconsumer to have a specific understanding of the lender’s payment practices in order to bedeemed to understand the costs and risks of the loan. Inexplicably, the Bureau has not reviewedand similarly rejected that conclusion. It is not good public policy for the Bureau to rely on thesame analysis that it has rejected in the context of the Underwriting Requirements to support adetermination of “unfair” or “abusive” with regard to lender payment practices. To promote thedevelopment of clearly articulated UDAAP standards, we urge the Bureau to reexamine thePayment Provisions using the same interpretation of “understanding” that the Bureau has appliedto the Underwriting Requirements.

iv. The application of the Payment Provisions to Traditional Consumer Loansresults in unnecessary and unwarranted regulatory burdens.

Traditional Consumer Loans frequently span multiple lines of business, product lines, and loanoperating systems. If the compliance date for the Payment Provisions is not extended, banks andother lenders will be forced—within six months—to prepare new disclosures, place thosedisclosures into multiple existing loan operating systems, and train bank staff on new procedures.The Bureau would impose these requirements despite the absence of evidence that Traditional Consumer Loans cause consumers harm and despite the Dodd-Frank Act’s mandate that theBureau “reduce unwarranted regulatory burdens.”

The imperative to develop compliance systems in little time would have a significant impact onbank operations. For example, one regional bank reported that the Payment Provisions wouldapply to 650,000 of the bank’s customers with consumer loans outstanding. In addition, theProvision would apply to nearly all loans to customers with the bank’s wealth managementdivision, because that division’s products are lines of credit or term loans with a balloonpayment. These loan products represent $250 million in outstanding term loans and $364 millionin outstanding lines of credit at that bank.

The additional costs that lenders would incur to comply with the Payment Provisions may leadbanks to exit the market for one or more Covered Loan products, thus reducing consumer choiceand credit availability, without any countervailing benefit to consumer protection.

b. An Extension of the Compliance Date for All Provisions in the Final RuleWill Allow the Bureau to Address Other Deficiencies in the PaymentsProvision

ABA has identified a number of problems with the Final Rule, including provisions in thePayment Provisions that, if followed, may create conflicts with other requirements. By extendingthe compliance date for all provisions in the Final Rule, the Bureau would have the opportunityto address these problems at one time.

For example, the Payment Provisions require a lender (who is not subject to the conditionalexclusion) to provide a notice to the borrower prior to the lender’s initiation of the first paymentwithdrawal from the borrower’s account. The notice must be provided either three business days(if by electronic delivery) or six business days (if by mail) prior to initiation of the withdrawal.These requirements may be impractical to follow in cases where the borrower provides a papercheck to the lending bank more than one business day prior to the date when the borrower seeksto make payment but fewer than three or six business days before that date. Under thosecircumstances, the bank would be required to provide the notice, and then wait up to three or sixdays (depending on the method of delivery of that notice) prior to initiating the transfer. Thismay result in late payment on the loan.

The Bureau acknowledged that other stakeholders have brought additional issues to the Bureau’sattention. We also expect that there are other issues that have not yet been identified. TheBureau has stated that it will “commence a separate rulemaking initiative” if it concludes that there is merit to any of the issues that have been brought to the agency’s attention. We urge theBureau to extend the compliance date to provide itself with an opportunity to consider these andother issues.

c. The Bureau Should Revise the Overbroad Definition of a Covered LoanThrough Notice-and-Comment Rulemaking

The Bureau has suggested informally that, if it decides to address the overbroad definition of aCovered Loan, it may do so through issuance of a guidance bulletin that states that the Bureauwill not bring adverse action against banks whose Traditional Consumer Loans are not incompliance with the Final Rule. Although we would appreciate the intent of such action, theissuance of guidance is insufficient, because the overbroad definition of a Covered Loan wouldremain in the Rule. It is untenable for a bank to rely on guidance that conflicts with the text of aregulation that has not been modified or rescinded. We urge the Bureau to revise the definition ofa Covered Loan through notice-and-comment rulemaking to provide banks with certainty that theFinal Rule does not apply to Traditional Consumer Loans.

d. Banks Need Sufficient Time to Design Systems to Comply with the Provisionsthat Remain in Force After the Bureau’s Rulemaking Concludes

The Bureau should extend the compliance date for all provisions in the Final Rule and, in theintervening time period, modify the definition of a Covered Loan to exclude TraditionalConsumer Loans offered by banks. In the event that the Bureau excludes Traditional ConsumerLoans from the Final Rule’s coverage, as we urge, banks will need sufficient time to developsystems to achieve compliance with the Rule for those bank loan products that remain subject tothe Rule. To implement new regulatory requirements, banks typically spend well over a yearreviewing a rule, identifying products that may be covered, conducting a gap analysis, and thenas necessary, modifying policies, procedures, and systems, training employees, and testing thenew procedures and systems. Even if the Bureau narrowed the types of loans restricted by theRule immediately after May 15, 2019 (the deadline for submission of comments in response tothe Bureau’s proposal to rescind the Underwriting Requirements), banks and other lenders wouldhave only three months to comply with the Payment Provisions. Plainly, that is insufficient time.

Conclusion

We appreciate and support the Bureau’s proposal to extend the compliance date of theUnderwriting Requirements in the Final Rule. We urge the Bureau to extend the compliance datefor all provisions in the Final Rule. An extension is needed to allow the Bureau to modify theFinal Rule to avoid regulation of Traditional Consumer Loans offered by banks. The Bureau didnot intend to restrict these products, which do not serve vulnerable consumers nor presentconsumer protection concerns. The Bureau has put forth no evidence in connection with the Final Rule that Traditional Consumer Loans are unfair or abusive. The Bureau should not letstand UDAAP findings that are unsupported by evidence.

Sincerely,

Jonathan Thessin
Senior Counsel, Center for Regulatory Compliance