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

 
CONTENT
Federal Register, Volume 84 Issue 31 (Thursday, February 14, 2019)
[Federal Register Volume 84, Number 31 (Thursday, February 14, 2019)]
[Proposed Rules]
[Pages 4252-4298]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-01906]
[[Page 4251]]
Vol. 84
Thursday,
No. 31
February 14, 2019
Part IV
Bureau of Consumer Financial Protection
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12 CFR Part 1041
Payday, Vehicle Title, and Certain High-Cost Installment Loans and
Delay of Compliance Date; Proposed Rules
Federal Register / Vol. 84 , No. 31 / Thursday, February 14, 2019 /
Proposed Rules
[[Page 4252]]
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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: Notice of proposed rulemaking.
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SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is
proposing to rescind certain provisions of the regulation promulgated
by the Bureau in November 2017 governing Payday, Vehicle Title, and
Certain High-Cost Installment Loans (2017 Final Rule or Rule). The
provisions of the Rule which the Bureau proposes to rescind 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, and recordkeeping requirements. This proposal is related to
another proposal, published separately in this issue of the Federal
Register, seeking comment on whether the Bureau should delay the August
19, 2019 compliance date for these portions of the 2017 Final Rule.
DATES: Comments must be received on or before May 15, 2019.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2019-
0006 or RIN 3170-AA80, by any of the following methods:
     Electronic: https://www.regulations.gov. Follow the
instructions for submitting comments.
     Email: 2019-NPRM-PaydayReconsideration@cfpb.gov. Include
Docket No. CFPB-2019-0006 or RIN 3170-AA80 in the subject line of the
message.
     Mail/Hand Delivery/Courier: Comment Intake, Bureau of
Consumer Financial Protection, 1700 G Street NW, Washington, DC 20552.
    Instructions: The Bureau encourages the early submission of
comments. All submissions should include the agency name and docket
number or Regulatory Information Number (RIN) for this rulemaking.
Because paper mail in the Washington, DC area and at the Bureau is
subject to delay, commenters are encouraged to submit comments
electronically. In general, all comments received will be posted
without change to https://www.regulations.gov. In addition, comments
will be available for public inspection and copying at 1700 G Street
NW, Washington, DC 20552, on official business days between the hours
of 10 a.m. and 5 p.m. Eastern Time. You can make an appointment to
inspect the documents by telephoning 202-435-7275.
    All comments, including attachments and other supporting materials,
will become part of the public record and subject to public disclosure.
Proprietary information or sensitive personal information, such as
account numbers, Social Security numbers, or names of other
individuals, should not be included. Comments will not be edited to
remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Eliott C. Ponte, Attorney-Advisor; Amy
Durant, Lawrence Lee, or Adam Mayle, Counsels; or Kristine M.
Andreassen, Senior Counsel, 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:
I. Summary of the Proposed Rule
    On October 5, 2017, the Bureau issued the 2017 Final Rule
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 (the Dodd-Frank Act or the Act).\1\ The Rule
was published in the Federal Register on November 17, 2017.\2\ It
became effective on January 16, 2018, although most provisions (12 CFR
1041.2 through 1041.10, 1041.12, and 1041.13) have a compliance date of
August 19, 2019.\3\ On January 16, 2018, the Bureau issued a statement
announcing its intention to engage in rulemaking to reconsider the 2017
Final Rule.\4\ 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.\5\ On October 26, 2018, the Bureau issued a
subsequent statement announcing it expected to issue notices of
proposed rulemaking (NPRMs) to reconsider certain provisions of the
2017 Final Rule and to address the Rule's compliance date.\6\ This is
one of those proposals; the other is published separately in this issue
of the Federal Register.
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    \1\ Public Law 111-203, 124 Stat. 1376 (2010).
    \2\ 82 FR 54472 (Nov. 17, 2017). The Bureau released its
proposal regarding payday, vehicle title, and certain high-cost
installment for public comment on June 2, 2016 (2016 Proposal). 81
FR 47864 (July 22, 2016).
    The Bureau received well over one million comments on the 2016
Proposal. As the Bureau noted in the 2017 Final Rule, these comments
included a large number of positive accounts of how people
successfully used such loans to address shortfalls or cope with
emergencies and concerns about the possibility of access to payday
loans being removed. 82 FR 54472, 54559. There were, however, a
significant though smaller number of comments discussing negative
experiences from individual consumers or persons concerned about the
impact payday loans have had on consumers whom they knew. Id. at
54559-60.
    \3\ Id. at 54814.
    \4\ See Bureau of Consumer Fin. Prot., Statement on Payday Rule
(Jan. 16, 2018), https://www.consumerfinance.gov/about-us/newsroom/cfpb-statement-payday-rule/.
    \5\ Cmty. Fin. Serv. Ass'n of Am. v. Consumer Fin. Prot. Bureau,
No. 1:18-cv-295 (W.D. Tex.). 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. 29.
    \6\ 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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    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.\7\ 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,\8\ establishing
certain requirements and limitations with respect to attempts to
withdraw payments on the loans from consumers' checking or other
accounts.\9\ These provisions are referred to herein as the ``Payment
Provisions'' of the 2017 Final Rule.
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    \7\ 12 CFR 1041.4 through 1041.6, 1041.10, 1041.11, and portions
of 1041.12.
    \8\ The 2017 Final Rule refers to all three of these categories
of loans together as covered loans. 12 CFR 1041.3(b).
    \9\ 12 CFR 1041.7 through 1041.9, and portions of 1041.12.
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    The Bureau is proposing in this NPRM to rescind the Mandatory
Underwriting Provisions of the 2017 Final Rule. Specifically, the
Bureau is proposing to rescind (1) the ``identification'' provision
which states that it is an unfair and abusive practice for a lender to
make covered short-term
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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; \10\ (2) the ``prevention'' provision which
establishes specific underwriting requirements for these loans to
prevent the unfair and abusive practice; \11\ (3) the ``conditional
exemption'' provision for certain covered short-term loans; \12\ (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;
\13\ and (5) those portions of the recordkeeping provisions related to
the mandatory underwriting requirements.\14\ The Bureau also is
proposing to rescind the Official Interpretations relating to these
provisions.
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    \10\ 12 CFR 1041.4.
    \11\ 12 CFR 1041.5.
    \12\ 12 CFR 1041.6.
    \13\ 12 CFR 1041.10 and 1041.11.
    \14\ 12 CFR 1041.12(b)(1) through (3).
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    As explained below, the Bureau now initially determines that the
evidence underlying the identification of the unfair and abusive
practice in the Mandatory Underwriting Provisions of the 2017 Final
Rule is not sufficiently robust and reliable to support that
determination, in light of the impact those provisions will have on the
market for covered short-term and longer-term balloon-payment loans,
and the ability of consumers to obtain such loans, among other things.
The Bureau is not aware of any additional evidence that would provide
the support needed for the key findings that are essential to such a
determination and does not believe it is cost-effective for itself and
for lenders and borrowers to conduct the necessary research to try to
develop those key findings. The Bureau is therefore proposing to
rescind those identifications. The Bureau is also now initially
determining that its approach for unfairness and abusiveness was
problematic and is proposing a different approach to determining
whether consumers can reasonably avoid the substantial injury that the
Rule determined is caused or likely to be caused by the failure to
underwrite these loans,\15\ whether such injury is outweighed by
countervailing benefits to consumers and to competition,\16\ and
whether the failure to underwrite takes unreasonable advantage of
particular consumer vulnerabilities.\17\ Based on its reconsideration
of these issues, the Bureau is proposing to rescind the Mandatory
Underwriting Provisions in their entirety.
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    \15\ See 12 U.S.C. 5531(c)(1)(A).
    \16\ See 12 U.S.C. 5531(c)(1)(B).
    \17\ See 12 U.S.C. 5531(d)(2)(A).
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    The Bureau is not proposing to reconsider the Payment Provisions of
the 2017 Final Rule, and the Payment Provisions are outside the scope
of this NPRM. However, the Bureau has received a rulemaking petition to
exempt debit card payments from the Rule's Payment Provisions. The
Bureau has also received informal 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 intends to examine these issues and if the Bureau determines
that further action is warranted, the Bureau will commence a separate
rulemaking initiative (such as by issuing a request for information
(RFI) or an advance notice of proposed rulemaking). In addition, the
Bureau intends to use its existing 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.\18\
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    \18\ 12 CFR 1041.9(b)(1)(ii).
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II. Background
    The SUPPLEMENTARY INFORMATION accompanying the 2017 Final Rule
contains background on the payday and vehicle title markets \19\ and on
the consumers who use these products.\20\ The SUPPLEMENTARY INFORMATION
also contains findings of the impacts that the Mandatory Underwriting
Provisions of the 2017 Final Rule would have on consumers and covered
persons.\21\ The Bureau does not here repeat all of that information
and those findings. Rather, this section summarizes the information and
findings from the 2017 Final Rule that the Bureau views as most
relevant to the Bureau's decision to propose rescinding the Mandatory
Underwriting Provisions.
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    \19\ See 82 FR 54472, 54474-96.
    \20\ Id. at 54555-60.
    \21\ Id. at 54814-46.
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A. The Market for Short-Term and Balloon-Payment Loans
    As the Bureau observed in the 2017 Final Rule, consumers living
paycheck to paycheck and with little to no savings often use credit as
a means of coping with financial shortfalls.\22\ 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.\23\ According to a recent survey conducted by the
Board of Governors of the Federal Reserve System (Board), over one-
quarter of adults are either just getting by or finding it difficult to
get by; a similar percentage skipped necessary medical care in 2017 due
to being unable to afford the cost. In addition, 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.\24\ 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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    \22\ Id. at 54474.
    \23\ Id., citing, generally, Rob Levy & Joshua Sledge, A Complex
Portrait: An Examination of Small-Dollar Credit Consumers (Ctr. for
Fin. Serv. Innovation, 2012), https://www.fdic.gov/news/conferences/consumersymposium/2012/A%20Complex%20Portrait.pdf.
    \24\ Bd. of Governors of the Fed. Reserve Sys., Report on the
Economic Well-Being of U.S. Households in 2017, at 2, 5, 7, 21, 23
(May 2018), https://www.federalreserve.gov/publications/files/2017-report-economic-well-being-us-households-201805.pdf; and Bd. of
Governors of the Fed. Reserve Sys., Report on the Economic Well-
Being of U.S. Households in 2017, Appendix A: Survey Questionnaire,
https://www.federalreserve.gov/publications/appendix-a-survey-questionnaire.htm. These represent improvements from the 2016 survey
relied upon in the 2017 Final Rule. 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.
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    The Mandatory Underwriting Provisions of the 2017 Final Rule
focused specifically on short-term loans and a smaller market segment
of longer-term balloon-payment loans. As the Bureau noted, 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.\25\
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    \25\ 82 FR 54472, 54475.
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1. Payday Loans
    Seventeen States and the District of Columbia prohibit payday
lending or impose interest rate caps that payday lenders find too low
to enable them to make such loans profitably. The remaining 33 States
have either created a carve-out from their general usury cap
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for payday loans or do not regulate interest rates on loans.\26\
Several States that previously authorized payday lending have, over the
past several years, changed their laws to restrict payday lending.\27\
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    \26\ See, e.g., id. at 54477 & n.25. The 2017 Final Rule cited
35 payday authorizing States, counting New Mexico among those
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. Now that the law is in effect, New Mexico is no longer
counted here. Recently, Ohio enacted a law that, when implemented on
April 27, 2019, will effectively prohibit short-term payday and
vehicle title lending. Because the Ohio law has not yet been
implemented, Ohio is counted as a payday authorizing State and
references herein refer to current Ohio law. 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.
    \27\ See, e.g., 82 FR 54472, 54485-86. In addition, most
recently, 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 takes effect February 1, 2019,
shortly before the release of this NPRM. Colorado is now counted
here as a State prohibiting 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).
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    States that permit payday lending have chosen to adopt a variety of
limitations, including regulations of the maximum price,\28\ minimum
loan term,\29\ maximum loan amount,\30\ the maximum number of loans
that can be made to an individual consumer (loan cap),\31\ the maximum
number of times that a consumer may renew or roll over a loan,\32\ and
the length of time between loans (cooling-off periods).\33\ In
addition, at least 16 States have adopted laws requiring payday lenders
to offer borrowers the option of taking an extended repayment plan when
encountering difficulty in repaying the loan.\34\ These State laws
represent the judgment of the various States as to the limitations, if
any, that should be placed on the terms pursuant to which consumers
have the ability to choose payday loans within their respective
jurisdictions.
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    \28\ Of the States that expressly authorize payday lending,
Rhode Island has the lowest cap at 10 percent of the loan amount.
R.I. Gen. Laws sec. 19-14.4-4(4). Florida caps fees at 10 percent of
the loan amount plus a flat $5 database verification fee. Fla. Stat.
Ann. sec. 560.404(6). Oregon's fees are $10 per $100 capped at $30
plus 36 percent interest. Or. Rev. Stat. sec. 725A.064(1) & (2).
Some States have tiered caps depending on the size of the loan.
Generally, in these States the cap declines with loan size. However,
in Mississippi, the cap is $20 per $100 for loans under $250 and
$21.95 for loans up to $500 (the State maximum). Miss. Code Ann.
sec. 75-67-519(4). Six States do not cap fees on payday loans or are
silent on fees: Delaware, Idaho, Nevada, Texas (no cap on credit
access business fees added to interest on loans), Utah, and
Wisconsin. Del. Code Ann. tit. 5, sec. 2229; Idaho Code sec. 28-46-
412(3); Nev. Rev. Stat. Ann. sec. 675.365; Tex. Fin. Code Ann. sec.
393.602(b); Utah Code Ann. sec. 7-23-401; Wis. Stat. Ann. sec.
138.14(10)(a). See also 82 FR 54472, 54477 & n.31.
    \29\ For example, Washington requires the due date to be on or
after the borrower's next pay date, but if the pay date is within
seven days of taking out the loan, the due date must be on the
second pay date after the loan is made. Wash. Rev. Code Ann. sec.
31.45.073(2). See also 82 FR 54472, 54478 & n.35.
    \30\ At least 18 States cap payday loan amounts between $500 and
$600 (Alabama, Alaska, Florida, Hawaii, Iowa, Kansas, Kentucky,
Michigan, Mississippi, Missouri, Nebraska, North Dakota, Ohio,
Oklahoma, Rhode Island, South Carolina, Tennessee, and Virginia).
Ala. Code sec. 5-18A-12(a); Alaska Stat. sec. 06.50.410; Fla. Stat.
Ann. sec. 560.404(5); Haw. Rev. Stat. sec. 480F-4(c); Iowa Code Ann.
sec. 533D.10(1)(b); Kan. Stat. Ann. sec. 16a-2-404(1)(c); Ky. Rev.
Stat. Ann. sec. 286.9-100(9); Mich. Comp. Laws Ann. sec.
487.2153(1); Miss. Code Ann. sec. 75-67-519(2); Mo. Rev. Stat. sec.
408.500(1); Neb. Rev. Stat. sec. 45-919(1)(b); N.D. Cent. Code sec.
13-08-12(3); Ohio Rev. Code Ann. sec. 1321.39(A); Okla. Stat. Ann.
tit. 59, sec. 3106(7); R.I. Gen. Laws sec. 19-14.4-5.1(a); S.C. Code
Ann. sec. 34-39-180(B); Tenn. Code Ann. sec. 45-17-112(o); Va. Code
Ann. sec. 6.2-1816(5). California limits payday loans to $300
(including the fee), and Delaware caps loans at $1,000. Cal. Fin.
Code sec. 23035(a); Del. Code Ann. tit. 5, sec. 2227(7). States that
limit the loan amount to the lesser of one percent of the borrower's
income or a fixed-dollar amount include Idaho (25 percent or
$1,000), Illinois (25 percent or $1,000), Indiana (20 percent or
$550), Washington (30 percent or $700), and Wisconsin (35 percent or
$1,500). Idaho Code Ann. sec. 28-46-413(1)-(2); 815 Ill. Comp. Stat.
122/2-5(e); Ind. Code secs. 24-4.5-7-402, 404; Wash. Rev. Code sec.
31.45.073(2); Wis. Stat. Ann. sec. 138.14(12)(b). At least one
State, Nevada, caps the maximum payday loan at 25 percent of the
borrower's gross monthly income. Nev. Rev. Stat. sec. 604A.5017. A
few States' laws (e.g., Utah and Wyoming) are silent as to the
maximum loan amount. Utah Code Ann. sec. 7-23-401; Wyo. Stat. Ann.
sec. 40-14-363. See also 82 FR 54472, 54477 & n.27.
    \31\ Washington limits consumers to no more than eight loans
from all lenders in a rolling 12-month period. See Wash. Dep't of
Fin. Insts., 2017 Payday Lending Report, at 7, https://dfi.wa.gov/sites/default/files/reports/2017-payday-loan-report.pdf. Delaware, a
State with no fee restrictions for payday loans, restricts consumers
to five payday loans, including rollovers, in a 12-month period.
Del. Code Ann. tit. 5, secs. 2227(7), 2235A(a)(1). See also 82 FR
54472, 54486 & nn.128, 129.
    \32\ States that prohibit rollovers include California, Florida,
Hawaii, Illinois, Indiana, Kentucky, Michigan, Minnesota,
Mississippi, Nebraska, Oklahoma, South Carolina, Tennessee,
Virginia, Washington, and Wyoming. Cal. Fin. Code sec. 23037(a);
Fla. Stat. Ann. sec. 560.404(18); Haw. Rev. Stat. sec. 480F-4(d);
815 Ill. Comp. Stat. 122/2-30; Ind. Code sec. 24-4.5-7-402(7); Ky.
Rev. Stat. Ann. sec. 286.9-100(14); Mich. Comp. Laws Ann. sec.
487.2155(1); Minn. Stat. Ann. sec. 47.60(2)(f); Miss. Code Ann. sec.
75-67-519(5); Neb. Rev. Stat. sec. 45-919(1)(f); Okla. Stat. Ann.
tit. 59, sec. 3109(A); S.C. Code Ann. sec. 34-39-180(F); Tenn. Code
Ann. sec. 45-17-112(q); Va. Code Ann. sec. 6.2-1816(6); Wash. Rev.
Code Ann. sec. 31.45.073(2); Wyo. Stat. Ann. sec. 40-14-364. Other
States such as Iowa and Kansas restrict a loan from being repaid
with the proceeds of another loan; Wisconsin limits such loans. Iowa
Code Ann. sec. 533D.10(1)(e); Kan. Stat. Ann. sec. 16a-2-404(6);
Wis. Stat. Ann. sec. 138.14 (12)(a). Other States that permit some
limited degree of rollovers include Alabama (one); Alaska (two);
Delaware (four); Idaho (three); Missouri (six if there is at least 5
percent principal reduction on each rollover); Nevada (may extend
loan up to 60 days after the end of the initial loan term); North
Dakota (one); Oregon (two); Rhode Island (one); and Utah (allowed up
to 10 weeks after the execution of the first loan). Ala. Code sec.
5-18A-12(b); Alaska Stat. sec. 06.50.470(b); Del. Code Ann. tit. 5,
sec. 2235A(a)(2); Idaho Code Ann. sec. 28-46-413(9); Mo. Rev. Stat.
sec. 408.500(6); Nev. Rev. Stat. sec. 604A.5029(1); N.D. Cent. Code
sec. 13-08-12(12); Or. Rev. Stat. sec. 725A.064(6); R.I. Gen. Laws
sec. 19-14.4-5.1(g); Utah Code Ann. sec. 7-23-401(4)(c). See also 82
FR 54472, 54478 & n.37.
    \33\ States with cooling-off periods include Alabama (next
business day after a rollover is paid in full); Florida (24 hours);
Illinois (seven days after a consumer has had payday loans for more
than 45 days); Indiana (seven days after five consecutive loans);
North Dakota (three business days); Ohio (one day with a two loan
limit in 90 days, four per year); Oklahoma (two business days after
fifth consecutive loan); Oregon (seven days); South Carolina (one
business day between all loans and two business days after seventh
loan in a calendar year); Virginia (one day between all loans, 45
days after fifth loan in a 180-day period, and 90 days after
completion of an extended payment plan or extended term loan); and
Wisconsin (24 hour after renewals). Ala. Code sec. 5-18A-12(b); Fla.
Stat. Ann. sec. 560.404(19); 815 Ill. Comp. Stat. 122/2-5(b); Ind.
Code sec. 24-4.5-7-401(2); N.D. Cent. Code sec. 13-08-12(4); Ohio
Rev. Code Ann. sec. 1321.41(E), (N), (R); Okla. Stat. Ann. tit. 59,
sec. 3110; Or. Rev. Stat. sec. 725A.064(7); S.C. Code Ann. sec. 34-
39-270(A), (B); Va. Code Ann. sec. 6.2-1816(6); Wis. Stat. Ann. sec.
138.14(12)(a). See also 82 FR 54472, 54478 & n.39.
    \34\ States with statutory extended repayment plans include
Alabama, Alaska, Florida, Idaho, Illinois, Indiana, Louisiana,
Michigan (fee permitted), Nevada, Oklahoma (fee permitted), South
Carolina, Utah, Virginia, Washington, Wisconsin, and Wyoming.
Florida also requires that, as a condition of providing a repayment
plan (called a grace period), borrowers make an appointment with a
consumer credit counseling agency and complete counseling by the end
of the plan. Ala. Code sec. 5-18A-12(c); Alaska Stat. sec.
06.50.550(a); Fla. Stat. Ann. sec. 560.404(22)(a); Idaho Code Ann.
sec. 28-46-414; 815 Ill. Comp. Stat. 122/2-40; Ind. Code sec. 24-
4.5-7-401(3), 404; La. Rev. Stat. Ann. sec. 9:3578.4.1; Mich. Comp.
Laws Ann. sec. 487.2155(2); Nev. Rev. Stat. sec. 604A.5027(1); Okla.
Stat. tit. 59, sec. 3109(D); S.C. Code Ann. sec. 34-39-280; Utah
Code Ann. sec. 7-23-403; Va. Code Ann. sec. 6.2-1816(26); Wash. Rev.
Code Ann. sec. 31.45.084(1); Wis. Stat. Ann. sec. 138.14(11)(g);
Wyo. Stat. Ann. sec. 40-14-366(a). See also 82 FR 54472, 54478 &
n.40.
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    Changes to State-level regulation as described above may have
contributed to the decline in payday lending complaints the Bureau
handled through its Consumer Response database. As cited in the 2017
Final Rule, in 2016 the Bureau handled approximately 4,400 complaints
in which consumers reported ``payday loan'' as the complaint
product.\35\ In contrast, the Bureau received approximately 2,900
payday loan complaints in 2017, and
[[Page 4255]]
approximately 2,300 in 2018.\36\ In each of these reporting years, it
appears that consumers complained most frequently about unexpected fees
associated with payday loans, while consumers complaining about
receiving a loan for which payday lenders had not determined their
ability to repay loans were less frequent.
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    \35\ Bureau of Consumer Fin. Prot., Consumer Response Annual
Report, Jan. 1-Dec. 31, 2016, at 33 (March 2017), https://www.consumerfinance.gov/documents/3368/201703_cfpb_Consumer-Response-Annual-Report-2016.PDF.
    \36\ Bureau of Consumer Fin. Prot., Consumer Response Annual
Report, Jan. 1-Dec. 31, 2017, at 34 (March 2018), https://www.consumerfinance.gov/documents/6406/cfpb_consumer-response-annual-report_2017.pdf; Bureau of Consumer Fin. Prot. Consumer
Response Database. To provide a sense of the number of complaints
for payday loans relative to the number of complaints for other
product categories, from October 1, 2017 through September 30, 2018,
approximately 0.7 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., Fall 2018 Semi-Annual
Report of the Bureau of Consumer Financial Protection, at 25
(forthcoming Feb. 2019). The Bureau notes that 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.
---------------------------------------------------------------------------
    The primary channel through which consumers obtain payday loans, as
measured by total dollar volume, is through State-licensed storefront
locations. Nevertheless, as discussed in the 2017 Final Rule, the
online payday loan industry generates about 50 percent of total payday
loan revenue.\37\ According to one industry analyst, there were an
estimated 14,348 storefronts in 2017, down from the industry's peak of
over 24,000 stores ten years earlier.\38\ In the 2017 Final Rule, the
Bureau noted that there were at least 10 payday lenders with
approximately 200 or more storefront locations.\39\ The Bureau also
estimated that there were over 2,400 storefront payday lenders that are
small businesses as defined by the Small Business Administration
(SBA).\40\
---------------------------------------------------------------------------
    \37\ See 82 FR 54472, 54487 and John Hecht, Short Term Lending
Update: Moving Forward with Positive Momentum (2018) (Jefferies LLC,
slide presentation) (on file).
    \38\ See John Hecht, Short Term Lending Update: Moving Forward
with Positive Momentum (2018) (Jefferies LLC, slide presentation)
(on file). In 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.
    \39\ 82 FR 54472, 54479 & n.49. These lenders include ACE Cash
Express, Advance America, Amscot Financial, Axcess Financial
(including brands Check `n Go, Allied Cash), Check Into Cash,
Community Choice Financial (including brand Checksmart), CURO
Financial Technologies (including brand Speedy Cash), DFC Global
Corp (Money Mart), FirstCash, and QC Holdings. Additional payday
lenders with at least 200 storefront locations include Cash Express,
LLC and Cottonwood Financial dba Cash Store. See ACE Cash Express,
``Store Locator,'' https://www.acecashexpress.com/locations; Advance
America, ``Find an Advance America Store Location,'' https://www.advanceamerica.net/store-locations; Amscot Financial, Inc.,
``Amscot Locations,'' https://www.amscot.com/locations.aspx; Check
`n Go, ``State Center,'' https://www.checkngo.com/resources/state-center; Allied Cash Advance, ``Allied Cash Advance Store
Directory,'' https://locations.alliedcash.com/index.html; Check Into
Cash, ``Payday Loan Information By State,'' https://checkintocash.com/payday-loan-information-by-state; Community Choice
Financial (Checksmart), ``Locations,'' https://www.ccfi.com/locations/; SpeedyCash, ``Speedy Cash Stores Near Me,'' https://www.speedycash.com/find-a-store; Money Mart Financial Services,
``Home,'' http://www.moneymartfinancialservices.com/index.html;
FirstCash Inc., ``Find a Location Near You,'' http://www.firstcash.com/; QC Holdings, Inc., ``United States Retail
Operations,'' https://www.qchi.com/productsandservices/usa/retail/;
see Cash Express, LLC, https://www.cashtn.com/; see also https://www.consumerfinance.gov/about-us/newsroom/bureau-consumer-financial-protection-settles-cash-express/(noting approximately 328 retail
lending outlets); Cottonwood Financial dba Cash Store, https://www.cashstore.com/cash-advance-lender-about-us (all last visited
Feb. 4, 2019).
    \40\ 82 FR 54472, 54479 & n.52. 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. See
id. at 54480 & n.53.
---------------------------------------------------------------------------
    Studies seeking to determine the number of consumers who use payday
loans annually have come up with a wide range of estimates, from 2.2
million households \41\ to 12 million individuals.\42\ 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
and is cited by at least one industry trade association.\43\
---------------------------------------------------------------------------
    \41\ 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. 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.
    \42\ 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), http://www.pewtrusts.org/~/media/legacy/
uploadedfiles/pcs_assets/2012/pewpaydaylendingreportpdf.pdf.
    \43\ 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 Feb. 4, 2019). 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.
---------------------------------------------------------------------------
    A number of studies have focused on the characteristics of payday
borrowers and have found that they typically come from low and moderate
income households.\44\ The Bureau's own research found that 18 percent
of storefront borrowers relied on Social Security or some other form of
government benefits or public assistance.\45\
---------------------------------------------------------------------------
    \44\ See 82 FR 54472, 54556-57 (citing studies discussed in
text).
    \45\ See id. at 54556 & n.469, referencing the Bureau's analysis
of confidential supervisory data in Bureau of Consumer Fin. Prot.,
Payday Loans and Deposit Advance Products--A White Paper of Initial
Data Findings, at 18 (2013), https://files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf.
---------------------------------------------------------------------------
    Studies of payday borrowers show poor credit histories, limited
credit availability, and recent credit-seeking activity.\46\ For
example, a report analyzing credit scores of borrowers from five large
storefront payday lenders and a number of online lenders found that the
average storefront borrower had a VantageScore 3.0 score of 532 and
that the average online borrower had a score of 525.\47\ An academic
paper that matched administrative data (i.e., data that is collected or
obtained from an organization's or institution's own records and
operations) from one storefront payday lender to credit bureau data
found that 80 percent of payday applicants had either no credit card or
no credit available on a card.\48\ The average borrower had 5.2 credit
inquiries on her credit report over the 12 months preceding her initial
application for a payday loan (three times the number for the general
population), but obtained only 1.4 accounts on average.\49\
---------------------------------------------------------------------------
    \46\ See 82 FR 54472, 54557 (citing studies discussed in text).
    \47\ See id. at 54557, nn.480, 482, citing nonPrime101, Report
8: Can Storefront Payday Borrowers Become Installment Loan
Borrowers? Can Storefront Payday Lenders Become Installment
Lenders?, at 5, 7 (2015) (on file). A VantageScore 3.0 score is a
credit score created by an eponymous joint venture of the three
major credit reporting companies; scores lie in the range of 300-
850. See 82 FR 54472, 54557 n.479. By way of comparison, the
national average VantageScore in 2017 was 675 and only 21.2 percent
of consumers have a VantageScore below 600. Experian, State of
Credit: 2017 (2018), https://www.experian.com/blogs/ask-experian/state-of-credit/.
    \48\ See 82 FR 54472, 54557 & n.477, citing Neil Bhutta et al.,
Consumer Borrowing after Payday Loan Bans, 59 J. of L. and Econ.
225, at 231-233 (2016). Note that the credit score used in this
analysis was the Equifax Risk Score which ranges from 280-850.
Frederic Huynh, FICO Score Distribution, FICO Blog (Apr. 15, 2013),
http://www.fico.com/en/blogs/risk-compliance/fico-score-distribution-remains-mixed/.
    \49\ 82 FR 54472, 54557 & n.478, citing Neil Bhutta et al.,
Consumer Borrowing after Payday Loan Bans, 59 J. of L. & Econ. 225,
at 231-233 (2016).
---------------------------------------------------------------------------
    Surveys of payday borrowers add to the picture of a substantial
portion of consumers in financial distress.\50\ For example, in a
survey of payday borrowers published in 2009, fewer than half reported
having any savings or
[[Page 4256]]
reserve funds.\51\ Similarly, a 2007 survey found that over 80 percent
of payday borrowers reported making at least one late payment on a bill
in the preceding three months, and approximately one quarter reported
frequently paying bills late.\52\ Approximately half reported bouncing
at least one check in the previous three months, and 30 percent
reported doing so more than once.\53\ Furthermore, a 2012 survey found
that 58 percent of payday borrowers report that they struggle to pay
their bills on time.\54\
---------------------------------------------------------------------------
    \50\ 82 FR 54472, 54458 (citing surveys referenced in text).
    \51\ Id. at 54458 & n.485, citing Gregory Elliehausen, An
Analysis of Consumers' Use of Payday Loans, at 29 (Geo. Wash. Sch.
of Bus., Monograph No. 41, 2009), https://www.researchgate.net/publication/237554300_AN_ANALYSIS_OF_CONSUMERS%27_USE_OF_PAYDAY_LOANS.
    \52\ 82 FR 54472, 54558 & n.486, citing Jonathan Zinman,
Restricting Consumer Credit Access: Household Survey Evidence on
Effects Around the Oregon Rate Cap, at 20 tbl. 1 (Dartmouth College,
2008), http://www.dartmouth.edu/~jzinman/Papers/
Zinman_RestrictingAccess_oct08.pdf.
    \53\ Id.
    \54\ 82 FR 54472, 54558 & n.487, citing Pew Charitable Trusts,
Payday Lending in America: How Borrowers Choose and Repay Payday
Loans, at 9 (Report 2, 2013), http://www.pewtrusts.org/en/research-and-analysis/reports/2013/02/19/how-borrowers-choose-and-repay-payday-loans.
---------------------------------------------------------------------------
    According to Bureau research, payday loan borrowers typically
borrow relatively small amounts, with a median loan size of $350.\55\
As the Bureau observed in the 2017 Final Rule, understanding why
borrowers take out a payday loan is challenging for several reasons.
For example, because money is fungible, a consumer who has an
unexpected expense may not feel the effect fully until weeks later and
thus, when surveyed, may say either that she took out the loan because
of the unexpected expense, or that she took out the loan to cover a
bill that had come due and for which she was short of cash.\56\ Perhaps
because of this difficulty, results across surveys are somewhat
inconsistent, with one finding that unexpected expenses were driving a
large share of payday borrowing, while others finding that payday loans
are used primarily to pay for regular expenses such as rent, utilities,
or other bills.\57\
---------------------------------------------------------------------------
    \55\ 82 FR 54472, 54477 & n.28, citing Bureau of Consumer Fin.
Prot., Payday Loans and Deposit Advance Products--A White Paper of
Initial Data Findings, at 15 (2013), https://files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf.
    \56\ 82 FR 54472, 54558.
    \57\ Id.; see also id. at 54558-59 (citing and discussing
surveys).
---------------------------------------------------------------------------
    Research by the Bureau found that 80 percent to 85 percent of
payday borrowers succeed in repaying their loans.\58\ Of these, the
Bureau found that between 22 percent and 30 percent do so after
receiving a single loan while the remainder repaid after reborrowing
one or more times.\59\ Of those who defaulted, according to the
Bureau's research, roughly 30 percent did so when the loan was
initially due while the remainder defaulted after taking out one or
more subsequent loans.\60\ The Bureau found that borrowers end up
taking out at least four loans in a row 43 to 50 percent of the time,
taking out at least seven loans in a row 27 to 33 percent of the time,
and taking out at least 10 loans in a row 19 to 24 percent of the
time.\61\ The average payday loan sequence, according to Bureau
research, is between 5 and 6 loans.\62\
---------------------------------------------------------------------------
    \58\ Bureau of Consumer Fin. Prot., Supplemental findings on
payday, payday installment, and vehicle title loans and deposit
advance products, at 120 (June 2016), https://www.consumerfinance.gov/documents/329/Supplemental_Report_060116.pdf
(hereinafter, Supplemental Findings).
    \59\ Id. The Bureau looked at repayment rates over loan
``sequences'' and analyzed outcomes using a 14-day definition of a
loan sequence (i.e., treating loans made within 14 days of a prior
loan as part of a single sequence) and, alternatively, a 30-day
definition. The higher repayment rates are from the 14-day
definition.
    \60\ Id.
    \61\ Id. at 123.
    \62\ Id. at 117.
---------------------------------------------------------------------------
    A longitudinal report by a specialty consumer reporting agency
following 1,000 borrowers conducted over 4.5 years found that 30
percent of the original 1,000 borrowers used payday loans persistently
over the full observation period.\63\ For the persistent borrowers, the
average number of loan sequences was approximately 7.3 and these
borrowers had a payday loan outstanding about 60 percent of the
time.\64\ Of the original borrowers who did not use payday loans
persistently during the observation period, the average number of loan
sequences was approximately 4.5.\65\
---------------------------------------------------------------------------
    \63\ See 82 FR 54472, 54836, citing nonPrime 101, Report 7C: A
Balanced View of Storefront Payday Borrowing Patterns, at tbl. A-7
(2016) (on file); see also id. at 6 (tbl.3), 11. The study sought to
have a constant population of 1,000 borrowers. Borrowers who left
during the time period of the study were replaced by new borrowers
to maintain a constant population 1,000 borrowers. Id. at 3. For the
study's definition of ``persistent borrower,'' see id. at 4.
    \64\ nonPrime101, Report 7C: A Balanced View of Storefront
Payday Borrowing Patterns, at 3, 6 (2016) (on file); see also id. at
14-15 & fig. 42.
    \65\ Id. at 6 & tbl. 3.
---------------------------------------------------------------------------
2. Single-Payment Vehicle Title Loans
    The second major category of loans covered by the Mandatory
Underwriting Provisions of the 2017 Final Rule is single-payment
vehicle title loans. As explained in the 2017 Final Rule, in a title
loan transaction, the borrower must provide identification and usually
the title to the vehicle as evidence that the borrower owns the vehicle
``free and clear.'' \66\ The lender retains the vehicle title or some
other form of security interest during the duration of the loan, while
the borrower retains physical possession of the vehicle.\67\ Single-
payment vehicle title loans are typically due in 30 days.\68\
---------------------------------------------------------------------------
    \66\ 82 FR 54472, 54489.
    \67\ See id. at 54490. See also, e.g., Speedy Cash, Title Loans
FAQs, https://www.speedycash.com/faqs/title-loans (last visited Feb.
4. 2019); TitleMax, Answers to Your Questions about Title Loans,
https://www.titlemax.com/faqs (last visited Feb. 4, 2019).
    \68\ See 82 FR 54472, 54490 & n.181, citing Pew Charitable
Trusts, Auto Title Loans--Market practices and borrowers'
experiences (2015), https://www.pewtrusts.org/~/media/assets/2015/
03/autotitleloansreport.pdf. See also Idaho Dep't of Fin., Idaho
Credit Code `Fast Facts,' https://www.finance.idaho.gov/ConsumerFinance/Documents/Idaho-Credit-Code-Fast-Facts-With-Fiscal-Annual-Report-Data-01012015.pdf; Tenn. Dep't of Fin. Inst., 2018
Report on the Title Pledge Industry, at 4 (Apr. 23, 2018) https://www.tn.gov/content/dam/tn/financialinstitutions/new-docs/TP%20Annual%20Report%202018.pdf.
---------------------------------------------------------------------------
    As with payday loans, the States have taken different regulatory
approaches with respect to single-payment vehicle title loans.
Seventeen States currently permit single-payment vehicle title
lending.\69\ Another six States permit title installment loans but
those loans are not affected by the Mandatory Underwriting Provisions
of the 2017 Final Rule.\70\ Three States (Arizona, Georgia, and New
Hampshire) permit single-payment vehicle title loans but prohibit or
substantially restrict payday loans.\71\ As with State restrictions on
payday loans, these State vehicle title laws represent the judgment of
the various States as to the limitations, if any, that should be placed
on consumers' ability to choose vehicle title loans within their
respective jurisdictions.
---------------------------------------------------------------------------
    \69\ As noted in the 2017 Final Rule, New Mexico had enacted a
law in 2017, effective January 1, 2018, that prohibits single-
payment vehicle title loans and allows only installment title
lending. New Mexico is no longer counted as one of the States
authorizing single-payment vehicle title loans. See 82 FR 54472,
54490. Ohio is counted as one of the 17 States but as noted above, a
bill signed by the governor in 2018 will prohibit lenders from
making loans of $5,000 or less secured by a vehicle title or any
other collateral. Ohio lenders must comply with the law as of April
27, 2019. 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.
    \70\ See 82 FR 54472, 54490. New Mexico is now counted in this
group as the State allows only title installment lending.
    \71\ Id.
---------------------------------------------------------------------------
    Also as with payday loans, some of the States that permit single-
payment vehicle title loans have adopted a
[[Page 4257]]
variety of regulatory provisions governing such loans, including
limitations on the maximum price \72\ and maximum loan size.\73\ A few
States regulate reborrowing with either a cooling-off period between
loans or a mandatory minimum amortization.\74\ A number of State laws
contain provisions addressing default and repossession including cure
provisions and provisions governing deficiencies or surpluses if a
vehicle is repossessed and sold.\75\
---------------------------------------------------------------------------
    \72\ States with a 15 percent to 25 percent per month rate cap
include Alabama, Georgia (rate decreases after 90 days),
Mississippi, and New Hampshire. Ala. Code sec. 5-19A-7(a); Ga. Code
Ann. sec. 44-12-131(a)(4); Miss. Code Ann. sec. 75-67-413(1); N.H.
Rev. Stat. Ann. sec. 399-A:18(I)(f). Tennessee limits interest rates
to 2 percent per month, but also allows for a fee up to 20 percent
of the original principal amount. Tenn. Code Ann. sec. 45-15-111(a).
Virginia's fees (installment title loans) are tiered at 22 percent
per month for amounts up to $700 and then decrease on larger loans.
Va. Code Ann. sec. 6.2-2216(A). See also 54472, 54490 & n.184.
    \73\ For example, some maximum vehicle title loan amounts are
$2,500 in Mississippi and Tennessee, and $5,000 in Missouri. Miss.
Code Ann. sec. 75-67-415(f); Tenn. Code Ann. sec. 45-15-115(3); Mo.
Rev. Stat. sec. 367.527(2). Illinois limits the loan amount to
$4,000 or 50 percent of monthly income, Virginia (installment title
loans) and Wisconsin limit the loan amount to 50 percent of the
vehicle's value and Wisconsin also has a $25,000 maximum loan
amount. Ill. Admin. Code tit. 38, sec. 110.370(a); Va. Code Ann.
sec. 6.2-2215(1)(d); Wis. Stat. Ann. sec. 138.16(1)(c), (2)(a).
Examples of States with no limits on loan amounts, limits of the
amount of the value of the vehicle, or statutes that are silent
about loan amounts include Arizona, Idaho, and Utah. Ariz. Rev.
Stat. Ann. sec. 44-291(A); Idaho Code Ann. sec. 28-46-508(3); Utah
Code Ann. sec. 7-24-202(3)(c). See also 82 FR 54472, 54491.
    \74\ Illinois requires 15 days between title loans. Ill. Admin.
Code tit. 38, sec. 110.370(c). Delaware requires title lenders to
offer a workout agreement after default but prior to repossession
that repays at least 10 percent of the outstanding balance each
month. Delaware does not cap fees on title loans and interest
continues to accrue on workout agreements. Del. Code Ann. tit. 5,
secs. 2255, 2258. New Hampshire law prohibits title lenders from
making a title loan within 60 days of a prior payday or title loan
and title loan renewals are permitted up to nine times with at least
10 percent amortization of the original balance owed. N.H. Rev.
Stat. Ann. secs. 399-A:18.I(e), 399-A:19.II. See also 82 FR 54472,
54491 & n.185.
    \75\ For example, Georgia allows repossession fees and storage
fees. Ga. Code Ann. sec. 44-12-131(a)(4)(C). Arizona, Delaware,
Idaho, Missouri, South Dakota, Tennessee, Utah, Virginia, and
Wisconsin specify that any surplus must be returned to the borrower.
Ariz. Rev. Stat. Ann. sec. 47-9608(A)(4); Del. Code Ann. tit. 5,
sec. 2260; Idaho Code Ann. sec. 28-9-615(d); Mo. Rev. Stat. sec.
408.553; S.D. Codified Laws sec. 54-4-72; Tenn. Code Ann. sec. 45-
15-114(b)(2); Utah Code Ann. sec. 7-24-204(3); Va. Code Ann. sec.
6.2-2217(C); Wis. Stat. sec. 138.16(4)(e). Mississippi requires that
85 percent of any surplus be returned. Miss. Code Ann. sec. 75-67-
411(5). See also 82 FR 54472, 54491 & n.188.
---------------------------------------------------------------------------
    As explained in the 2017 Final Rule, information about the vehicle
title market is more limited than the storefront payday industry.\76\
There are approximately 8,000 title loan storefront locations in the
United States, about half of which also offer payday loans.\77\ Of
those locations that predominantly offer vehicle title loans, three
privately held firms dominate the market and together account for
approximately 3,000 stores in over 20 States.\78\ In addition to the
large title lenders, the Bureau estimated that there are about 800
vehicle title lenders that are small businesses as defined by the
SBA.\79\
---------------------------------------------------------------------------
    \76\ 82 FR 54472, 54491.
    \77\ See id. at 54491 & n.197, citing Pew Charitable Trusts,
Auto Title Loans--Market practices and borrowers' experiences
(2015), https://www.pewtrusts.org/~/media/assets/2015/03/
autotitleloansreport.pdf.
    \78\ The largest vehicle title lender is TMX Finance, LLC,
formerly known as Title Max Holdings, LLC, with about 1,200 stores.
See https://www.titlemax.com/store-locator/ and https://www.titlebucks.com/store-locator/ (last visited Feb. 4, 2019) (TMX
Finance has stores in 16 States and TitleBucks has stores in 6
States); see also Community Loans of America, https://clacorp.com/about-us (last visited Feb. 4, 2019) (over 1,000 locations in 25
States); Select Management Resources (roughly 600 stores) (Select
Management Resources brands include LoanMax, LoanStar Title Loans,
Midwest Title Loans, and North American Title Loans), https://www.loanmaxtitleloans.net/SiteMap, https://www.loanstartitleloans.net/SiteMap, https://www.midwesttitleloans.net/SiteMap, https://www.northamericantitleloans.net/SiteMap (all last visited Feb. 4,
2019). Store counts for these three firms may include States with
stores that offer installment vehicle title loans.
    \79\ 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. and Ctr. for Responsible Lending, 2013), https://www.responsiblelending.org/other-consumer-loans/car-title-loans/research-analysis/CRL-Car-Title-Report-FINAL.pdf.
---------------------------------------------------------------------------
    The available evidence suggests that between 1.8 million households
and 2 million adults use vehicle title loans annually, although these
studies do not necessarily differentiate between single-payment and
installment vehicle title loans.\80\ The demographic profiles of
vehicle title borrowers appear to be roughly comparable to the
demographics of payday borrowers, which is to say that they tend to be
lower and moderate income.\81\ In one survey, 30 percent of vehicle
title borrowers reported that they struggle to meet their expenses most
or all months and another 20 percent said that was true half the
time.\82\ The Bureau is not aware of any published research regarding
the credit profiles of single-payment vehicle title borrowers.
---------------------------------------------------------------------------
    \80\ 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. The number of
households using title loans in the FDIC survey rose from the 1.7
million households reported in the 2015 survey cited in the 2017
Final Rule. See Pew Charitable Trusts, Auto Title Loans--Market
practices and borrowers' experiences, at 33 (2015), https://
www.pewtrusts.org/~/media/assets/2015/03/autotitleloansreport.pdf;
82 FR 54472, 54491 & n.195.
    \81\ Fed. Deposit Ins. Corp., 2017 FDIC National Survey of
Unbanked and Underbanked Households (Oct. 2018), https://www.fdic.gov/householdsurvey/2017/2017report.pdf (calculations made
using custom data tool).
    \82\ Pew Charitable Trusts, Auto Title Loans--Market practices
and borrowers' experiences, at 6 (2015), https://www.pewtrusts.org/
~/media/assets/2015/03/autotitleloansreport.pdf.
---------------------------------------------------------------------------
    As with payday loans, understanding the factors that cause
consumers to use vehicle title loans is challenging. In one survey, 25
percent of borrowers attributed their need for a vehicle title loan to
an unexpected emergency expense, 52 percent attributed their need to
recurring expenses, and the remainder pointed to other expenses or did
not know.\83\
---------------------------------------------------------------------------
    \83\ Id. at 7.
---------------------------------------------------------------------------
    Vehicle title loans differ from payday loans in at least two
important respects. First, these loans enable consumers to borrow
larger amounts: The Bureau's research found that the median vehicle
title loan amount was $694, or roughly double the size of the median
payday loan amount.\84\ Second, whereas a payday loan is only available
to those with a bank account or other transaction account, unbanked
consumers with clear vehicle title can obtain a vehicle title loan.
Indeed, some vehicle title lenders do not require a copy of a pay stub
or other evidence of current income in order to make a loan.\85\
---------------------------------------------------------------------------
    \84\ 82 FR 54472, 54490 & n.182, citing Bureau of Consumer Fin.
Prot., Single-Payment Vehicle Title Lending, (May 2016), https://files.consumerfinance.gov/f/documents/201605_cfpb_single-payment-vehicle-title-lending.pdf.
    \85\ 82 FR 54472, 54490 & n.174.
---------------------------------------------------------------------------
    The Bureau's research found that roughly two-thirds of single-
payment vehicle title borrowers repay their loans. Of borrowers who
repaid, 12 percent of them did so when the initial loan was due and the
remainder reborrowed one or more times before repaying.\86\ Of
borrowers who defaulted, roughly 30 percent did so when the loan was
initially due, while the remainder defaulted after taking out one or
more subsequent loans.\87\ Borrowers end up taking out at least four
loans in a row roughly 55 percent of the time, taking out at least
seven loans roughly 35 percent of the time, and taking out at
[[Page 4258]]
least 10 loans slightly over 20 percent of the time.\88\
---------------------------------------------------------------------------
    \86\ Id. at 54566 & n.531, citing 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.
    \87\ 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.
    \88\ Id. at 12. The percentage of vehicle title borrowers in
each of the categories described in the text does not appear to vary
with different definitions of loan sequences as substantially all
reborrowing occurs when the loan is due.
---------------------------------------------------------------------------
3. Longer-Term Balloon-Payment Loans
    The third category of loans covered by the Mandatory Underwriting
Provisions of the 2017 Final Rule 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.\89\ In 2017, the
Bureau noted that there did not appear to be a large market for such
loans. However, the Bureau expressed the concern that the market for
these longer-term balloon-payment loans, with structures similar to
payday loans and that pose similar risks to consumers, might grow if
only covered short-term loans were regulated under the 2017 Final
Rule.\90\ Because the market was relatively small, the Bureau
supplemented its analysis with relevant information on related types of
covered longer-term loans, such as hybrid payday loans, payday
installment loans, and vehicle title installment loans.\91\ 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.\92\
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    \89\ 82 FR 54472, 54475. For examples of longer-term balloon-
payment loans, see id. at 54486 & n.143, 54490 & n.179.
    \90\ Id. at 54472, 54527-28.
    \91\ Id. at 54580.
    \92\ Id. at 54581.
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    In analyzing the data that was available, the Bureau found that
about 60 percent of longer-term balloon-payment loans resulted in
refinancing, reborrowing, or default.\93\ By contrast, nearly 60
percent of comparable fully-amortizing installment loans without a
balloon-payment were repaid without refinancing or reborrowing.\94\
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    \93\ Id. at 54582.
    \94\ Id.
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B. The Mandatory Underwriting Provisions of the 2017 Final Rule
    The SUPPLEMENTARY INFORMATION accompanying the 2017 Final Rule
provides an explanation of the Mandatory Underwriting Provisions of the
Rule. This part II.B provides a high-level summary of certain of those
provisions that are most directly relevant to the Bureau's decision to
propose their reconsideration. The Bureau's rationale for the Mandatory
Underwriting Provisions, as set forth in the SUPPLEMENTARY INFORMATION
accompanying the 2017 Final Rule, is discussed in part V.A below.
    As noted above, the 2017 Final Rule contains, in Sec.  1041.4, 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 the consumers will have the ability to repay the loans
according to their terms.
    Section 1041.5 contains a 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 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.\95\
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    \95\ The Rule defines ``basic living expenses'' and ``major
financial obligations.'' See 12 CFR 1041.5(a)(1) and (3).
---------------------------------------------------------------------------
    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, the 2017 Final Rule contains a conditional
exemption in Sec.  1041.6 which allows lenders to make covered short-
term loans without an ability-to-repay determination under Sec.
1041.5. In order to qualify for the conditional 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 conditional exemption is not available for vehicle
title loans. A lender may not make more than three loans in succession
under this conditional 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 conditional 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, the Bureau
considered and rejected a number of alternatives to the Mandatory
[[Page 4259]]
Underwriting Provisions, 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.\96\
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    \96\ See 82 FR 54472, 54636-40.
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C. The Estimated Impacts of the Mandatory Underwriting Provisions of
the 2017 Final Rule
    The SUPPLEMENTARY INFORMATION accompanying the 2017 Final Rule
contains regulatory impact analyses, including an analysis of the
benefits and costs to consumers and covered persons \97\ as required by
section 1022(b)(2)(A) of the Dodd-Frank Act (also referred to as the
``section 1022(b)(2) analysis''),\98\ and the final Regulatory
Flexibility Act analysis (FRFA) \99\ as required by that Act.\100\ The
Bureau does not here repeat all of that information and those findings.
Rather, this part summarizes the estimates and conclusions from those
analyses that the Bureau views as most relevant to its decision to
propose rescinding the Mandatory Underwriting Provisions.
---------------------------------------------------------------------------
    \97\ See id. at 54814-53.
    \98\ 12 U.S.C. 5512(b)(2)(A).
    \99\ See 82 FR 54472, 54853-70.
    \100\ 5 U.S.C. 601 through 612.
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    In the section 1022(b)(2) analysis for the 2017 Final Rule, the
Bureau 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. In order to simulate the impacts of the Mandatory
Underwriting Provisions, the Bureau assumed, after reviewing a number
of studies by the Bureau, Bureau staff, 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-
pay requirement 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).\101\
Applying these assumptions to data with respect to current patterns of
borrowing and reborrowing, the Bureau estimated that, absent the
conditional 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.\102\ Factoring in the expected effects of the conditional
exemption, and assuming that payday lenders would endeavor to take full
advantage of that exemption before seeking to qualify consumers for a
loan under the mandatory underwriting requirements of Sec.  1041.5, the
Bureau 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 conditional exemption, a
decrease in payday lender revenue of between 71 and 76 percent.\103\
Given that short-term vehicle title loans are not eligible for the
conditional exemption, the Bureau 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.\104\
---------------------------------------------------------------------------
    \101\ 82 FR 54472, 54826-34.
    \102\ Id. at 54826, 54834.
    \103\ Id. at 54826.
    \104\ Id. at 54834.
---------------------------------------------------------------------------
    The Bureau, in its section 1022(b)(2) analysis, determined that
these revenue impacts would have a substantial effect on the market.
The Bureau 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.\105\
---------------------------------------------------------------------------
    \105\ Id. at 54835.
---------------------------------------------------------------------------
    In the section 1022(b)(2) analysis, the Bureau identified a number
of impacts that the Mandatory Underwriting Provisions would have on
consumers' ability to access credit. Specifically, the Bureau 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 conditional exemption and would not be able
to satisfy the ability-to-repay requirement.\106\ Vehicle title
borrowers would be more likely to be unable to obtain an initial loan
because the conditional exemption does not extend to such loans; \107\
the Bureau noted that while those borrowers could pursue a payday loan,
there are two States that permit vehicle title loans 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.\108\
---------------------------------------------------------------------------
    \106\ Id. at 54840.
    \107\ Id.
    \108\ Id.
---------------------------------------------------------------------------
    In the section 1022(b)(2) analysis the Bureau 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 conditional exemption and because of the
impact of the Rule on vehicle title loans, which tend to be for larger
amounts.\109\ Additionally, because of the principal step-down feature
of the conditional exemption, consumers obtaining loans under that
exemption would be forced to repay their loans more quickly than they
do today. The Bureau believed 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
conditional 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.\110\ Finally, the Bureau 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 will lose easy
access to stores.\111\
---------------------------------------------------------------------------
    \109\ Id. at 54841.
    \110\ Id.
    \111\ 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.
---------------------------------------------------------------------------
    The Bureau, in the section 1022(b)(2) analysis, went on to observe
that consumers who are unable to obtain a new loan because they cannot
satisfy the Rule's mandatory underwriting requirement and have
exhausted or cannot qualify for a loan under the conditional 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 simply defaulting on bills, or they may choose to borrow
from sources
[[Page 4260]]
that are more expensive or otherwise less desirable.\112\ 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.\113\ Similarly, ``borrowing'' by paying a bill late may lead to
late fees or other negative consequences like the loss of utility
service.\114\ Other consumers may turn to friends or family when they
would rather borrow from a lender.\115\ The Bureau concluded, however,
that to the extent the 2017 Final Rule's Mandatory Underwriting
Provisions curbed extended borrowing sequences by consumers who did not
expect such lengthy sequences, those provisions would have a positive
effect on consumer welfare.\116\
---------------------------------------------------------------------------
    \112\ See 82 FR 54472, 54841.
    \113\ Id.
    \114\ Id.
    \115\ Id.
    \116\ Id. at 54846.
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III. Outreach
    The Bureau has engaged in efforts to monitor and support industry
implementation since the 2017 Final Rule was issued. As a part of those
efforts, the Bureau has received input from a number of stakeholders
regarding various aspects of the 2017 Final Rule. This input has
included both concerns about lenders' ability to comply with the Rule
and about the broader effects of various substantive provisions of the
Rule on covered loans.
    In developing this proposal, the Bureau has taken into account both
the input it has 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,
including the Bureau's Call for Evidence series of RFIs issued in
spring 2018. The issues that the Bureau has determined are appropriate
to revisit are discussed in detail below.
    Some of the concerns stakeholders have raised to the Bureau are
outside of the scope of this proposal. For example, the Bureau received
a rulemaking petition to exempt debit card payments from the Rule's
Payment Provisions. The Bureau has also received informal 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 intends to examine these issues and
if the Bureau determines that further action is warranted, the Bureau
will commence a separate rulemaking initiative (such as by issuing an
RFI or an advance notice of proposed rulemaking).
    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. The Bureau has provided other regulators with information
about the Bureau's proposals, and received feedback that has assisted
the Bureau in preparing this proposal.
    Consultation with State and Local Officials. The Bureau's outreach
also 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 Consultations. The Bureau has engaged in consultation with
Indian tribes about this proposal. The Bureau held a consultation on
December 19, 2018, at the Bureau's headquarters. All Federally-
recognized Indian tribes were invited to this consultation, which
generated frank and valuable input from Tribal leaders to Bureau senior
leadership and staff about the effects such a proposal could have on
Tribal nations and lenders.
    In the meantime, the Bureau expects to release a small entity
compliance guide to aid compliance with the Payment Provisions of the
2017 Final Rule. The guide will be published on the Bureau's regulatory
implementation website for the Rule at https://www.consumerfinance.gov/policy-compliance/guidance/payday-lending-rule/.
IV. Legal Authority
    Part IV of the SUPPLEMENTARY INFORMATION that accompanied the 2017
Final Rule discussed the legal authorities for the Rule.\117\
Commenters may refer to that discussion for information about the legal
background relating to the Rule. Each of the legal authorities that the
Bureau relied upon in the 2017 Final Rule provides the Bureau with
discretion to issue rules, and the Bureau preliminarily interprets
these authorities to permit the Bureau to exercise that discretion to
rescind a previously issued rule. This part IV summarizes the legal
authorities that the Bureau views as most relevant to consideration of
this proposal to rescind the Mandatory Underwriting Provisions.
---------------------------------------------------------------------------
    \117\ 82 FR 54472, 54519-24.
---------------------------------------------------------------------------
    The Bureau adopted the Mandatory Underwriting Provisions of the
2017 Final Rule in principal reliance on the Bureau's authority under
section 1031(b) of the Dodd-Frank Act.\118\ 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.
---------------------------------------------------------------------------
    \118\ 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 such substantial injury is not outweighed by
countervailing benefits to consumers or to competition.\119\ As the
2017 Final Rule explained, 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 FTC and other Federal agency rulemakings.\120\ When applying
section 1031(c) of the Dodd-Frank Act, the Bureau also considers the
Federal Trade Commission's ``Commission Statement
[[Page 4261]]
of Policy on Scope of Consumer Unfairness Jurisdiction'' (FTC Policy
Statement), the principles of which Congress generally incorporated
into section 5 of the FTC Act.\121\
---------------------------------------------------------------------------
    \119\ 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).
    \120\ 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 Federal
Trade Commission (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).
    \121\ 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 Policy Statement).
---------------------------------------------------------------------------
    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.\122\ 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 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.
---------------------------------------------------------------------------
    \122\ 12 U.S.C. 5531(d).
---------------------------------------------------------------------------
    The Bureau's reasons for proposing to rescind its use of unfairness
and abusiveness authority in the Mandatory Underwriting Provisions are
discussed in parts V.B and V.C below.
    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 of the 2017 Final Rule.\123\ These include the
conditional 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.
---------------------------------------------------------------------------
    \123\ See 82 FR 54472, 54522.
---------------------------------------------------------------------------
    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, by rule, 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.\124\ Section 1022(b)(3)(B) specifies three factors that
the Bureau shall, as appropriate, take into consideration in issuing
such an exemption.\125\ 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.\126\ The term Federal consumer
financial law includes rules prescribed under Title X of the Dodd-Frank
Act, including those prescribed under section 1031.\127\ Additionally,
in the 2017 Final Rule, 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.\128\
---------------------------------------------------------------------------
    \124\ 12 U.S.C. 5512(b)(3)(A).
    \125\ 12 U.S.C. 5512(b)(3)(B).
    \126\ 12 U.S.C. 5512(b)(1). The Bureau also interprets section
1022(b)(1) of the Dodd-Frank Act as authorizing it to rescind 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.
    \127\ 12 U.S.C. 5481(14).
    \128\ 12 U.S.C. 5511(c)(3), 12 U.S.C. 5512(c)(7), 12 U.S.C.
5514(b)(7), and 12 U.S.C. 5522.
---------------------------------------------------------------------------
    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. If the Bureau decides to rescind its use of section 1031 authority
in the Mandatory Underwriting Provisions, the Bureau preliminarily
concludes that it should also rescind its uses of these other
authorities in the Mandatory Underwriting Provisions. The specific
provisions of the 2017 Final Rule that the Bureau is proposing to
rescind are discussed further in the section-by-section analysis in
part VI below.
V. Explanation of the Bases for This Proposal To Rescind the Mandatory
Underwriting Provisions of the 2017 Final Rule
    This part explains the Bureau's reasons for proposing to rescind
the use of its unfairness and abusiveness authority under section 1031
of the Dodd-Frank Act in the Mandatory Underwriting Provisions of the
2017 Final Rule. 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 reasons for preliminarily concluding that the Bureau
should require more robust and reliable evidence than it supplied in
the 2017 Final Rule to support those factual predicates. Part V.C sets
forth the Bureau's additional reasons for preliminarily determining
that, under sections 1031(c) and (d) of the Dodd-Frank Act, the Bureau
no longer identifies an unfair and abusive practice as set out in Sec.
1041.4 of the 2017 Final Rule.\129\ In part V.D, the Bureau discusses
its consideration of alternatives. In part V.E, the Bureau concludes
its analysis and requests comments.
---------------------------------------------------------------------------
    \129\ 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
preliminarily believes that if the latter is rescinded the former
should also be rescinded.
---------------------------------------------------------------------------
    Before addressing these factual and legal issues, the Bureau offers
a few preliminary observations to place this rulemaking in its proper
context.
    Consumers living paycheck to paycheck and with little to no savings
to fall back on face challenging financial lives. The Bureau's research
has demonstrated that liquid savings and the ability to absorb a
financial shock are closely tied to financial well-being.\130\ A major
focus of the Bureau's consumer education efforts has been, and
continues to be, on encouraging savings among consumers. The Bureau
also continues to conduct research to understand the efficacy of
alternative methods of promoting savings \131\ and, more generally, to
better understand the specific events that can cause consumers to
struggle to make ends meet and the choices consumers face in these
circumstances.\132\
---------------------------------------------------------------------------
    \130\ Bureau of Consumer Fin. Prot., Financial well-being in
America, at 48-49 (2017), https://files.consumerfinance.gov/f/documents/201709_cfpb_financial-well-being-in-America.pdf.
    \131\ The Bureau has published a study of a randomized control
trial testing alternative means of encouraging consumers with a
prepaid card to place some of their income into a savings vehicle.
See Bureau of Consumer Fin. Prot., Tools for saving: Using prepaid
accounts to set aside funds (2016), https://files.consumerfinance.gov/f/documents/092016_cfpb_ToolsForSavingPrepaidAccounts.pdf. The Bureau also is
studying alternative means of encouraging savings of tax refunds in
a research partnership with a major tax preparer.
    \132\ Bureau of Consumer Fin. Prot., Making Ends Meet Survey,
https://www.consumerfinance.gov/data-research/making-ends-meet-survey/ (``Many households run out of money at one time or another
and this survey is designed to help us understand consumer
experiences and decisions when money gets tight. Since people's
experiences can vary widely, please fill out the survey even if you
have not borrowed or run out of money. The information you provide
will help shape federal policies to ensure that everyone is treated
fairly and respectfully when they borrow money to make ends
meet.'').
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[[Page 4262]]
    At the same time, the Bureau recognizes that a substantial number
of households do not have the ability to withstand financial shocks
without the use of credit or other alternatives, such as obtaining
money from friends or relatives, cutting back on expenses, or pawning
personal property. The Bureau is committed to ensuring that all
consumers have access to consumer financial products and services and
that the market for ``liquidity loan products'' is fair, transparent,
and competitive.\133\ For example, the Bureau continues to exercise
supervisory and enforcement authority over lenders in this market and
the Bureau has brought a number of enforcement actions in the past year
against payday lenders that the Bureau determined were engaged in
deceptive or other unlawful conduct.\134\ The Bureau also continues to
monitor this market for risks to consumers and to consider ways of
assuring that consumers receive timely and understandable information
to make responsible decisions regarding their use of these
products.\135\ Further, the Bureau has expressed its support for the
efforts of other regulators to encourage depository institutions to
offer credit products for consumers struggling to make ends meet,\136\
and the Bureau's newly-created Office of Innovation plans to work with
financial technology (fintech) firms seeking to enter the market for
liquidity lending and enhance the competitiveness of the market.
---------------------------------------------------------------------------
    \133\ See 12 U.S.C. 1021(a).
    \134\ See, e.g., In the Matter of Cash Express, LLC, Consent
Order, CFPB No. 2018-BCFP-0007 (Oct. 24, 2018), https://files.consumerfinance.gov/f/documents/bcfp_cash-express-llc_consent-order_2018-10.pdf; Stipulated Final Judgment and Order, CFPB v.
Moseley, Case No. 4:14-cv-00789-SRB (W.D. Mo. Aug. 10, 2018),
https://files.consumerfinance.gov/f/documents/bcfp_hydra_stipulated-final-judgment-order_2018-08.pdf; In the Matter of Triton Management
Group, Inc., et al., Consent Order, CFPB No. 2018-BCFP-0005 (July
19, 2018), https://files.consumerfinance.gov/f/documents/bcfp_triton-management-group_consent-order_2018-07.pdf; In the
Matter of Enova Int'l, Inc., Consent Order, CFPB No. 2019-BCFP-0003
(Jan. 25, 2019), https://files.consumerfinance.gov/f/documents/cfpb_enova-international_consent-order_2019-01.pdf.
    \135\ See 12 U.S.C. 5512(c) and 5511(b)(1).
    \136\ See Press Release, Bureau of Consumer Fin. Prot., Bureau
Acting Director Mulvaney Statement on the OCC Short-Term, Small-
Dollar Lending Announcement (May 23, 2018), https://www.consumerfinance.gov/about-us/newsroom/bureau-acting-director-mulvaney-statement-occ-short-term-small-dollar-lending-announcement/.
---------------------------------------------------------------------------
    The Mandatory Underwriting Provisions in the 2017 Final Rule, in
contrast to the Bureau's efforts discussed above to increase credit
access and competition in credit markets, would have the effect of
restricting access to credit and reducing competition for these
products. Moreover, the Mandatory Underwriting Provisions would impose
requirements that would have the effect of reducing credit access and
competition in the States which have determined it is in their
citizens' interest to be able to use such products, subject to State-
law limitations. For the reasons that follow, the Bureau preliminarily
believes that neither the evidence cited nor legal reasons provided in
the 2017 Final Rule support its determination that the identified
practice is unfair and abusive, thereby eliminating the basis for the
2017 Final Rule's Mandatory Underwriting Provisions to address that
conduct.
    The Bureau notes that, even if it were to finalize the proposed
revocation of the Mandatory Underwriting Provisions, doing so would not
preclude the agency in the future from imposing one or more
alternatives to these provisions, provided that the Bureau has the
necessary and appropriate factual and legal bases for doing so.
A. Overview of the Factual Predicates and Legal Conclusions Underlying
the Mandatory Underwriting Provisions of the 2017 Final Rule
1. Unfairness
    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.\137\
---------------------------------------------------------------------------
    \137\ 12 U.S.C. 5531(c)(1).
---------------------------------------------------------------------------
    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 determining if the consumers have the ability to
repay 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.\138\
---------------------------------------------------------------------------
    \138\ 82 FR 54472, 54590-94.
---------------------------------------------------------------------------
    The Bureau went on to address the issue of whether the substantial
injury that the Bureau had found was reasonably avoidable by consumers.
The Bureau stated that under section 1031(c)(1)(A) of the Dodd-Frank
Act for an injury to be reasonably avoidable consumers must ``have
reasons generally to anticipate the likelihood and severity of the
injury and the practical means to avoid it.'' \139\ 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.'' \140\
---------------------------------------------------------------------------
    \139\ Id. at 54594.
    \140\ Id. at 54597.
---------------------------------------------------------------------------
    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 ``is possible that many
borrowers accurately anticipate their debt duration.'' \141\ 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.'' \142\ That led the Bureau to conclude
that ``many consumers do not understand or perceive the probability
that certain harms will occur'' \143\ and that therefore it would not
be reasonable to expect consumers to take steps to avoid injury.\144\
---------------------------------------------------------------------------
    \141\ Id.
    \142\ Id.
    \143\ Id.
    \144\ Id. at 54594.
---------------------------------------------------------------------------
    The Bureau based that finding in the 2017 Final Rule primarily on
its interpretation of limited data from a study by Professor Ronald
Mann (Mann Study), which 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 time consumers were
in debt.\145\ The Bureau
[[Page 4263]]
stated that its interpretation of the limited data from this study
``provides the most relevant data describing borrowers' expected
durations of indebtedness with payday loan products.'' \146\ The Mann
Study is discussed further in part V.B.1 below.\147\
---------------------------------------------------------------------------
    \145\ Ronald 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 id. at 54816-17, 54836-37
(section 1022(b)(2) analysis discussion of the Mann Study).
    \146\ 82 FR 54472, 54816.
    \147\ 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 82 FR 54472, 54568, 54836. However, the
Bureau noted the weaknesses of these studies, id. at 54568, and, as
discussed, relied primarily on the Mann Study.
---------------------------------------------------------------------------
    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,\148\ 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.\149\ These additional factors are discussed in detail in part
V.B.2 below.
---------------------------------------------------------------------------
    \148\ See, e.g., id. at 54616.
    \149\ Id. at 54505-07.
---------------------------------------------------------------------------
2. Abusiveness
    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.'' \150\ The Bureau, in imposing the Mandatory Underwriting
Provisions of the 2017 Final Rule, relied on both of these prongs of
the abusiveness definition.
---------------------------------------------------------------------------
    \150\ 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
of the 2017 Final Rule.
---------------------------------------------------------------------------
    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.'' \151\ 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.'' \152\ 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.'' \153\ This finding also was based primarily on
the Bureau's interpretation of limited data from the Mann Study and is
discussed further below.\154\
---------------------------------------------------------------------------
    \151\ 82 FR 54472, 54615 (summarizing the Bureau's rationale for
the 2016 Proposal).
    \152\ Id. at 54617.
    \153\ Id. at 54615.
    \154\ 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.\155\ 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 time to shop
for such alternatives.'' \156\ 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.\157\ According to the Bureau, 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.\158\ 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.'' \159\
---------------------------------------------------------------------------
    \155\ Id. at 54618.
    \156\ Id. at 54618-20.
    \157\ Id. at 54619.
    \158\ Id.
    \159\ Id. at 54620.
---------------------------------------------------------------------------
    In support of the conclusion that consumers with payday loans could
not protect their own interests, the Bureau relied in the 2017 Final
Rule primarily on a survey of payday borrowers conducted by the Pew
Charitable Trusts (Pew Study).\160\ 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.'' \161\ 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.'' \162\ The Pew Study is discussed
further below in part V.B.3.
---------------------------------------------------------------------------
    \160\ Pew Charitable Trusts, How Borrowers Choose and Repay
Payday Loans (2013), http://www.pewtrusts.org/~/media/assets/2013/
02/20/pew_choosing_borrowing_payday_feb2013-(1).pdf.
    \161\ See id., citing the Pew Study at 20; see also 82 FR 54472,
54618-19 (further discussing the Pew Study).
    \162\ 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 consumer 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.'' \163\ The Bureau reasoned,
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
[[Page 4264]]
determining when that line has been crossed.'' \164\ 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.'' \165\
---------------------------------------------------------------------------
    \163\ Id. at 54621.
    \164\ Id.
    \165\ 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 underwriting, the limited repayment
options and the way those are presented to consumers, and the
collection tactics used when consumers fail to repay.\166\ 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.\167\ 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.\168\
---------------------------------------------------------------------------
    \166\ Id. at 54622-23.
    \167\ Id. at 54623.
    \168\ Id.
---------------------------------------------------------------------------
B. Reconsidering the Evidence for the Factual Findings in Light of the
Impacts of the Mandatory Underwriting Provisions
    In questioning here whether the evidence is sufficient for the
Bureau's factual findings necessary to support the determinations that
the identified practice was unfair and abusive and thereby warrants the
imposition of the Mandatory Underwriting Provisions of the 2017 Final
Rule, the Bureau is not addressing whether the evidence supporting the
factual findings in the 2017 Final Rule would be sufficient to
withstand judicial review under the Administrative Procedure Act
(APA).\169\ Here, even if the evidence is sufficient for the factual
findings necessary to support the Bureau's unfairness and abusiveness
determinations on which the Mandatory Underwriting Provisions are
based, the Bureau believes it is prudent as a policy matter to require
a more robust and reliable evidentiary basis to support key findings in
a rule that would eliminate most covered short-term and longer-term
balloon-payment loans and providers from the marketplace, thus
restricting consumer access to these products.
---------------------------------------------------------------------------
    \169\ 5 U.S.C. 500 et seq.
---------------------------------------------------------------------------
    As explained in part II.C, in the regulatory impact analyses
accompanying the 2017 Final Rule, the Bureau estimated that the
Mandatory Underwriting Provisions would have dramatic effects on the
market for payday and single-payment vehicle title loans and on
consumers who use those products. The Bureau estimated that the
Mandatory Underwriting Provisions would result in a large (55 to 62
percent) contraction of the storefront payday industry--an industry
that includes over 2,400 small businesses--and the virtually complete
elimination of the single-payment vehicle title industry--an industry
that includes over 800 small businesses.\170\ The Bureau further
estimated in the 2017 Final Rule that, of the current set of payday
borrowers, 6 percent would not be able to initiate a payday loan
sequence to meet a borrowing need and that 15 percent or more of
vehicle title borrowers would not be able to obtain short-term
loans.\171\ The Bureau further acknowledged that additional borrowers
who could obtain loans might nevertheless be unable to borrow the
amount of money they needed, and that many borrowers would likely be
required to repay their loans more quickly than prior to the Rule--a
requirement that could create financial hardship for such
consumers.\172\ In short, the Mandatory Underwriting Provisions of the
Rule would impose substantial burdens on industry, significantly
constrain lenders' offering of products, and substantially restrict
consumer choice and access to credit. All this would occur
notwithstanding the judgments that the various States have made to
permit lenders to offer and consumers to choose such products subject
to certain limitations.
---------------------------------------------------------------------------
    \170\ 82 FR 54472, 54479, 54492.
    \171\ Id. at 54609. Specifically, the Bureau noted in the 2017
Final Rule that two States that permit vehicle title lending do not
permit payday lending. In addition, 15 percent of vehicle title
borrowers do not have a checking account, and thus may not be
eligible for a payday loan. Id. at 54840.
    \172\ Id. at 54840-41.
---------------------------------------------------------------------------
    The Bureau preliminarily believes that the dramatic effects on
consumers' ability to choose credit and on lenders' ability to offer
them such credit that would follow from prohibiting the identified
practice has significant implications for how the Bureau ought to
assess the evidentiary support for the predicate factual findings. For
purposes of this rulemaking proposal, the Bureau need not reconsider
that the 2017 Final Rule found that the identified practice causes or
is likely to cause substantial injury. However, the Bureau is concerned
about whether the evidence in this instance provides a ``reasonable
basis'' to find that (1) the identified injury ``is not reasonably
avoidable by consumers'' for purposes of an unfairness analysis; (2)
that there is either a ``lack of understanding on the part of the
consumer of the material risks, costs, or conditions of the product or
service'' or an ``inability of the consumer to protect the interests of
the consumer in selecting or using a consumer financial product or
service'' for purposes of an abusiveness analysis.\173\ The FTC Policy
Statement explained that reasonable avoidability for purposes of
unfairness analysis 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.'' \174\
---------------------------------------------------------------------------
    \173\ 12 U.S.C. 5531(c), (d).
    \174\ See FTC Policy Statement, Int'l Harvester, 104 F.T.C. 949,
1074.
---------------------------------------------------------------------------
    If a rule could have such dramatic impacts on consumer choice and
access to credit, the Bureau preliminarily believes that 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 that injury. Similarly, the Bureau preliminarily
believes that it would be reasonable under the Dodd-Frank Act and
prudent to have robust and reliable evidence to support key findings of
about ``lack of understanding'' and an ``inability to protect'' as
needed to establish abusiveness.
    Accordingly, the Bureau preliminarily concludes that it should have
a robust and reliable evidentiary basis for key findings with respect
to ``reasonable avoidability,'' ``lack of understanding,'' and
``inability to protect'' that are essential to the Mandatory
Underwriting Provisions in the 2017 Final Rule. For the reasons
discussed below, the Bureau preliminarily believes that the evidence on
which the Mandatory Underwriting Provisions of the 2017 Final Rule
rests is not sufficiently robust and reliable to support such findings
regardless of whether it would be sufficient to withstand judicial
review under the APA, and that rescission of the Mandatory Underwriting
Provisions is therefore appropriate.
[[Page 4265]]
1. The Mann Study and the Findings Based on It
    As discussed in part V.A.1, in determining that the identified
practice is unfair, in the 2017 Final Rule the Bureau concluded, as
required by section 1031(c)(1)(A) of the Dodd-Frank Act, that the
practice causes or is likely to cause substantial injury to consumers
and that this injury is not reasonably avoidable by consumers.\175\
That latter determination rested on the Bureau's finding that many
consumers do not have 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.\176\ That finding was based primarily on the Bureau's
interpretation of limited data from the Mann Study, which the Bureau
described in the 2017 Final Rule as providing the most relevant data
describing borrowers' expected durations of indebtedness with payday
loan products.\177\
---------------------------------------------------------------------------
    \175\ 82 FR 54472, 54596.
    \176\ Id. at 54597.
    \177\ Id. at 54816.
---------------------------------------------------------------------------
    Similarly, as discussed in part V.A.2, in determining that the
practice of making covered short-term or longer-term balloon-payment
loans without assessing consumers' ability to repay is abusive under
section 1031(d)(2)(A) of the Dodd-Frank Act, the Bureau found in the
2017 Final Rule that many consumers do not understand the material
risks, cost, or conditions of such loans, because they do not have a
specific understanding of their individualized risk and cannot
accurately predict how long they will be in debt after taking out these
loans.\178\ That finding, too, was based primarily on the Bureau's
interpretation of limited data from the Mann Study.\179\
---------------------------------------------------------------------------
    \178\ Id. at 54597.
    \179\ Id.
---------------------------------------------------------------------------
    In the Mann Study, a set of consumers, when applying for a loan,
completed a survey that asked for their expectations as to the length
of time they would be in debt after taking out the loan. Professor Mann
compared those answers to administrative data from lenders showing the
total length of time it took for the borrower to pay off the loan and
not reborrow from the same lender for a full pay period.\180\ Based on
his analysis of the data, Professor Mann concluded that most borrowers
anticipate that they will not be free of debt at the end of the initial
loan term and instead will need to reborrow.\181\ He also concluded
that borrowers' estimates of an ultimate repayment date ``are
realistic.'' \182\ Professor Mann further concluded that this evidence
indicates that most borrowers ``have a good understanding of their own
use of the product.'' \183\
---------------------------------------------------------------------------
    \180\ See Mann Study at 117.
    \181\ Id. at 128.
    \182\ Id. at 109.
    \183\ Id.
---------------------------------------------------------------------------
    In the 2017 Final Rule, the Bureau acknowledged Professor Mann's
quantitative findings but ``dispute[d] his interpretation of those
findings.'' \184\ Professor Mann provided the Bureau with certain
charts and graphs from his study, including scatterplots of borrowers'
reborrowing expectations and outcomes.\185\ The Bureau analyzed these
materials and concluded based on them that borrowers who experienced
very long reborrowing sequences do not anticipate these outcomes and
that, in general, borrowers' predictions of their outcomes were
uncorrelated with their outcomes.\186\ The Bureau noted, for example,
that based on the limited materials it received from Professor Mann,
none of the borrowers who experienced sequences of longer than 140 days
(10 biweekly loans) predicted that outcome, and that none of the
borrowers who predicted such an outcome actually experienced it.\187\
The Bureau further stated in the 2017 Final Rule that its analysis of
these limited materials found no correlation between individual
consumers' predictions of their outcomes and their actual
outcomes.\188\
---------------------------------------------------------------------------
    \184\ 82 FR 54472, 54836. The Bureau specifically relied on a
scatterplot provided by Professor Mann depicting his respondents'
predicted durations of indebtedness vs. the time they actually spent
in debt, and the corresponding regression line. Professor Mann also
provided the Bureau with other data, including histograms of his
respondents' days to clearance, prediction errors, borrowing
experience, etc. However, the Bureau did not have access to the
complete data from Professor Mann's study, including individual-
level survey responses that would allow the data provided in the
figures to be linked to the other information collected in the Mann
Study.
    \185\ See 82 FR 54472, 54836 nn.1190-91.
    \186\ Id. at 54836-37; see also id. at 54569.
    \187\ Id. at 54569.
    \188\ Id. at 54570.
---------------------------------------------------------------------------
    The Bureau initially offered its interpretation of limited data
from the Mann Study in its 2016 Proposal.\189\ In response, Professor
Mann submitted a comment taking issue with the Bureau's analysis. In
his comment, Professor Mann observed that the Bureau had made
``substantial use'' of his study but described the Bureau's use of the
work as ``inaccurate and misleading,'' and deemed the Bureau's summary
of his work ``unrecognizable.'' \190\ In issuing the Rule, the Bureau
discussed Professor Mann's comment and concluded that his objections
``reflect more of a difference in emphasis than a disagreement over the
facts.'' \191\
---------------------------------------------------------------------------
    \189\ See 81 FR 47864, 47928-29.
    \190\ Comment submitted by Ronald Mann, Docket No. CFPB-2016-
0025-141822, at 1.
    \191\ 82 FR 54472, 54569.
---------------------------------------------------------------------------
    Upon further consideration, there are clear limitations to the Mann
Study which the Bureau now believes undermine the reliability and
probative value of the Bureau's interpretation of the limited data it
received from Professor Mann as the main basis for the Bureau to make
findings concerning consumer awareness of potential outcomes from
taking out payday loans from payday lenders throughout the United
States. The Mann Study involved a single payday lender in just five
States and was administered at a limited number of locations.\192\ A
study focusing on a single lender or limited number of lenders may not
necessarily be representative of the variety of payday lenders across
the United States. In addition, these five States also are not
necessarily representative of payday lending nationally.\193\ Thus, the
Mann Study's findings and the Bureau's interpretation of limited data
from that study are most informative about what prospective customers
of this single lender at these locations in these States understood
about how long they would need to borrow. While the Mann Study may
provide useful insights as to these potential customers, consumers
using other lenders or in other places might or 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 \194\--the Bureau preliminarily
concludes the Mann Study and the Bureau's interpretation of limited
data from that study are not a sufficiently robust and representative
basis to make general findings about all lenders making payday loans to
all borrowers in all States, let alone to generalize about borrowers
using short-term vehicle title
[[Page 4266]]
loans or other types of covered short-term or longer-term balloon-
payment loans, which the Mann Study and the Bureau's interpretation of
limited data from that study did not even address.
---------------------------------------------------------------------------
    \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. Mann Study 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).
---------------------------------------------------------------------------
    For all of these reasons, the Bureau is now reconsidering its
decision to rely so heavily on its interpretation of limited data from
a study with such a narrow focus as the basis for a rule with effects
of the magnitude of those estimated to arise from the Mandatory
Underwriting Provisions of the 2017 Final Rule. In this case, more
research asking consumers about their ex ante understanding of their
own, or others', expected outcomes, and possibly various measures of
these distributions, would increase the evidentiary base. Without
additional research involving more lenders and more locations, it is
difficult to be confident that the conclusions that the Bureau drew in
the 2017 Final Rule from its interpretations of the limited data from
the Mann Study can be applied generally to payday lenders and payday
loans across the United States. Consequently, the Bureau preliminarily
believes that, especially given the dramatic market impacts of the 2017
Final Rule's Mandatory Underwriting Provisions on the future ability of
consumers who want to do so to choose these products, the Mann Study's
findings and the Bureau's interpretation of limited data from that
study were not adequately robust and representative to serve as the
primary basis of the Bureau's findings. Additionally, the Bureau notes
that in two industry-sponsored surveys conducted of consumers who had
successfully paid off a payday loan, the overwhelming majority of
respondents reported that when they took out their first loan they
understood well or quite well how long it would take to ``completely
repay the loan'' and that they were able to repay their loan in the
amount of time expected.\195\
---------------------------------------------------------------------------
    \195\ See id. at 54570 (discussing studies). The 2017 Final Rule
noted a number of limitations in these studies, including a sampling
bias resulting from surveying only successful repayers and the fact
that these were ex post surveys asking about expectations at an
earlier point in time. Id. Despite these limitations, these studies
tend to corroborate concerns about the robustness and
representativeness of the Bureau's key findings based on its
interpretation of limited data from the Mann Study.
---------------------------------------------------------------------------
    Finally, the Bureau notes that, in two academic papers based upon
surveys of payday borrowers, only a small portion--around 11 or 12
percent of borrowers--reported that they were somewhat or very
dissatisfied with their most recent payday loan experience.\196\ While
the Bureau notes there are concerns about the representativeness of the
samples surveyed, if it took consumers longer to pay off payday loans
than they thought it would, one might expect consumers to be
dissatisfied with their payday loans. They were not. These results thus
add to the Bureau's preliminary conclusion that its interpretation in
the 2017 Final Rule of limited data from the Mann Study provides an
insufficiently robust and representative foundation for the findings on
which the Bureau relied in concluding that its identified practice was
unfair and abusive.
---------------------------------------------------------------------------
    \196\ See Gregory Elliehausen & Edward Lawrence, Payday Advance
Credit in America: An Analysis of Customer Demand, at 52 (2001),
http://citeseerx.ist.psu.edu/viewdoc/download;jsessionid=F5246C700D90651E3340EF590C686B41?doi=10.1.1.200.7
740&rep=rep1&type=pdf; Gregory Elliehausen, An Analysis of
Consumers' Use of Payday Loans, at 41 (2009), https://www.researchgate.net/publication/237554300_AN_ANALYSIS_OF_CONSUMERS'_USE_OF_PAYDAY_LOANS; see also
Christy A. Bronson & Daniel J. Smith, Swindled or Served?: A Survey
of Payday Lending Customers in Southeast Alabama, 40 S. Bus. & Econ
J. 16 (2016) (finding general satisfaction with payday lending in
non-random survey of 48 people in Southeast Alabama).
---------------------------------------------------------------------------
    For all these reasons and as discussed further below, the Bureau
preliminarily believes the limited data from the Mann Study was not
sufficiently robust and representative, in light of the Rule's dramatic
impacts in restricting consumer access to payday loans, to be the
linchpin for a series of key findings, including that (1) consumers who
use covered short-term or longer-term balloon-payment loans lack the
understanding needed to reasonably avoid injury from lenders' failure
to assess consumers' ability to repay those loans; (2) consumers lack
understanding of the material risks, costs, or conditions of such
loans; and (3) consumers' lack of understanding contributes to their
inability to protect their interests in the selection or use of such
loans. The Bureau also preliminarily believes that it cannot, in a
timely and cost-effective manner for itself and for lenders and
borrowers, develop evidence that might or might not corroborate the
Mann Study results that the Bureau relied upon to support the key
findings the Bureau set forth in the 2017 Final Rule.\197\ The Bureau
invites comment on the robustness and representativeness of the
evidence supporting these findings, including comment on the weight the
Bureau placed on its interpretation of limited data from the Mann Study
and on any other evidence that may bear on these findings.
---------------------------------------------------------------------------
    \197\ As the Bureau noted in the 2017 Final Rule, ``[m]easuring
consumers' expectations about re-borrowing is inherently
challenging.'' 82 FR 54472, 54568.
---------------------------------------------------------------------------
2. Other Evidence on the Consumer Understanding of Risk
    The Bureau, in the 2017 Final Rule, pointed to other evidence and
made a number of additional factual findings in support of its key
finding, also principally based on the Mann Study, that consumers were
not able to predict accurately 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.
    For instance, the Bureau stated in the 2017 Final Rule that the way
in which covered short-term and longer-term balloon-payment loans are
structured and marketed, in addition to lenders' practices in
encouraging consumers to reborrow, are factors that exacerbate and
contribute to consumer confusion and lack of understanding as to
whether they will end up in long reborrowing sequences.\198\ Further,
the Bureau relied on its expertise and experience in supervisory
matters and enforcement actions concerning covered lenders in making
judgments about the covered short-term and longer-term balloon-payment
loan markets.\199\ That is, the Bureau determined on the basis of its
expertise and experience that the available data--primarily its
interpretation of limited data from the Mann Study--corroborated its
belief that ``a large number of consumers do not understand even
generally the likelihood and severity of [the] risks'' associated with
taking out a short-term loan.\200\
---------------------------------------------------------------------------
    \198\ See, e.g., id. at 54555; see also id. at 54561 (explaining
that ``[v]arious lender practices exacerbate the problem by
marketing to borrowers who are particularly likely to wind up in
long sequences of loans, by failing to screen out borrowers who are
likely to wind up in long-term debt or to establish guardrails to
avoid long-term indebtedness, and by actively encouraging borrowers
to continue to reborrow when their single-payment loans come
due.''). The Bureau, in the 2017 Final Rule, pointed to a host of
lender practices before, during, and after origination that the
Bureau said tend to diminish consumers' ability to avoid or mitigate
harms and protect their own interests in selecting or using covered
products. Id. at 54560-61. These included marketing that portrays
the product as a short-term financial fix rather than emphasizing
the substantial risks of reborrowing, screening only for immediate
default risk at origination rather than conducting more vigorous
underwriting, various practices in connection with taking account
access and vehicle title, the presentation of repayment options as
only allowing for full repayment or rollovers, and failing to inform
consumers of ``off-ramp'' payment options. Id. at 54561-65.
    \199\ See id. at 54506-07.
    \200\ Id. at 54597-98. The Bureau also interpreted one survey of
payday borrowers, about how long the average borrower would have a
payday loan outstanding, to suggest that borrowers were ``somewhat
optimistic'' about reborrowing behavior generally. See id. at 54568
& n.542 (citing Marianne Bertrand & Adair Morse, Information
Disclosures, Cognitive Biases and Payday Borrowing, 66 J. of Fin.
1865 (2011)). The survey asked the question: ``What's your best
guess of how long it takes the average person to pay back in full a
$300 payday loan?'' (quoted at 82 FR 54568). However, the Bureau did
not address the overall findings from the survey that, though
responses varied widely, the mean response to the survey was ``close
to [the] range'' of other data indicating how long borrowers
actually took to pay back their loans. See Bertrand & Morse at 1878.
---------------------------------------------------------------------------
[[Page 4267]]
    These additional findings,\201\ in essence, supplemented and were
ultimately subordinate to the Bureau's interpretation of limited data
from the Mann Study, which was the linchpin for the Bureau's findings
in the 2017 Final Rule that consumers lacked an understanding of the
possible risks and consequences associated with taking out payday
loans. The Bureau does not believe that this additional evidence and
other findings suffice to compensate for the insufficient robustness
and representativeness of the limited data from the Mann Study.
---------------------------------------------------------------------------
    \201\ 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.''). Other data
cited in the 2017 Final Rule to support consumers' underestimation
of the cost and timing of repaying payday loans appears to be cited
out of context. See, e.g., id. at 54571 (citing Rob Levy & Joshua
Sledge, A Complex Portrait: An Examination of Small-Dollar Credit
Consumers, (Ctr. for Fin. Serv. Innovation, 2012), https://www.fdic.gov/news/conferences/consumersymposium/2012/A%20Complex%20Portrait.pdf). The Bureau suggested that users of
payday and vehicle title loan products were more likely to
underestimate the cost of their loans compared to users of other
credit products. On further review, the Bureau does not believe that
this statement presents a complete picture, because the cited study
asked for predictions on cost and timing regarding small dollar loan
products only, not more common credit products like credit cards.
See 82 FR 54472, 54571; Levy & Sledge at 21. The Bureau also did not
address the study's findings identifying many users of payday and
title loan products who found the loans less costly than expected,
and found themselves in debt for less time than expected. See Levy &
Sledge at 21.
---------------------------------------------------------------------------
3. The Pew Study and the Finding Based on It
    As discussed in part V.A.2 above, the Bureau in the 2017 Final Rule
also found that consumers who use covered short-term or longer-term
balloon-payment loans lack the ability to protect their interests in
selecting or using these loans, and that lenders' practice of making
such loans without assessing consumers' ability to repay took
unreasonable advantage of that vulnerability.\202\ The predicate
finding that these consumers lack the ability to protect themselves
relied heavily on a survey of payday borrowers conducted by the Pew
Charitable Trusts, discussed above, in which 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?'' \203\ The Bureau interpreted the
survey results as demonstrating that these consumers, if faced with an
immediate need for cash, lack the ability to ``effectively identify or
develop alternatives that would vitiate the need to borrow [or] allow
them to borrow on terms within their ability to repay.'' \204\
---------------------------------------------------------------------------
    \202\ 82 FR 54472, 54614.
    \203\ Pew Study at 6, 21, 60.
    \204\ 82 FR 54472, 54619.
---------------------------------------------------------------------------
    The Bureau preliminarily believes that the Pew Study is an
inadequate basis for the Bureau in the 2017 Final Rule to have drawn
broad conclusions about consumers' ability to take actions to protect
their own interests. To begin with, the survey asked respondents about
their feelings, not about their actions. Respondents were not asked
whether they had, in fact, taken out a payday loan at a time when they
said they would have done so on ``pretty much any terms.'' That some
respondents at some time felt they had been at some point willing to
take a payday loan on any terms does not indicate what they actually
did at that time or how often they took out payday loans in general.
Further, the Pew Study itself contains a number of other findings that
cast doubt on whether, as the Bureau found, 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 deal with cash shortfalls.\205\ Similarly, in a prior survey, the
Pew Charitable Trusts found that if payday loans were not available,
borrowers would cut back on expenses (81 percent), delay paying some
bills (62 percent), borrow from friends or family (57 percent), or pawn
personal property (57 percent) \206\--further raising questions with
respect to the Bureau's reliance in the 2017 Final Rule on the Pew
Study to find that consumers cannot explore other alternatives and thus
cannot protect their interests. These results indicate that consumers
are familiar with mechanisms other than payday loans to deal with cash
shortfalls.
---------------------------------------------------------------------------
    \205\ Pew Study at 9.
    \206\ Pew Charitable Trusts, Payday Lending in America: Who
Borrows, Where They Borrow, and Why, at 16 (2012), http://
www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/
pewpaydaylendingreportpdf.pdf.
---------------------------------------------------------------------------
    Other research casts further doubt on the weight the Bureau placed
in the 2017 Final Rule on the Pew Study and on the robustness and
reliability of the evidence to support the Bureau's finding that
consumers who use payday or other covered short-term or longer-term
balloon-payment loans lack the ability to explore alternatives. One
study suggests that, precisely because they are financially vulnerable,
payday borrowers are accustomed to facing cash shortfalls and have used
a variety of different approaches for dealing with such situations.
Some involve juggling of expenses, while others involve accessing
alternative sources of cash, including overdraft, pawn loans, and
informal borrowing. Research released since the 2017 Final Rule
underscores the point. In a recent report issued by the 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.\207\ Although it is possible that those who said they would
use a payday loan are systematically different from other respondents
and do not have other options available to them, this Board report at
least raises significant questions as to whether that is so.
---------------------------------------------------------------------------
    \207\ 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.
---------------------------------------------------------------------------
    The Bureau also suggested in the 2017 Final Rule that consumers who
take out a covered short-term or longer-term balloon-payment loan may
do so because of the ``lack of . . . availability of better
alternatives.'' \208\ Here, too, the Pew Study is inconclusive. It
found that many borrowers repaid their loans using methods they could
have used instead of taking out a payday loan in the first instance,
suggesting that these borrowers may have had other alternatives at the
time they took out the
[[Page 4268]]
loan.\209\ Other recent research has emphasized the extent to which
borrowing among friends and families is common among the most
financially vulnerable.\210\ Moreover, in the 2017 Final Rule, the
Bureau itself reviewed a range of options that it believed would be
available and accessible to consumers if they were unable to obtain a
covered short-term or longer-term balloon-payment loan as a result of
the ability-to-repay determination required by the Rule.\211\ These
include installment loans offered by payday and vehicle title lenders
and other providers which are replacing short-term products,\212\ as
well as emerging fintech products such as wage advances and no-cost
advances.
---------------------------------------------------------------------------
    \208\ 82 FR 54472, 54620.
    \209\ Alternatives to borrowing identified by the Pew Study
included receiving funds from family and friends, using tax refunds,
pawning or selling items, using credit cards, and taking out a loan
from a bank or credit union. Pew Study at 36-38.
    \210\ See, e.g., Jonathan Morduch and Julie Siwicki, In and Out
of Poverty: Episodic poverty and income volatility in the U.S.
Financial Diaries, at 17 (2017), https://www.usfinancialdiaries.org/paper2.
    \211\ 82 FR 54472, 54609-11.
    \212\ See, e.g., John Hecht, Short Term Lending Update: Moving
Forward with Positive Momentum (2018) (Jefferies LLC, slide
presentation) (on file); see also 82 FR 54472, 54609.
---------------------------------------------------------------------------
    Finally, the Bureau notes that in 17 States and the District of
Columbia, payday loans are prohibited. Consumers in these States that
find themselves in difficult financial circumstances rely primarily on
options other than covered short-term and longer-term balloon-payment
loans,\213\ raising questions about the Bureau's finding that consumers
in States in which payday loans are not prohibited cannot do so.
---------------------------------------------------------------------------
    \213\ 82 FR 54472, 54485 (noting that at least 11 States and
jurisdictions that previously permitted payday lending took steps to
restrict or eliminate such lending altogether).
---------------------------------------------------------------------------
    For all the reasons set forth above, the Bureau preliminarily
believes 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. And as with the Mann Study, as discussed above, the
Bureau preliminarily believes that it cannot, in a timely and cost-
effective manner for itself and for lenders and borrowers, develop
sufficiently robust and reliable evidence that might or might not
corroborate the Pew Study results. The Bureau seeks comment on the
robustness and reliability of the evidence supporting this key finding,
including comment on the weight the Bureau placed on the Pew Study, and
on any other evidence that may bear on this finding.
4. Other Evidence Pertaining to Inability To Protect
    In addition to the Pew Study, and as set out in part V.B.2 above,
the Bureau pointed in the 2017 Final Rule to the structure of the loans
themselves, expressing the belief that their short repayment periods
and balloon payments may make it substantially harder for consumers to
work themselves out of debt than if they were subject to a longer,
slower repayment schedule.\214\ As support for the findings in the 2017
Final Rule that the identified practice was abusive, the Bureau also
pointed to a host of lender practices before, during, and after
origination that the Bureau said tend to diminish consumers' ability to
avoid or mitigate harms and protect their own interests in selecting or
using covered products.\215\
---------------------------------------------------------------------------
    \214\ Id. at 54561.
    \215\ Id. at 54560-61.
---------------------------------------------------------------------------
    As set forth in part V.B.2 above, the data identified in the 2017
Final Rule suggests that many consumers do use short-term loans as
marketed--that is, as short-term or stop-gap measures, without
initiating a prolonged sequence of reborrowing.\216\ Further, evidence
in the 2017 Final Rule showed that, while some lenders may discourage
the use of repayment plans or off-ramps or otherwise encourage extended
reborrowing, many consumers nevertheless avoid long reborrowing
sequences and pay off their covered short-term and longer-term balloon-
payment loans with no, or minimal, renewals.\217\
---------------------------------------------------------------------------
    \216\ Id. at 54570-71.
    \217\ Id. at 54704.
---------------------------------------------------------------------------
5. Conclusion
    Based on its analysis in parts V.B.1 through V.B.4 above, the
Bureau believes that the key evidentiary grounds relied upon in the
2017 Final Rule were insufficiently robust and reliable to support the
findings of an unfair and abusive practice as identified in Sec.
1041.4. The Bureau preliminarily concludes that neither the Bureau's
interpretation of limited data from the Mann Study nor other sources on
which the Bureau relied provide a sufficiently robust and
representative evidentiary basis, in light of the expected impacts of
the 2017 Final Rule, to conclude that consumers do not have a specific
understanding of their personal risks and cannot accurately predict
whether they will remain in long reborrowing sequences after taking out
covered short-term and longer-term balloon-payment loans. The Bureau
also preliminarily concludes that the Pew Study, and other evidence
cited in support of the Pew Study, do not provide a sufficiently robust
and reliable basis to conclude 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. The Bureau further
preliminarily concludes that the weaknesses in the evidentiary record
on which the Bureau relied for the Mandatory Underwriting Provisions in
the 2017 Final Rule is particularly problematic as a policy matter
because these provisions will have dramatic effects, including
eliminating many lenders and decreasing consumer access to financial
products that they may want. Accordingly, the Bureau preliminarily
believes that these conclusions are sufficient to rescind Sec.  1041.4.
C. The Legal Findings Under Section 1031 of the Dodd-Frank Act
    In addition to, and independent from, its preliminary determination
that the evidence relied upon in the 2017 Final Rule was insufficiently
robust and reliable to support the Bureau's key findings underlying the
unfairness and abusiveness determinations, the Bureau also
preliminarily determines that the standards for unfairness and
abusiveness used in the 2017 Final Rule were problematic for the
reasons discussed below.
    Specifically, as to the Bureau's unfairness findings in the 2017
Final Rule, the Bureau is making this preliminary conclusion about how
the 2017 Final Rule applied: (1) Section 1031(c)(1)(A) of the Dodd-
Frank Act relating to determining whether injuries are reasonably
avoidable, and (2) section 1031(c)(1)(B) about whether substantial
injury is outweighed by countervailing benefits. The Bureau is also
making this preliminary conclusion, as to the Bureau's abusiveness
findings in the 2017 Final Rule, about how the 2017 Final Rule applied:
(1) Section 1031(d)(2)(A) relating to determining whether consumers
lack understanding of the material costs, risks, or conditions of a
consumer financial product or service; and (2) section 1031(d)(2)
relating to the determination that lenders took unreasonable advantage
of consumers by making covered short-term and balloon-payment loans
without reasonably assessing borrowers' ability to repay such loans
according to their terms.
    Accordingly, as discussed further below, the Bureau preliminarily
[[Page 4269]]
believes that the 2017 Final Rule should not have concluded that the
identified practice was unfair and abusive. This preliminary conclusion
is independent from the Bureau's preliminary conclusions regarding the
evidentiary basis for the 2017 Final Rule. In other words, even if the
evidence on which the 2017 Final Rule was based was sufficiently robust
and reliable, the Bureau preliminarily believes that the Bureau should
not have concluded in the 2017 Final Rule that the identified practice
was unfair and abusive because the agency used problematic approaches,
as discussed below, in applying the standards for unfairness and
abusiveness.
1. Reasonable Avoidability
    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) that that injury was not
reasonably avoidable by consumers; and (3) that the injury was not
outweighed by countervailing benefits to consumers or competition.\218\
The Bureau believes the approach it used to reach these conclusions was
problematic, as discussed below, and it now preliminarily proposes a
better approach to applying the reasonable avoidability standard,
incorporating the lessons of relevant precedent by the FTC. The Bureau
preliminarily concludes that, even assuming that the factual findings
in the 2017 Final Rule were correct and sufficiently supported, those
findings did not establish that consumers could not reasonably avoid
harm under the best interpretation of the statute, informed by relevant
precedent.
---------------------------------------------------------------------------
    \218\ Id. at 54588.
---------------------------------------------------------------------------
    As discussed in part V.A.1, the Bureau, in the Mandatory
Underwriting Provisions of the 2017 Final Rule, 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.'' \219\ As discussed above, the Bureau interpreted
this standard in the 2017 Final Rule context 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.\220\ The Bureau acknowledged 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.'' \221\ The Bureau also acknowledged that the
Mann Study on which the Bureau so heavily relied found that most payday
borrowers expected some repeated sequences of loans.\222\ 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.'' \223\
Because it found that consumers are not in a position to evaluate the
risks, the Bureau found that consumers could not reasonably avoid the
injuries.\224\
---------------------------------------------------------------------------
    \219\ Id. at 54594.
    \220\ Id. at 54594-96.
    \221\ Id.at 54615.
    \222\ Id. at 54569.
    \223\ Id. at 54597.
    \224\ Id. at 54594; see also id. at 54597.
---------------------------------------------------------------------------
    The Bureau is concerned that in the 2017 Final Rule it applied a
problematic standard for reasonable avoidability under section
1031(c)(1)(A) of the Dodd-Frank Act.
    In applying unfairness principles, the FTC and courts have long
recognized that 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.'' \225\
Put differently, ``an injury is reasonably avoidable if consumers have
reason to anticipate the impending harm and the means to avoid it.''
\226\ The FTC Policy Statement emphasizes the importance of consumer
choice in unfairness analysis. As the FTC Policy Statement explains,
unfairness authority is not intended to ``second-guess the wisdom of
particular consumer decisions'' and consumers are expected to ``survey
the available alternatives, choose those that are most desirable, and
avoid those that are inadequate or unsatisfactory.'' \227\ Unfairness
matters typically are brought to halt ``some form of seller behavior
that unreasonably creates or takes advantage of an obstacle to the free
exercise of consumer decisionmaking.'' \228\ The Bureau finds these
precedents informative as the Bureau considers how to apply section
1031(c)(1)(A) of the Dodd-Frank Act.
---------------------------------------------------------------------------
    \225\ See Int'l Harvester, 104 F.T.C. at 1066.
    \226\ Davis v. HSBC Bank Nev., N.A., 691 F.3d 1152, 1168 (9th
Cir. 2012), quoting Orkin Exterminating Co., Inc. v. F.T.C., 849
F.2d 1354, 1365-66 (11th Cir. 1988).
    \227\ FTC Policy Statement, Int'l Harvester, 104 F.T.C. 1074.
    \228\ Id. The FTC Policy Statement offers examples of such
misbehavior, including withholding critical information, engaging in
overt coercion, or exercising undue influence over susceptible
classes of purchasers.
---------------------------------------------------------------------------
    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.\229\ Even though the Bureau used this interpretation in the 2017
Final Rule, the Bureau now preliminarily concludes 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. To
require that consumers know their individualized likelihood and
magnitude of harm from an act or practice to reasonably avoid their
effects inflates the injury from them, would practically speaking shift
the burden to lenders to make such determinations, thereby deterring
lenders from offering products or product features, which effectively
suppresses rather than facilitates consumer choice.
---------------------------------------------------------------------------
    \229\ 82 FR 54472, 54597-98.
---------------------------------------------------------------------------
    This 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.'' \230\ The Bureau
went on to state that ``[t]he only disclosure that the Bureau could
envision that could come close to positioning consumers to mitigate the
unfair and abusive practice effectively would be an individualized
forecast'' and that such ``an individualized disclosure might require
more compliance burden than the
[[Page 4270]]
[Mandatory Underwriting Provisions in the Final Rule] to the extent
that it would require a lender to forecast how many rollovers or how
much re-borrowing might be required in the event that a consumer is not
likely to repay the entire balance during the initial loan term.''
\231\
---------------------------------------------------------------------------
    \230\ Id. at 54637 (emphasis added).
    \231\ Id. (emphasis added).
---------------------------------------------------------------------------
    Thus, according to the 2017 Final Rule, many consumers are unable
to reasonably avoid injury because they are unable to examine their own
circumstances, the loan terms, and the typical loan performance in
these markets, and determine from this information both their personal
likelihood of timely repayment and the seriousness of the consequences
if they fail to repay. The application of reasonable avoidability in
the 2017 Final Rule contemplates that consumers cannot reasonably avoid
harm even though they have a general knowledge that difficulty repaying
(either temporarily or permanently) could occur and could lead them
either to reborrow or default and experience adverse credit reporting,
collections efforts, and even repossessions, liens, and garnishment of
wages. Indeed, under the 2017 Final Rule's interpretation, consumers
cannot reasonably avoid injury even if they recognize that they will be
unable to repay the loan when initially due and will need to borrow but
are uncertain as to precisely how long it will take them to be able to
fully pay off the debt. Rather than consider whether consumers have
reason to anticipate the impending harm and the means to avoid it, the
Bureau interpreted the standard as requiring consumers to understand
the specific likelihood and severity of potential harm to them.
    Upon further consideration, the Bureau now preliminarily believes
that using this reasonable avoidability standard was problematic.
Whether through disclosure or through underwriting, the logic the
Bureau applied in the 2017 Final Rule requires providers of covered
short-term and longer-term balloon-payment loans to engage in extremely
detailed, specific action with regard to particular consumers to
correct for the consumers' individualized understanding--or lack of
understanding--about their own finances and likely experiences with
such loans.
    As discussed in part IV, FTC Act precedent informs the Bureau's
understanding of the unfairness standard under section 1031(c)(1)(A) of
the Dodd-Frank Act. Accordingly, the Bureau considers FTC precedents
when evaluating whether an act or practice causes harm or is likely to
cause harm that is reasonably avoidable by consumers pursuant to
section 1031(c)(1)(A) of the Dodd-Frank Act. When 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,'' \232\ meaning that ``people
know the physical steps to take in order to prevent'' injury,\233\ but
``also . . . understand the necessity of actually taking those steps.''
\234\ Under this approach, whether a consumer can anticipate and avoid
injury through consumer choice informs whether that injury is
reasonably avoidable.\235\ In some cases, consumer injury was not
reasonably avoidable because a potential harm was not disclosed and
consumers could not anticipate that harm from prior experience.\236\ In
other cases, firms have engaged in deception or outright coercion to
prevent the exercise of free consumer choice.\237\ However, the Bureau
has not identified relevant precedent suggesting that consumers must
understand their own specific individualized likelihood and magnitude
of harm to reasonably avoid injury or requiring the disclosure of such
information to prevent injury. A disclosure that generally alerts
consumers to the likelihood and magnitude of harm generally has been
sufficient to avoid a finding that consumers did not appreciate the
value of taking steps to avoid that harm.\238\
---------------------------------------------------------------------------
    \232\ See Davis, 691 F.3d at 1168.
    \233\ See Int'l Harvester, 104 F.T.C. at 1066.
    \234\ Id.
    \235\ See Orkin, 849 F.2d at 1365.
    \236\ See id. (``consumer choice was impossible'' when company
raised annual fees without a contractual basis for lifetime termite
protection services); Int'l Harvester, 104 F.T.C. at 1066.
(``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.'').
    \237\ See F.T.C. v. Wyndham Worldwide Corp., 799 F.3d 236, at
245-46 (3rd Cir. 2015) (injury from data breaches was not reasonably
avoidable because of misleading privacy policy that overstated the
company's data security practices); Holland Furnace Co. v. F.T.C.,
295 F.2d 302 (7th Cir. 1961) (company representatives dismantled
furnaces without permission and refused to reassemble them until
consumers agreed to buy services or parts).
    \238\ See, e.g., Int'l Harvester, 104 F.T.C. 949, at *46 (noting
that the dissemination of the disclosure --``AVOID FIRES. TIGHTEN
cap securely, Do not open when engine is RUNNING or HOT''--would
have made the injury from fuel geysering reasonably avoidable).
---------------------------------------------------------------------------
    The Bureau's approach to reasonable avoidability is also consistent
with trade regulation rules promulgated by the FTC over several decades
to address unfair or deceptive practices that occur on industry-wide
bases.\239\ To prevent such conduct, the FTC has routinely established
disclosure requirements that mandate businesses provide to consumers
general information about material terms, conditions, or risks related
to products or services.\240\ However, 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.\241\
---------------------------------------------------------------------------
    \239\ 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.
    \240\ 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).
    \241\ 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 preliminarily believes that it should interpret the
reasonable avoidability standard as not necessarily requiring 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.
Indeed, by virtue of the fact that many payday borrowers experience
income and debt volatility, the 2017 Final Rule effectively presupposed
that payday borrowers per se cannot reasonably avoid injury. The Bureau
now preliminarily believes that the 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 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 extended loan
sequences, default, or struggle to pay other bills after repaying their
payday loan. The Bureau now preliminarily concludes
[[Page 4271]]
that this approach, consistent with the FTC's longstanding approach on
informed consumer decision-making in its interpretation of the
unfairness standard, is the best interpretation of section
1031(c)(1)(A) as a legal and policy matter. In the Bureau's preliminary
judgment, this approach appropriately emphasizes informed consumer
decision-making.\242\
---------------------------------------------------------------------------
    \242\ As the FTC stated in the FTC 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 Policy
Statement, Int'l Harvester, 104 F.T.C. at 1074. See also Orkin, 849
F.2d at 1365 (``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 at the best regulator
of the market.''') (quoting Am. Fin. Serv. Ass'n v. F.T.C., 767 F.2d
957, 976 (D.C. Cir. 1985)).
---------------------------------------------------------------------------
    Applying an interpretation consistent with FTC precedent, the
Bureau preliminarily believes that, assuming for present purposes that
the identified practice causes or is likely to cause substantial
injury, consumers can reasonably avoid that injury. As noted above, in
the 2017 Final Rule, the Bureau expressly 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.'' \243\ Payday loans are advertised as
products designed to assist consumers who are in financial distress,
which tends to create general awareness that payday borrowers may not
necessarily be in a position to readily obtain cheaper forms of credit.
In light of their limited options and financial volatility, payday
borrowers may infer that there are risks associated with taking the
loans. Indeed, as previously noted, the Bureau expressly acknowledged
that the Mann Study on which the Bureau so heavily relied found that
most payday borrowers expected some repeated sequences of loans. The
Bureau also notes that a significant portion of longer-term borrowers--
who were the Bureau's primary concern in the 2017 Final Rule--have
previously used covered short-term and longer-term balloon-payment
loans and personally experienced extended loan sequences.\244\
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, a Bureau analysis of a study of State-mandated
payday loan disclosures--which inform consumers about repayment and
reborrowing rates--found that such disclosures had a limited impact on
reducing payday loan use and, in particular, reborrowing.\245\ The
majority of consumers in the study continued to take out payday loans
despite the disclosures. 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.
---------------------------------------------------------------------------
    \243\ 82 FR 54472, 54615.
    \244\ Id. at 54597.
    \245\ Id. at 54577-78; see Tex. Office of Consumer Credit
Comm'r, Credit Access Businesses, http://occc.texas.gov/industry/cab.
---------------------------------------------------------------------------
    The Bureau in the 2017 Final Rule did not offer evidence that would
support the conclusion that consumers cannot reasonably avoid
substantial injury from taking out payday loans when applying a
standard that focuses on a more generalized understanding of likelihood
and magnitude of 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.\246\ Accordingly, the Bureau preliminarily believes
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.
---------------------------------------------------------------------------
    \246\ 82 FR 54472, 54840-41.
---------------------------------------------------------------------------
    The Bureau seeks comments on this issue, including comment on the
Bureau's proposed revised interpretation of reasonable avoidability
under section 1031(c)(1) of the Dodd-Frank Act. The Bureau requests
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.
2. Countervailing Benefits to Consumers and to Competition
    After determining in the 2017 Final Rule that the identified
practice causes or is likely to cause substantial injury to consumers
which is not reasonably avoidable by them, the Bureau went on to
determine that such substantial injury is not outweighed by
countervailing benefits to consumers or to competition. This is a
necessary element of an unfairness determination under section
1031(c)(1)(B) of the Dodd-Frank Act. The Bureau now revisits this
latter determination and believes certain countervailing benefits from
the identified practice were greater than the Bureau found in the 2017
Final Rule. Even assuming arguendo that the identified practice causes
or is likely to cause substantial injury to consumers which is not
reasonably avoidable, the Bureau now revalues and determines that the
countervailing benefits under the unfairness analysis were greater than
the Bureau found in the 2017 Final Rule, and now preliminarily believes
that the benefits to consumers and competition from the practice
outweigh any such injury.
a. 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.\247\ 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.'' \248\ 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.\249\
---------------------------------------------------------------------------
    \247\ 12 U.S.C. 5531(b).
    \248\ 12 CFR 1041.4 (emphasis added).
    \249\ 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 obtain any loans and, of those who obtained a loan,
only one-third would be able to obtain a subsequent loan.\250\ The end
result, the Bureau estimated, would be to eliminate between 89 and 93
percent of all loans.\251\
---------------------------------------------------------------------------
    \250\ 82 FR 54472, 54833.
    \251\ Id. at 54826 (storefront payday), 54834 (vehicle title).
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[[Page 4272]]
    In conducting its countervailing benefits analysis, however, 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
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 anticipated
that the 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.\252\
---------------------------------------------------------------------------
    \252\ 12 U.S.C. 5512(b)(3).
---------------------------------------------------------------------------
    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. In the words of
the Bureau, 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 ``reduces the weight on this [the countervailing
benefits] side of the scale.'' \253\ This weight would have been much
greater had the Bureau properly considered the full benefits from
lenders engaging in the identified practice.
---------------------------------------------------------------------------
    \253\ 82 FR 54472, 54609, 54603.
---------------------------------------------------------------------------
    The Bureau preliminarily believes that the approach taken by the
Bureau in the 2017 Final Rule puts the proverbial cart before the
horse. The principal step-down exemption is a carve-out from
requirements adopted to prevent an identified unfair and abusive
practice. Thus, a predicate for the exemption, as pertinent here, 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
outweighs countervailing benefits to consumers or to competition. 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 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.'' \254\ In the 2017 Final Rule, the Bureau declared
a practice unfair based on its 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 inflating the costs
of the practice relative to its benefits. Because the Bureau did not
confront the total tradeoffs between the benefits and costs of the
identified practice, the Bureau now preliminarily believes that the
2017 Final Rule undervalued countervailing benefits. Doing so may brand
business practices as unfair when they are beneficial on net to
consumers or competition.
---------------------------------------------------------------------------
    \254\ See FTC Policy Statement, Int'l Harvester, 104 F.T.C. at
1073.
---------------------------------------------------------------------------
    Accordingly, the Bureau preliminarily believes 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 to consumers 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.
b. Effect of Undervaluing Countervailing Benefits
    The Bureau also preliminarily believes 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 it acknowledged but, in the
Bureau's current view, undervalued--any aggregate injury to consumers
caused by the identified practice is outweighed by the aggregate
countervailing benefits to consumers and competition of that practice.
    As the Bureau noted in the 2017 Final Rule, 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.'' The Bureau approaches this determination by
first weighing the relevant injury in the aggregate (taking the
findings of the 2017 Rule as a given because it need not reconsider
them here), then weighing countervailing benefits in the aggregate, and
then assessing which of the two predominates.\255\
---------------------------------------------------------------------------
    \255\ 82 FR 54472, 54602. ``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.'' Id. at 54591.
---------------------------------------------------------------------------
i. Countervailing Benefits to Consumers
    In the 2017 Final Rule, 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).\256\ The Bureau follows the same framework
here. At the same time, the Bureau requests comment on whether these
are the appropriate categories within which to analyze the existence of
countervailing benefits.
---------------------------------------------------------------------------
    \256\ Id. at 54599-600.
---------------------------------------------------------------------------
    Repayers. In between 22 percent and 30 percent of payday loan
sequences \257\
[[Page 4273]]
and a smaller slice of vehicle title sequences,\258\ 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 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.\259\ 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.\260\
---------------------------------------------------------------------------
    \257\ 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.
    \258\ 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).
    \259\ See 82 FR 54472, 54603-04.
    \260\ Id.
---------------------------------------------------------------------------
    The Bureau now believes 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. This risk arises in part from the
difficulty some borrowers may have in proving their ability to repay
and in part from that 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,''
\261\ the Bureau now preliminarily believes that somewhat greater
weight should be placed on this risk. The Bureau's experience in other
markets indicates that some lenders generally seek to take steps to
avoid pressing the limits of the law.
---------------------------------------------------------------------------
    \261\ Id. at 54603.
---------------------------------------------------------------------------
    Moreover, from the perspective of the repayers, 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, that would lead to a vast constriction of
supply. The Bureau believes that a 90 percent reduction in revenue
would produce at least a corresponding reduction in supply \262\ and
could have even a more profound effect if the remaining revenue were
insufficient to sustain the business model. In other words, the Bureau
preliminarily believes 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.
Prohibiting such lending will necessarily decrease the ability of the
repayers to obtain covered short-term and longer-term balloon-payment
loans.
---------------------------------------------------------------------------
    \262\ 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.\263\ 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 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.\264\
After taking into account this reduction, the Bureau concluded,
however, that the remaining countervailing benefits were outweighed by
the injury to those reborrowers who find themselves ``unexpectedly
trapped in extended loan sequences.'' \265\
---------------------------------------------------------------------------
    \263\ Id. at 54605.
    \264\ Id. at 54606.
    \265\ Id. at 54605.
---------------------------------------------------------------------------
    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. 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.\266\ Moreover, as explained above, the Bureau
believes that this reliance on the principal step-down exemption was
misplaced.
---------------------------------------------------------------------------
    \266\ 12 CFR 1041.6.
---------------------------------------------------------------------------
    The Bureau preliminarily believes 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, 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 on the grounds that 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, 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 type of loans.
    The Bureau acknowledges 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'' \267\--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.\268\ Moreover, over 35
percent of the reborrowers required only between one and three
additional loans before being able to repay and stop borrowing
[[Page 4274]]
for 30 days and an additional almost 20 percent of the reborrowers
required between four and six additional loans before being able to
repay.\269\ 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.
---------------------------------------------------------------------------
    \267\ 82 FR 54472, 54620.
    \268\ 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.
    \269\ See Supplemental Findings at 122 (fig. 36).
---------------------------------------------------------------------------
    In sum, the Bureau preliminarily believes that there are
substantial countervailing benefits for reborrowers that flow from the
identified practice that the Bureau now preliminarily believes 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 \270\ and 32 percent of
vehicle title borrowers,\271\ the Bureau 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).\272\
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.'' \273\ 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.'' \274\
---------------------------------------------------------------------------
    \270\ See id. at 120 (tbl. 23).
    \271\ 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.
    \272\ 82 FR 54472, 54604.
    \273\ Id.
    \274\ Id. at 54604, 54590.
---------------------------------------------------------------------------
    Of course, 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 is now concerned that in the 2017 Final Rule
it may have 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 is also concerned that the 2017 Final Rule may have
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 now preliminarily believes that the
2017 Final Rule's approach to its countervailing benefits analysis
caused it to underestimate the countervailing benefits in terms of
access to credit that flows from the identified practice. 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
now preliminarily believes 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
believes that after giving full and 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 invites comment on these preliminary conclusions.
ii. Countervailing Benefits to Competition
    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.\275\ For the reasons
previously discussed, the Bureau now preliminarily believes 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 under which lenders would be able to make upwards
of 90 percent of the loans they would not be able to make if the
identified practice were determined to be unfair. The Bureau
preliminarily believes that the loss of revenue from these loans and in
the corresponding reduction in supply would have a dramatic effect on
competition, especially if lenders cannot stay in business in the face
of such decreases in revenue.
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    \275\ 82 FR 54472, 54611-12.
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    The Bureau recognizes that because of State-law regulation of
interest rates, the effect of reduced competition may not manifest
itself in higher prices. However, payday and vehicle title lenders
compete on non-price dimensions and a rule which caused at least a 90
percent reduction in revenue and supply would likely materially impact
such competition.
    The Bureau also notes that, as the 2017 Final Rule recognized, a
number of innovative products are seeking to compete with traditional
short-term lenders by assisting consumers in finding ways to draw on
the accrued cash value of wages they have earned but not yet paid, and
that some of these products take the form of extensions of credit.\276\
Other innovators are providing emergency assistance at no cost to
consumers through a tip model.\277\ 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 believes that a prohibition of making short-
term or balloon-payment loans without assessing consumers' ability to
repay would constrain innovation in this market.
---------------------------------------------------------------------------
    \276\ 12 CFR 1041.3(d)(7).
    \277\ 12 CFR 1041.3(d)(8).
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    The Bureau preliminarily believes 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 invites
comment on these preliminary conclusions.
3. Lack of Understanding of Material Risks, Costs, or Conditions
    As discussed in part V.A.2 above, 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
[[Page 4275]]
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
interpreted the statute 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.'' \278\
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    \278\ 82 FR 54472, 54617.
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    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 unlawful in the consumer financial services sphere. The
Bureau preliminarily believes that this element of the abusiveness test
for this proposal should be treated as similar to reasonable
avoidability. That is, the Bureau now preliminarily believes that the
approach taken in the 2017 Final Rule was problematic, as discussed
below, and now applies 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 believes that consumers have a sufficient understanding
under section 1031(d)(2)(A) of the Dodd-Frank Act if they appreciate
the general risks of harm associated with the products sufficient for
them to consider taking reasonable steps to avoid that harm. 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 believes 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.C.1
above regarding reasonable avoidability, the Bureau has preliminarily
determined 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
seeks comment on this issue, including comment on how the Bureau should
interpret section 1031(d)(2)(A) of the Dodd-Frank Act.
4. Taking Unreasonable Advantage
    The Bureau is also reconsidering 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 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 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.\279\ The Bureau's unreasonable advantage analysis
applied a multi-factor analysis, concluding that:
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    \279\ 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.\280\
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    \280\ Id. at 54623 (bracketed numbers added).
    The Bureau has decided to reassess this application of section
1031(d)(2) of the Dodd-Frank Act. This inquiry is inherently a question
of judgment in light of the factual, legal, and policy factors that can
inform what is reasonable or unreasonable in particular circumstances.
Upon further consideration, the Bureau preliminarily concludes that the
factors cited in the 2017 Final Rule do not constitute unreasonable
advantage-taking.
    First, insofar as the Bureau in the 2017 Final Rule focused on the
atypicality of granting credit without assessing ability to repay, the
Bureau now questions whether this practice is an appropriate indicator
of unreasonable advantage-taking. Although the Bureau pointed to the
fact that the practice of extending credit without assessing ability to
repay is an unusual one, it is actually 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 believes 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, to presume that atypicality is
inherently suggestive of unreasonable advantage-taking would risk
stifling innovation. These all suggest that even if the lack of
underwriting were atypical, it still should not be viewed as inherently
suggestive of unreasonable advantage-taking, given differences between
particular consumer financial markets and the needs of their respective
consumers.
    Second, on taking advantage of particular consumer vulnerabilities,
as discussed above, the Bureau preliminarily believes that limitations
in the Rule's evidentiary record, including issues related to the Mann
Study and the Pew Study, call into question the Bureau's findings
regarding the degree of vulnerabilities of covered short-term and
longer-term balloon-payment loan users. But even if the Bureau's
findings in the 2017 Final Rule regarding user vulnerabilities are
valid, the Bureau now preliminarily does not believe that they would
independently support an unreasonable advantage-taking determination.
The ``takes unreasonable advantage of'' 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 now believes 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, 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
[[Page 4276]]
prices or including different terms in contracts for them.\281\
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    \281\ As previously noted, due to similarities between the
unfairness provisions in the Dodd-Frank Act and the FTC Act, FTC Act
precedent informs 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 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.
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 Bureau is concerned that the 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 Bureau stated that lenders' ``business model--unbeknownst
to borrowers--depends on repeated re-borrowing.'' \282\ However,
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. But the Bureau
asserted that the two are connected, because lenders' business models
are ``directly inconsistent with the manner in which the product is
marketed to consumers.'' \283\ The Bureau nevertheless did not have
evidence, for example, 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. The Bureau 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. The Bureau noted that ``covered short-
term loans are marketed as being intended for short-term or emergency
use,'' \284\ but that appears to be a statement about how most
consumers use these loans, not a statement about the lenders' revenue
structures.\285\
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    \282\ 82 FR 54472, 54621.
    \283\ Id. at 54623.
    \284\ Id. at 54616.
    \285\ 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, on eliminating or sharply limiting feasible conditions that
would reduce harm for a substantial portion of consumers, the Bureau
questions whether a lender's decision not to offer such conditions
constitutes unreasonable advantage-taking in this context. As discussed
above with respect to atypicality, the Bureau does not believe that a
lender's forgoing underwriting in this context necessarily indicates
unreasonable advantage-taking.\286\ Further, a lender's decision not to
offer a short-term, non-amortizing product may be reasonable given that
some States constrain the offering of longer-term products and, 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 now preliminarily does not believe this factor is of
significant probative value concerning whether the identified practices
takes unreasonable advantage of consumer vulnerabilities.
---------------------------------------------------------------------------
    \286\ Further, the Bureau notes that this factor, which suggests
that a lender takes unreasonable advantage by not assessing ability
to repay because, inter alia, the lender does not underwrite, relies
to a significant extent on circular logic. By presuming the
unreasonable advantage-taking determination in this manner, the
Bureau in the 2017 Final Rule neglected to offer a meaningful
rationale for the weight that it placed on the failure to underwrite
in the fourth factor of the analysis, and the Bureau preliminarily
believes that it should not be given this weight.
---------------------------------------------------------------------------
    For these reasons, the Bureau preliminarily believes that it does
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.
    The Bureau seeks 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 seeks
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 to underwrite an automobile loan or consumer
finance lender would do for a small business loan.
5. Conclusion
    Based on its analysis in parts V.C.1 through V.C.4 above, the
Bureau preliminarily believes that the findings of an unfair and
abusive practice as identified in Sec.  1041.4 rested on applications
of sections 1031(c) and (d) of the Dodd-Frank Act that the Bureau
should no longer use. Specifically, the Bureau preliminarily concludes
that the Bureau should no longer rely upon the 2017 Final Rule's: (1)
Application of the reasonable avoidability element of unfairness under
section 1031(c)(1)(A) of the Dodd-Frank Act by finding that consumers
could not reasonably avoid injury; (2) application of the
countervailing benefits element under section 1031(c)(1)(B) of the
Dodd-Frank Act and valuation of certain countervailing benefits under
that section; (3) application of the lack of consumer understanding
prong of abusiveness under section 1031(d)(2)(A) of the Dodd-Frank Act;
and (4) application of the taking unreasonable advantage element of
abusiveness under section 1031(d)(2) of the Dodd-Frank Act.
    Based on these preliminary findings, the Bureau now proposes to
rescind 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 and abusive
practice. The identification of an unfair and abusive practice as set
out in Sec.  1041.4 was predicated on certain factual findings
established in the 2017 Final Rule as well as a particular application
of section 1031(c) and (d) of the Dodd-Frank Act adopted in the 2017
Final Rule. The Bureau's preliminary conclusions here mean that neither
factual nor legal grounds sustain the identification of an unfair and
abusive practice as set out in Sec.  1041.4.
    The Bureau requests comment on these legal conclusions, the
application and understanding of these specific provisions of section
1031(c) and (d) of the Dodd-Frank Act, and the application of the
factual findings in part V.B above to these sections that would be
pertinent to the Bureau's preliminary determination that there are no
grounds to identify an unfair or abusive practice in Sec.  1041.4,
which identifies the failure to conduct an ability-to-repay analysis in
connection with a covered short-term or longer-term balloon-payment
loan as an unfair and abusive practice.
D. Consideration of Alternatives
    The Bureau generally considers alternatives in its rulemakings.
Here, the context for the consideration of alternatives is that the
Bureau is proposing to rescind the Mandatory Underwriting Provisions of
the 2017 Final Rule, which were based on the Bureau's discretionary
authority, not a
[[Page 4277]]
specific statutory directive.\287\ The Bureau has preliminarily
concluded as a matter of policy, as outlined in part V.B above, that a
more robust and reliable evidentiary record is needed to support a rule
that would have such dramatic impacts on the viability of payday
lenders, competition among payday lenders, and the availability of
payday loans to consumers who want one, and that the findings of an
unfair or abusive practice as set out in Sec.  1041.4 rested on
applications of the relevant standards that the Bureau should no longer
use, as detailed in part V.C.
---------------------------------------------------------------------------
    \287\ 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).
---------------------------------------------------------------------------
    In light of this posture, 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 rescission of the Mandatory Underwriting Provisions.
For example, one alternative analyzed in the 2017 Final Rule was a
payment-to-income test, offered in lieu of the specific underwriting
criteria established by the Mandatory Underwriting Provisions. In this
context, the payment-to-income test, limits on the number of loans in a
sequence, and other alternatives that would rely on authority under
section 1031 of the Dodd-Frank Act are not viable alternatives to
rescission, because the Bureau is proposing to rescind the underlying
findings concerning the existence of an unfair and abusive
practice.\288\
---------------------------------------------------------------------------
    \288\ This includes, for instance, the payment-to-income
alternative, the various State law regulatory approaches such as
loan caps, and other interventions. See 82 FR 54472, 54636-40.
---------------------------------------------------------------------------
    The Bureau 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 is not choosing to exercise its rulemaking
discretion in order to pursue new disclosure requirements pursuant to
section 1032 of the Dodd-Frank Act. As explained in the Bureau's
preliminary findings set out in parts V.B and V.C above, there are
indications that consumers potentially enter into these transactions
with a general understanding of the risks entailed, including the risk
of reborrowing. It is thus not clear to the Bureau at this time what
purpose would be served by requiring disclosures as to the general
risks of reborrowing be provided to these consumers. Further, as
previously noted, a Bureau analysis of a study of State-mandated payday
loan disclosures found that such disclosures had a limited impact on
reducing payday loan use and, in particular, reborrowing, which
suggests that consumers already have the information they deem
relevant. Moreover, developing the evidentiary basis for disclosure
requirements would be challenging and the development of disclosures
would likely require the dedication of resources that does not seem
warranted given the above factors and given the value of those
resources if used to protect consumers through other Bureau activities,
such as law enforcement. However, the Bureau does intend, in the normal
course of its market monitoring activities, to continue to review
whether consumers have the information they need to make informed
decisions in the selection and use of short-term and balloon-payment
loans.
    The Bureau requests comment on its consideration of alternatives to
the rescission of the Mandatory Underwriting Provisions, including its
preliminary conclusion that the alternatives to the Mandatory
Underwriting Provisions, as articulated in the 2017 Final Rule, are not
viable alternatives to the rescission of the Mandatory Underwriting
Provisions in light of the Bureau's factual and legal findings set
forth in parts V.B and V.C above.
E. Conclusion
    The Bureau believes that each of the concerns raised above are
sufficiently serious in their own right to merit reconsideration of the
2017 Final Rule, and even more so when considered in combination. As
described above, the Bureau believes that, in light of the 2017 Final
Rule's dramatic market impacts, the studies on which it primarily
relied in the Rule do not provide a sufficiently robust and reliable
basis for finding that consumers cannot reasonably avoid injury or
protect their interests, and do not understand the material risks,
costs, and conditions of the loans. The Bureau also now preliminarily
believes that the 2017 Final Rule used a problematic approach in
applying section 1031 of the Dodd-Frank Act in determining what level
of individualized understanding would be necessary to make the findings
necessary to support a determination that the identified practice was
unfair and abusive; in evaluating the countervailing benefits to
consumers and to competition of the identified practice; 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 preliminarily concludes that it is appropriate to propose
rescinding the Mandatory Underwriting Provisions of the 2017 Final
Rule. After many years of rulemaking, outstanding questions that the
Bureau and other stakeholders have on whether the identified practice
is unlawful and whether the Bureau intervention (i.e., the Mandatory
Underwriting Provisions) is appropriate remain; the Bureau therefore
preliminarily concludes that significantly more time, money, and other
resources would be needed from the Bureau, industry, consumers, and
other stakeholders to engage in the research and analysis required to
develop specific evidence that might support determining that the
identified practice is unfair and abusive and that imposing an ability-
to-repay regulatory scheme is a necessary and appropriate response to
that practice.
    The Bureau seeks comment on these preliminary determinations that
each of the concerns raised above (set out in parts V.B and V.C) are
sufficiently serious in their own right to merit rescission of the
Mandatory Underwriting Provisions.
    Because the 2017 Final Rule's constellation of Mandatory
Underwriting Provisions was premised on the existence of Sec.  1041.4,
which identified that the failure to conduct an ability-to-repay
assessment constitutes an unfair and abusive practice,\289\ the Bureau
also preliminarily finds that rescinding Sec.  1041.4 would also
require rescinding the provisions setting forth the interventions that
constitute the remedy for the practice because the Bureau only has
legal authority to promulgate the Mandatory Underwriting Provisions
where it has specifically identified an unfair or abusive act or
practice.\290\ The Bureau also seeks comment on rescission of the
provisions in the 2017 Final Rule that
[[Page 4278]]
were predicated on the unfair and abusive practice identified in Sec.
1041.4. These include the mandatory underwriting requirements in Sec.
1041.5,\291\ a conditional exemption from those underwriting
requirements in Sec.  1041.6,\292\ and related reporting and
recordkeeping requirements in Sec. Sec.  1041.10 through 1041.12.\293\
The technical aspects of the proposal to rescind and additional, more
specific questions with regard to the specific amendments to the 2017
Final Rule are discussed in more detail in part VI below.
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    \289\ See comment 4-1 (noting that lenders that comply with
Sec.  1041.6 in making covered short-term loans have not committed
unfair and abusive practices under Sec.  1041.4 and are not subject
to Sec.  1041.5).
    \290\ See 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.''); see
also id. at 5531(c) (stating that ``[t]he Bureau shall have no
authority under this section to declare an act or practice . . .
unlawful on the grounds that such act or practice is unfair'' unless
the act or practice meets the elements of unfairness); id. at
5531(d) (stating that ``[t]he Bureau shall have no authority under
this section to declare an act or practice abusive . . . unless the
act or practice'' meets one of two tests of abusiveness).
    \291\ 12 CFR 1041.5 (requiring that providers make a reasonable
determination that the consumer would be able to make the payments
on the loan and be able to meet the consumer's basic living expenses
and other major financial obligations without needing to reborrow
over the ensuing 30 days).
    \292\ 12 CFR 1041.6 (permitting providers, in lieu of following
Sec.  1041.5, to make a covered short-term loan without meeting all
the specific underwriting criteria set out above, as long as the
loan satisfies certain prescribed terms, the lender confirms that
the consumer meets specified borrowing history conditions, and the
lender provides required disclosures to the consumer).
    \293\ 12 CFR 1041.10 (requiring providers to furnish certain
information); 12 CFR 1041.11 (establishing requirements for
registered information systems); 12 CFR 1041.12 (requiring providers
to establish and follow a compliance program and retain certain
records).
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    Finally, the Bureau invites comments on any other issues or factors
not specifically identified above that may nonetheless be relevant to
its proposal to rescind the Mandatory Underwriting Provisions of the
2017 Final Rule.
VI. Section-by-Section Analysis
    As described in greater detail in part V above, the Bureau is
proposing to rescind Sec. Sec.  1041.4 and 1041.5 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 proposing to
rescind certain derivative provisions that are premised on these two
core sections, including a conditional 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 preliminarily concludes that, if Sec. Sec.
1041.4 and 1041.5 are rescinded, these derivative provisions would no
longer serve the purposes for which they were included in the 2017
Final Rule and should be rescinded as well.
    This part VI describes the particular modifications the Bureau is
proposing in order to effect the rescission of these various Mandatory
Underwriting Provisions. Specifically, as discussed in more detail
below, the Bureau is proposing to remove 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 proposing modifications to 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 VI is describing the specific modifications to
regulatory text and commentary that the Bureau is proposing, it refers
to ``removing'' text rather than ``rescinding'' 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.\294\ In order
to avoid confusion, the Bureau is not proposing to renumber the
sections or paragraphs that it is not removing; rather, the Bureau is
proposing that those section and paragraph numbers be marked as
``[Reserved]'' so that the remaining provisions would continue with the
same numbering as they have currently.
---------------------------------------------------------------------------
    \294\ 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.
---------------------------------------------------------------------------
    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 if the Bureau adopts 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 proposing to make to
the regulatory text and commentary of the 2017 Final Rule.\295\
---------------------------------------------------------------------------
    \295\ 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 NPRM, the documents published in the Federal Register are the
controlling documents.
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    The Bureau seeks comment on the changes to the regulatory text and
commentary that it is proposing in this part VI, and in particular
whether any of the changes would affect implementation of the Payment
Provisions. The Bureau also seeks comment on whether any other
modifications not identified herein would be necessary to effect
rescission of the Mandatory Underwriting Provisions as proposed.
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 proposing to remove 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
proposing this change for consistency with the proposed 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 proposing to
remove comment 2(a)(5)-1 for consistency with the proposed 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 proposing to remove and reserve Sec.
1041.2(a)(14) for consistency with the proposed 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
proposing to remove and reserve Sec.  1041.2(a)(19) for consistency
with the proposed removal
[[Page 4279]]
of the provisions in which this term appears, as discussed below.
    The Bureau requests 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 rescission of the Mandatory
Underwriting Provisions.
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 part 1041, which are covered loans that
satisfy the conditions and requirements set forth in Sec.  1041.3(e).
The Bureau is proposing to revise 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 proposing to revise 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 proposing this change for consistency with the proposed
removal of Sec.  1041.11 discussed below.
3(e)(3) Income Documentation Condition
    Section 1041.3(e)(2) 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
proposing to remove 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 proposing to revise this comment for consistency with the
proposed 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 proposing to remove and
reserve 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 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 proposing to remove and reserve Sec.
1041.4 and to remove 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 proposing to remove and reserve Sec.
1041.5 and to remove the commentary accompanying Sec.  1041.5.
Section 1041.6 Conditional Exemption for Certain Covered Short-Term
Loans
    Section 1041.6 provides a conditional 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 proposed removal of Sec. Sec.  1041.4 and 1041.5,
the Bureau is proposing to remove and reserve Sec.  1041.6 and to
remove the commentary accompanying Sec.  1041.6.
Subpart D--Information Furnishing, Recordkeeping, Anti-Evasion, and
Severability
    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); and addresses
severability (Sec.  1041.14). The Bureau is proposing to remove the
portion of the subpart's heading that refers to information furnishing
for consistency with the proposed removal of Sec. Sec.  1041.10 and
1041.11. Specific revisions 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 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 proposed herein, the Bureau is
proposing to remove and reserve Sec.  1041.10 and to remove 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 proposed herein, the
Bureau is proposing to remove and reserve Sec.  1041.11 and to remove
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 proposing to
remove 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 proposing to remove 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
[[Page 4280]]
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 proposing to make these changes for consistency with
the proposed 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 (4) 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)) and as well as
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)). Proposed revisions to the regulatory text of Sec.
1041.12(b)(1) through (3), and related commentary, are discussed in
turn further below.
    Comment 12(b)-1 addresses record retention requirements generally.
The Bureau is proposing to remove 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 proposing to remove 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
proposing these changes for consistency with the proposed removal of
Sec. Sec.  1041.4 through 1041.6 discussed above as well as the
proposed changes to Sec.  1041.12(b)(1) discussed below.
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 proposing to remove the
language in the heading and in the introductory text for Sec.
1041.12(b)(1) that refers to the 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 would require 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 is proposing to explicitly
retain this requirement in Sec.  1041.12(b)(1), for all covered loans,
to avoid potential confusion. The Bureau is also proposing to remove
the commentary accompanying Sec.  1041.12(b)(1). The Bureau is
proposing these changes for consistency with the other changes proposed
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 proposed removal of Sec.  1041.5, the Bureau is
proposing to remove and reserve Sec.  1041.12(b)(2) and to remove 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 proposing
to remove and reserve Sec.  1041.12(b)(3) and to remove the commentary
accompanying Sec.  1041.12(b)(3), for consistency with the proposed
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 proposed herein, the Bureau is
proposing to revise 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
proposing to incorporate 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. The Bureau is also proposing
to revise comment 12(b)(3)-1 to reflect the proposed change to Sec.
1041.12(b)(3) and to incorporate the description of how a lender
complies with the requirement to retain records in a tabular format.
This description is currently included in comment 12(b)(2)-1. The
Bureau is also proposing to remove the cross-reference to Sec.
1041.12(b)(2) in the description of how records must be retained, and
to remove the final sentence of the commentary discussing association
of records under Sec.  1041.12(b)(5) with unique loan and consumer
identifiers in Sec.  1041.12(b)(3) as the Bureau is proposing to remove
those recordkeeping requirements from Sec.  1041.12(b)(3).
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 conditional
[[Page 4281]]
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 proposed
removal of Sec.  1041.6, the Bureau is proposing to remove and reserve
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 conditional 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 proposed removal of Sec.  1041.6, the
Bureau is proposing to remove and reserve Model Form A-2.
VII. Compliance and Effective Dates
    The Bureau is proposing that the final rule take effect 60 days
after publication in the Federal Register.\296\ As discussed above, the
current compliance date for the Mandatory Underwriting Provisions of
the 2017 Final Rule is August 19, 2019, which the Bureau has separately
proposed elsewhere in this issue of the Federal Register to delay by 15
months, to November 19, 2020. After considering comments received on
that proposal, the Bureau intends to publish a final rule with respect
to the compliance date for the Mandatory Underwriting Provisions of the
2017 Final Rule. Likewise, after considering comments received on this
proposal, the Bureau expects to publish a final rule with respect to
the Mandatory Underwriting Provisions themselves. The Bureau seeks
comment on this aspect of the proposal.
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    \296\ 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). If finalized, this proposal would not
establish any requirements; instead, it would rescind the relevant
provisions of the 2017 Final Rule. Accordingly, if finalized this
proposal would be a substantive rule which relieves a restriction
that is exempt from section 553(d) of the APA.
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VIII. Dodd-Frank Act Section 1022(b)(2) Analysis
A. Overview
    In developing this proposal, the Bureau has considered the
potential benefits, costs, and impacts as required by section
1022(b)(2)(A) of the Dodd-Frank Act.\297\ Specifically, section
1022(b)(2)(A) of the Dodd-Frank Act calls for the Bureau to consider
the potential benefits and costs 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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    \297\ 12 U.S.C. 5512(b)(2)(A).
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    In advance of issuing this proposal, the Bureau has consulted with
the prudential regulators and the Federal Trade Commission, 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 preliminarily 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 preliminarily 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 sections 1031(c) and (d) of the Dodd-
Frank Act that the Bureau should no longer use. The Bureau therefore is
proposing to rescind the Mandatory Underwriting Provisions of the 2017
Final Rule because it preliminarily 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.\298\
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    \298\ 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 the section 1022(b)(2) analysis that accompanied the 2017 Final
Rule, the Bureau endeavored to consider comprehensively the economic
benefits and costs that were likely to result from that Rule. These
benefits and costs included direct pecuniary impacts, as well as non-
pecuniary impacts that the available evidence indicated were likely to
result from the Rule, if the proposal were to be adopted. The Bureau
relied on the then-available evidence to analyze the potential
benefits, costs, and impacts of the Rule.
    In this section 1022(b)(2) analysis, the Bureau endeavors to
consider comprehensively the economic benefits and costs that are
likely to result from the proposal to rescind the Mandatory
Underwriting Provisions of the 2017 Final Rule, possibly including some
indirect effects.\299\
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    \299\ Note that, in considering these ``second-order'' impacts,
the Bureau focuses on those effects where research has established a
plausible, causal link between the intervention and the benefits or
costs.
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    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, 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
part V.B, the Bureau has altered its conclusion as to the weight to be
accorded to the key evidence in finding an unfair and abusive act or
practice as well as warranting regulatory intervention.\300\ The new
research that has become available after the drafting of the 2017 Final
Rule have 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 those of the previously considered evidence.
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    \300\ The same evidence may be evaluated differently for
purposes of legal and economic analysis.
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    The Bureau invites submission of additional data and studies that
can 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 that Rule and relied on
here. Specifically, in some instances the data to perform quantitative
analyses of particular issues or effects are not available, or are
quite limited, and submissions that would augment the current analysis
are especially welcome. Absent these data, portions of the analysis to
follow 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 in this proposal are presented in general terms or ranges
(as
[[Page 4282]]
they were in the section 1022(b)(2) analysis of the 2017 Final Rule),
rather than as point estimates.
    The Bureau also requests comment on potential alternatives.
3. Major Provisions and Coverage of the Proposed Rule
    In this analysis, the Bureau focuses on the benefits, costs, and
impacts of the three major elements of the proposal: (1) The revocation
of the 2017 Final Rule's requirement to reasonably determine borrowers'
ability to repay covered short-term and longer-term balloon-payment
loans according to their terms (along with the conditional exemption
allowing for a principal step-down approach to issuing a limited number
of short-term loans); (2) the revocation of the recordkeeping
requirements associated with (1); and (3) the revocation of the 2017
Final Rule's requirements concerning furnishing provisions and their
associated requirements for registered information systems.
    In the 2017 Final Rule, the Bureau delineated two major classes of
short-term lenders it expected to be affected by the Mandatory
Underwriting Provisions: Payday/unsecured short-term lenders, both
storefront and online, and short-term vehicle title lenders.\301\ The
Bureau also noted that at least one bank that was offering a deposit
advance product was likely to be affected by the Rule's
provisions.\302\ Similarly, any depository institution that might have
considered offering a deposit advance product was likely to be affected
by the Rule's provisions.\303\ The Bureau also recognized that some
community banks and credit unions occasionally make short-term secured
or unsecured loans, but noted the Bureau believed that those loans
generally fall within the conditional exemption for alternative loans
or the conditional exemption for accommodation loans under Sec.
1041.3(e) and (f), respectively.\304\ Similarly, the Bureau recognized
that some firms in the financial technology space are seeking to offer
products designed to enable consumers to better cope with liquidity
shortfalls, but the Bureau believed that those products, to a
significant extent, fall within the exclusion for wage advance programs
under Sec.  1041.3(d)(7) or the exclusion for no-cost advances under
Sec.  1041.3(d)(8).\305\
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    \301\ 82 FR 54472, 54814.
    \302\ Id.
    \303\ Id. at 54815. Notably, on October 5, 2017, the Office of
the Comptroller of the Currency (OCC) rescinded guidance that had
limited the provision of deposit advance products. 82 FR 47602 (Oct.
12, 2017); see also News Release, Office of the Comptroller of the
Currency, Acting Comptroller of the Currency Rescinds Deposit
Advance Product Guidance (NR-2017-118, Oct. 5, 2017), https://www.occ.treas.gov/news-issuances/news-releases/2017/nr-occ-2017-118.html. A May 23, 2018 OCC bulletin goes farther, and encourages
banks to offer responsible short-term, small-dollar installment
loans, which would likely compete with the loans covered by this
proposal. 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. Additionally,
on November 14, 2018, the FDIC issued an RFI seeking public comment
on consumer demand for small-dollar credit products, the supply of
small-dollar credit products currently offered by banks, and whether
there are steps the FDIC could take to better enable banks to
provide such products to consumers to meet demand. 83 FR 58566,
58567 (Nov. 20, 2018); see also Fed. Deposit Ins. Corp., Financial
Institution Letter, Request for Information on Small-Dollar Lending
(FIL-71-2018, Nov. 14, 2018), https://www.fdic.gov/news/news/financial/2018/fil18071.pdf. Given these changes, it is likely that
these firms will more seriously consider offering these products
under this proposal.
    \304\ 82 FR 54472, 54815.
    \305\ Id. The Bureau also believes many current fintech
offerings fall outside of at least the mandatory underwriting
requirements of the Rule, as they often focus on longer-term lending
without balloon payments.
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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 Rule's requirements concerning underwriting and RISes.
It follows that lenders of each of these types will experience effects
much like those of short-term lenders by the proposed revocation of the
mandatory underwriting and RIS requirements.
    The proposal's revocation of 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 proposed revocation of the RIS
provisions relates to the application process and operational
requirements for entities who otherwise would have sought to become
RISes.\306\
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    \306\ 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 proposal would, if
adopted, go into effect.
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4. Description of the Baseline
    The major impact of the proposal on which the Bureau is seeking
public comment would be to eliminate the Federal regulations requiring
underwriting of covered short-term and longer-term balloon-payment
loans. No lenders are required to comply with the 2017 Final Rule until
the compliance date (which currently is August 19, 2019) and until the
court in litigation challenging the 2017 Final Rule lifts its stay of
the compliance date. Accordingly, if the Bureau makes its proposal
final before lenders have to comply with the Mandatory Underwriting
Provisions in the 2017 Final Rule, then no lenders will have had to
comply with them. As a practical matter, issuing regulatory
requirements and revoking them before covered entities have had to
actually comply with them means there is little effect on stakeholders
from the combined effect of issuing and revoking the requirements, that
is, the combined effect is returning to the status quo prior to the
agency issuing a final rule.
    Nevertheless, the Bureau is considering the agency's two regulatory
actions (that is issuing the 2017 Final Rule and proposing to rescind
the Mandatory Underwriting Provisions of the 2017 Final Rule prior to
its compliance date) separately for section 1022(b)(2) analysis
purposes. The issuance was evaluated in a section 1022(b)(2) analysis
when the Bureau issued the 2017 Final Rule. The proposed revocation is
evaluated in this section 1022(b)(2) analysis.
    In considering the potential benefits, costs, and impacts of the
proposal to rescind the Mandatory Underwriting Provisions in the 2017
Final Rule, to provide the most comprehensive assessment of the impact
that the proposal would have, the Bureau takes as a baseline a scenario
in which compliance with the 2017 Final Rule would become mandatory as
of August 19, 2019 and compares the effect of the proposal to the
market that would exist if, before reaching the compliance date, the
Bureau elects to issue a final rule rescinding the Mandatory
Underwriting Provisions of the 2017 Final Rule.
    In other words, the Bureau takes the 2017 Final Rule as the
baseline, and considers economic attributes of the relevant markets as
they were (and continue to be) projected to exist 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.\307\ 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
revocation; it is the Bureau's belief that this is a reasonable
[[Page 4283]]
assumption but seeks comment on any such changes.\308\
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    \307\ 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.
    \308\ 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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    As noted above, 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. As such, the expected impacts articulated in those analyses
are taken as features of the baseline in this analysis. The Bureau
welcomes comments on this approach.
    The baseline specifically recognizes the wide variation in State-
level restrictions that currently exist. As described in greater detail
in the 2017 Final Rule, there were at that time 35 (now 33) States that
either have created a carve-out from their general usury cap for payday
loans or have no usury caps on consumer loans.\309\ The remaining 15
(now 17) States and the District of Columbia either ban payday loans or
have fee or interest rate caps that payday lenders apparently find too
low to sustain their business models. Except as described below, this
proposal would have minimal impact on covered persons in these States,
and State law would still be binding on the markets in these areas.
Further variation exists across the States that allow payday loans, as
States vary in their payday loan size limits and their restrictions
related to rollovers (e.g., when they are permitted and whether they
are subject to certain limitations, such as a cap on the number of
rollovers or requirements that the borrower amortize--i.e., repay part
of the original loan amount--on the rollover). Numerous cities and
counties within these States have also passed local ordinances
restricting the location, number, or product features of payday
lenders.\310\ Restrictions on vehicle title lending similarly vary
across and within States, in a manner that often (but not always)
overlaps with payday lending restrictions. Overall, these restrictions
result in fewer than half of States allowing single-payment vehicle
title loans that are covered by the Mandatory Underwriting Provisions
of the 2017 Final Rule.\311\
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    \309\ For a list of States, see Pew Charitable Trusts, State
Payday Loan Regulation and Usage Rates (Jan. 14, 2014), http://www.pewtrusts.org/en/multimedia/data-visualizations/2014/state-payday-loan-regulation-and-usage-rates. Other reports reach slightly
different totals of payday authorizing States depending on their
categorization methodology. See, e.g., Susanna Montezemolo, The
State of Lending in America & Its Impact on U.S. Households: Payday
Lending Abuses and Predatory Practices, at 32-33 (Ctr. for
Responsible Lending, 2013), http://www.responsiblelending.org/sites/default/files/uploads/10-payday-loans.pdf; Consumer Fed'n of Am.,
Legal Status of Payday Loans by State, http://www.paydayloaninfo.org/state-information (last visited Feb. 4, 2019)
(listing 32 States as having authorized or allowed payday lending).
Since publication of these reports, South Dakota enacted a 36
percent usury cap for consumer loans. Press Release, S.D. Dep't of
Labor and Reg., Initiated Measure 21 Approved (Nov. 10, 2016),
http://dlr.sd.gov/news/releases16/nr111016_initiated_measure_21.pdf.
    Legislation in New Mexico prohibiting short-term payday and
vehicle title loans went into effect on January 1, 2018. Regulatory
Alert, N.M. Reg. and Licensing Dep't, Small Loan Reforms, http://www.rld.state.nm.us/uploads/files/HB%20347%20Alert%20Final.pdf.
Legislation passed in Ohio placing significant restrictions on
short-term loans with an effective date of October 29, 2018. Ohio
132nd General Assembly House Bill 123, Modify short-term, small, and
mortgage loan laws, https://www.legislature.ohio.gov/legislation/
legislation-summary?id=GA132-hb-123. On February 1, 2019, a ballot
initiative approved by voters in November 2018 will go into effect
as law in Colorado reducing APRs on payday loans to 36 percent. 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).
    \310\ For a sample list of local payday ordinances and
resolutions, see Consumer Fed'n of Am., Controlling the Growth of
Payday Lending Through Local Ordinances and Resolutions (Oct. 2012),
www.consumerfed.org/pdfs/Resources.PDL.LocalOrdinanceManual11.13.12.pdf; see also, e.g.,
Portland Or., Code sec. 7.26.050; Eugene Or., Code sec. 3.556; Tex.
Mun. League, City Regulation of Payday and Auto Title Lenders,
http://www.tml.org/payday-updates.
    \311\ For a discussion of State vehicle title lending
restrictions, see Consumer Fed'n of Am., Car Title Loan Regulation
(Nov. 16, 2016), http://consumerfed.org/wp-content/uploads/2017/01/11-16-16-Car-Title-Loan-Regulation_Chart.pdf.
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    Another notable feature of the baseline is the restriction in the
Military Lending Act (MLA) to address concerns about the extension of
high-cost credit to servicemembers.\312\ The MLA, as implemented by the
Department of Defense, requires, among other things, that the creditor
may not impose a military annual percentage rate (MAPR) greater than 36
percent in connection with an extension of consumer credit to a covered
borrower. In 2007, the Department of Defense issued its initial
regulation under the MLA, limiting the Act's application to closed-end
loans with a term of 91 days or less in which the amount financed did
not exceed $2,000, closed-end vehicle title loans with a term of 181
days or less, and closed-end tax refund anticipation loans.\313\ This
covered most short-term and longer-term payday and vehicle title loans.
These regulations remain in effect and affect the terms of loans
available to servicemembers.\314\
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    \312\ The MLA Act, part of the John Warner National Defense
Authorization Act for Fiscal Year 2007, was signed into law in
October 2006. The interest rate cap took effect October 1, 2007. See
10 U.S.C. 987.
    \313\ 72 FR 50580 (Aug. 31, 2007).
    \314\ As noted in the 2017 Final Rule, effective October 2015
the Department of Defense expanded its definition of covered credit
to include open-end credit and longer-term loans so that the MLA
protections generally apply to all credit subject to the
requirements of Regulation Z (12 CFR part 1026), which implements
the Truth in Lending Act, other than certain products excluded by
statute. 80 FR 43560 (July 22, 2015) (codified at 32 CFR part 232).
---------------------------------------------------------------------------
    In considering the benefits, costs, and impacts of the proposal,
the Bureau uses this baseline. More specifically, the Bureau notes that
the 2017 Final Rule and this proposal would have limited impacts, with
some limited exceptions, for consumers in States that currently do not
allow such lending or that impose usury limits that have led payday and
vehicle title lenders to refrain from doing business in those States,
or for consumers who are not eligible for such lending.\315\ It is
possible that consumers in these States access such loans online, by
crossing State lines, or through other means. To the extent the 2017
Final Rule would limit such lending, this proposal may impact these
consumers. Similarly, in States which regulate payday lending in ways
that prevent or limit the volume of loans extended, the 2017 Final Rule
and the proposal would have fewer impacts on consumers and covered
persons, as the State laws may already restrict lending. The overall
effects of these more restrictive State laws were described in the 2017
Final Rule and earlier in this proposal. In the remaining States--those
that allow lending covered by the 2017 Final Rule without any binding
limitations--the proposal would have its most substantial impacts
relative to the 2017 Final Rule baseline.
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    \315\ The 2017 Final Rule would affect such consumers to the
extent that they would otherwise cross State lines to obtain a
covered short-term or longer-term balloon-payment loan or borrow
from an unlicensed lender. Evidence of consumers crossing State
borders to obtain loans suggests these consumers overwhelmingly
reside near a border with a State that allows such lending (see
Onyumbe Enumbe Lukongo & Thomas W. Miller, Adverse Consequences of
the Binding Constitutional Interest Rate Cap in the State of
Arkansas (Mercatus Working Paper 2017), https://www.mercatus.org/system/files/lukongo_wp_mercatus_v1.pdf for one example). As such,
the potential impacts on consumers residing in payday restricting
States is likely concentrated in those consumers near a border who
are willing and able to cross to obtain a payday loan.
---------------------------------------------------------------------------
    Notably, the quantitative simulations set forth in the 2017 Final
Rule and summarized below reflect these variations in the baseline
across States and across consumers with one exception. The data used
for the 2017 Final Rule's analysis inherently capture the nature of
shocks to, and mismatches in the timing between, consumers'
[[Page 4284]]
income and payments that drive much of the demand for covered short-
term and longer-term balloon-payment loans.\316\ To the extent that
these shocks and mismatches have not changed since the time periods
covered by the data (2011-2012), they are captured in the simulations.
The analysis is also based on the statutory and regulatory environment
extant when the data were compiled. The implication is that to the
extent that the environment absent the 2017 Final Rule has changed in
the intervening years, those changes are not reflected in the
simulations. More specifically, the simulations will overstate the
proposal's effects on lending volume in those areas where other
regulatory changes since that time have limited lending. The
simulations also will underestimate the proposal's effects on lending
volume in any areas where regulatory changes since that time have
relaxed restrictions on lending. In general, the Bureau believes that
the States 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 proposal.\317\ That said, the
simulation results are generally consistent with the additional
estimates, using other data and time periods, provided to the Bureau in
industry and alternative credit bureau comments on the 2016 Proposal.
---------------------------------------------------------------------------
    \316\ The Bureau believes that obtaining additional data to
update its estimates would not be a cost-effective enterprise. As
noted in text, these results are largely consistent with estimates
offered in industry comments on the 2016 Proposal, which provides
additional validation that that the available evidence upon which
this analysis relies is reliable for these purposes.
    \317\ 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. Serv. of Am., Best Practices for the Small-
Dollar Loan Industry, https://www.cfsaa.com/files/files/CFSA-BestPractices.pdf (last visited Feb. 4, 2019).
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5. Major Impacts of the Proposal
    The primary impact of this proposed rule relative to the baseline
in which compliance with the Mandatory Underwriting Provisions of the
2017 Final Rule becomes mandatory would 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 would increase by 104 percent to 108
percent, with an increase in revenue for payday lenders between 204
percent and 213 percent.\318\ 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. The specific details,
assumptions, and structure of these simulations are described in the
2017 Final Rule.\319\
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    \318\ 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.
    \319\ 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. 82 FR 54472, 54827, 54834.
Taking the decreased values as the baseline and reintroducing the
reduced loan volumes and revenues yields the numbers cited here.
---------------------------------------------------------------------------
    The Bureau expects, again relative to the chosen baseline, that
these increases would result in an increase in the number of
storefronts relative to the market projected to exist under the 2017
Final Rule. As discussed in the section 1022(b)(2) analysis for the
2017 Final Rule, a decrease in payday storefronts was observed in
States that experienced loan volume declines of the magnitude projected
to occur for payday loans under the 2017 Final Rule after those States
adopted restrictive regulations (e.g., Washington),\320\ making a
corresponding relative increase likely if the Mandatory Underwriting
Provisions are rescinded. This might in turn improve physical access to
credit for consumers, especially for consumers in rural areas.
Additionally, the increase in storefronts would be 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. Again as
explained in the 2017 Final Rule, 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.
Additionally, the Bureau anticipated in the 2017 Final Rule that online
options would be available to the vast majority of current payday
borrowers, including those in rural areas.\321\ Assuming that this is
correct, the improved physical access to payday storefronts would
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).
---------------------------------------------------------------------------
    \320\ Supplemental Findings, chapter 3 part B.
    \321\ 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.
---------------------------------------------------------------------------
    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 should
this proposal take effect.\322\ Additionally, many of the restrictions
imposed by the 2017 Final Rule could have been voluntarily adopted by
lenders absent the Rule but the Bureau has no evidence that they were.
That they were not adopted implies the Rule's impacts are welfare-
decreasing for lenders. Reversing these restrictions should therefore
be welfare enhancing for lenders.
---------------------------------------------------------------------------
    \322\ Should lenders have to comply with the Rule prior to the
finalization of this proposal, it is possible that firms that exited
the market because they had to comply would not return. However, the
Bureau believes the demand for loans would remain such that the
volume of loans and revenue estimates detailed in this analysis
would still result. In this scenario, it is likely that there will
be fewer lenders with increased (average) loan volumes.
---------------------------------------------------------------------------
    As for the effects on consumers, the Bureau noted in the 2017 Final
Rule that the evidence on the impacts of the availability of payday
loans on consumer welfare varies. The Bureau found that, in general,
the evidence to date suggests that access to payday loans appears to
benefit consumers in circumstances where they use these loans for short
periods of time and/or to address an unforeseen and discrete need, such
as when they experience a transitory and unexpected shock to their
incomes or expenses.\323\ The Bureau also found that the evidence to
date suggests that, in more general circumstances, access to, and
intensive use of, these loans appears to make consumers worse off. The
Bureau summarized the evidence in the 2017 Final Rule, noting that
``access to payday loans may well be beneficial for those borrowers
with discrete, short-term needs, but only if they are able to
[[Page 4285]]
successfully avoid long sequences of loans.'' \324\
---------------------------------------------------------------------------
    \323\ See, e.g., 82 FR 54472, 54818, and 54842-46.
    \324\ Id. at 54846.
---------------------------------------------------------------------------
    As the 2017 Final Rule, which includes the conditional exemption
for loans with a step-down in principal, allows for continued access to
the credit that appears most beneficial--that which assists consumers
with discrete, short-term needs--the Bureau believed that much of the
welfare benefit estimated in the literature would be preserved under
the Rule, despite the substantial reduction in availability of
reborrowing.\325\ Additionally, the 2017 Final Rule limited the
potential costs that could be realized by borrowers who would have
experienced long durations of indebtedness where the, albeit more
limited, literature, and the Bureau's own analysis and study set forth
in the 2017 Final Rule suggested that prolonged reborrowing has, on
average, negative effects.\326\ Given this, 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,\327\ it follows that the inverse effects would ensue,
relative to the chosen baseline, from this proposal to rescind the 2017
Final Rule. It bears emphasis, however, that the 2017 Final Rule's
conclusion as to these effects was dependent upon the evidence that
consumers who experienced long durations of indebtedness generally did
not anticipate those outcomes and, as discussed above, the agency now
believes that this evidence is not sufficiently robust and
representative to support the findings necessary to determine that the
identified practice is unfair and abusive.
---------------------------------------------------------------------------
    \325\ Id. at 54818.
    \326\ Id. at 54839, 54842.
    \327\ Id. at 54835, 54842.
---------------------------------------------------------------------------
    In drafting this proposal, 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 proposal--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 will 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 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 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, is discussed in detail below.
    The Bureau has also conducted a Paperwork Reduction Act (PRA)
analysis to estimate the benefits associated with the proposal's
reduction in the hour and dollar costs of the information collection
requirements to the entities subject to the 2017 Final Rule. The PRA
separates these estimates into one-time and annual ongoing categories
for total burden reduction, labor burden hour reduction, and labor
burden dollar reduction. As discussed in part X below, a revised
Supporting Statement detailing the changes to the information
collections for the Rule and their effects on the Rule's overall burden
will be made available for public comment on the electronic docket
accompanying this proposed rule.
    The discussion of impacts that follows is organized into three main
categories mentioned above: (1) The revocation of the 2017 Final Rule's
requirement to reasonably determine borrowers' ability to repay covered
short-term and longer-term balloon-payment loans; (2) the revocation of
the recordkeeping requirements associated with (1); and (3) the
revocation of the 2017 Final Rule's requirements concerning furnishing
provisions. Within each of these main categories, the discussion is
organized to facilitate a clear and complete consideration of the
benefits, costs, and impacts of the major provisions of this proposed
rule. Impacts on depository institutions with $10 billion or less in
total assets and on rural consumers are discussed separately below.
B. Potential Benefits and Costs of the Proposal to Consumers and
Covered Persons--Provisions Relating Specifically to Ability-To-Repay
Determinations for Covered Short-Term and Longer-Term Balloon-Payment
Loans
    This section discusses the impacts of revoking the Mandatory
Underwriting Provisions of the 2017 Final Rule relative to the chosen
baseline in which compliance with the Rule was mandatory. Those
provisions specifically relate to covered short-term and longer-term
balloon-payment loans, and the analyses of their benefits and costs
contained in the 2017 Final Rule were sensitive to the potential
shifting to products not covered by the Mandatory Underwriting
Provisions of the Rule (i.e., the Bureau did not attempt to anticipate
how lenders might adjust their offerings in light of the Rule). In the
2017 Final Rule, the Bureau stated that the potential evolution of
lender offerings that may arise in response to the Rule was beyond the
scope of the section 1022(b)(2) analysis contained therein; \328\
similarly 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.\329\
---------------------------------------------------------------------------
    \328\ Id. at 54472, 54818, 54835.
    \329\ For example, there appears to be a shift in the market
away from payday lending toward short-term installment lending.
Payday loan revenue from both storefront and online channels
declined from 2015 to 2016 by 11.9 percent and 9.9 percent,
respectively. By contrast, short-term installment loan revenue was
expected to increase 7.5 percent in 2017. Ctr. for Fin. Serv.
Innovation, 2017 Financially Underserved Market Size Study, at 12,
13, 18, 44, and 45 (Dec. 2017), https://s3.amazonaws.com/cfsi-innovation-files/wp-content/uploads/2018/03/07221553/2017-Market-Size-Report_FINAL_4-1.pdf. The Bureau does not attempt to anticipate
if, or how much of, a move back to payday lending may result from
this proposal, as it is beyond the scope of the available evidence,
and the Bureau is unaware of any examples in the market that could
provide such data.
---------------------------------------------------------------------------
    Revoking the requirements for originations, and the associated
restrictions on reborrowing, is likely to have a substantial impact on
the markets for these products relative to the markets that exist under
the 2017 Final Rule. In order to present a clear analysis of the
benefits and costs of the proposal, this section first describes the
benefits and costs of the proposal to covered persons relative to the
baseline
[[Page 4286]]
where compliance with the 2017 Final Rule becomes mandatory and then
discusses the implications of the proposal for the markets for these
products. The benefits and costs to consumers are then described.
1. Benefits and Costs to Covered Persons
    This proposal would rescind a number of operational requirements on
lenders making covered short-term and longer-term balloon-payment loans
and remove restrictions on the number of these loans that can be made.
As this proposal would rescind the requirements associated with the
mandatory underwriting approach, it also obviates the need for the
principal step-down approach set out in Sec.  1041.6 of the 2017 Final
Rule as an alternative to the mandatory underwriting approach in Sec.
1041.5 for making covered short-term and longer-term balloon-payment
loans.\330\ As the proposal would remove restrictions on the
operational requirements for lenders, allowing them to avoid making an
ability-to-repay determination, 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.
---------------------------------------------------------------------------
    \330\ The principal step-down approach is an alternative to the
mandatory underwriting approach detailed in 12 CFR 1041.6. Under
this approach, a lender would not need to determine ability-to-repay
for an initial loan of up to $500. Subsequent loans issued within 30
days of an initial loan would need to amortize by one-third of the
principal of the previous loan, and no more than three loans in a
sequence, or six loans in a rolling 12-month period would be
permitted. After reaching the limit imposed by the principal step-
down approach, borrowers would need to obtain all further loans via
the mandatory underwriting approach.
---------------------------------------------------------------------------
a. Revocation of the Operational Requirements Associated With Mandatory
Underwriting
    Under the proposal, lenders would not be required to make an
ability-to-repay determination prior to originating a loan, nor would
they be required to ensure adherence to limits on loans made via the
principal step-down approach, nor would they need to report loans to
RISes to ensure compliance with those limits.
    More specifically, under the proposal lenders would not need to
consult their own records and the records of their affiliates to
determine whether the borrower had 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 would not need to
maintain the ability-to-repay-related records mandated by the 2017
Final Rule. Lenders would 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, and would no longer be required to
furnish information regarding covered short-term and longer-term
balloon-payment loans they originate to all RISes. Lenders would 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 proposed revocation of each of these operational requirements
entails a reduction in costs that were to be incurred under the 2017
Final Rule for loan applications (not just for loans that are
originated). Additionally, if and depending on when the proposal is
adopted, lenders may not be required to develop or adhere to procedures
to comply with each of these requirements and train their staff in
those procedures. The Bureau believes that many lenders use automated
systems when originating loans, and will 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. Reversing the obligation to incur operational
costs should be of minimal benefit to lenders. Reversing the obligation
in fact may actually 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.
    Each of the costs this proposal would obviate is considered in
detail in the 2017 Final Rule at part VII.F.
    Total Impacts of the Operational Requirements Associated with
Mandatory Underwriting. In the 2017 Final Rule, the Bureau estimated
that obtaining a statement from the consumer, taking reasonable steps
to verify income, obtaining a national consumer report and a report
from an RIS, projecting the consumer's residual income or debt-to-
income ratio, estimating the consumer's basic living expenses, and
arriving at a reasonable ability-to-repay determination will take
essentially no additional time for a fully automated electronic system
and between 15 and 45 minutes for a fully manual system. The Bureau
further noted total costs would depend on the existing utilization
rates of, and wages paid to, staff that will spend time carrying out
this work. To the extent that lenders needed to increase staff and/or
hours to comply with the 2017 Final Rule's operational requirements
with respect to the mandatory underwriting approach, under the proposal
they would experience decreased costs from hiring, training, wages, and
benefits relative to what will occur under the 2017 Final Rule.
    Additional savings under this proposal would come from what would
have been an obligation to obtain a national consumer report costing
between $0.55 and $2.00, and/or a report from an RIS costing $0.50.
Lenders using third-party services to gather verification information
about income would realize an additional small benefit under the
proposal from avoiding the fees associated with using these services.
    Developing Procedures, Upgrading Systems, and Training Staff. Under
the 2017 Final Rule, lenders must develop policies and procedures to
comply with the requirements of the Mandatory Underwriting Provisions
and train their staff in those procedures. Many of these requirements
are not qualitatively different from the practices in which most
lenders would engage absent the 2017 Final Rule--such as gathering
information and documents from borrowers and ordering various types of
consumer reports--though the Rule's requirements may demand more, and
more costly, efforts to obtain such information and documents.
    Developing procedures to make a reasonable determination that a
borrower has the ability to repay a loan without reborrowing while
paying for major financial obligations and basic living expenses will
likely be costly and challenging for many lenders. The Bureau expected
that vendors, law firms, and trade associations will likely offer both
products and guidance to lenders, potentially mitigating the cost of
these procedures for lenders, because such service providers can
realize economies of scale.\331\
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    \331\ As noted above, the Bureau believes that many lenders use
automated systems when originating loans, and will incorporate many
of the operational requirements of the mandatory underwriting
approach into those systems. While this may mitigate some of the
costs discussed here, the operational costs will remain substantial.
---------------------------------------------------------------------------
    The Bureau estimated that lender staff engaging in making loans
would require approximately 5 hours per employee of initial training in
carrying out the tasks described in the 2017 Final Rule and 2.5 hours
per employee per year of periodic ongoing training; lenders would
benefit
[[Page 4287]]
if they did not have to incur these time costs if the Bureau adopts
this proposal.
b. Operational Requirements--Principal Step-Down Approach
    All of the costs described in the 2017 Final Rule associated with
the principal step-down approach would be ultimately unnecessary under
the proposal. This is because the principal step-down approach is an
alternative to using the mandatory underwriting approach to issue new
loans. Under this proposal, lenders would generally be expected to
continue their pre-2017 Final Rule practices, and need not engage in
any of the principal step-down procedures. As such, all benefits and
costs associated with that approach would be eliminated under this
proposal. This includes avoiding the system upgrades and time costs of
providing the required disclosures.
c. Effect on Loan Volumes and Revenue From Eliminating Underwriting
Requirements and Restrictions on Certain Reborrowing
    In the 2017 Final Rule, the Bureau described the estimated effects
of the underwriting requirements under the mandatory underwriting
approach and the restrictions on certain reborrowing under both the
mandatory underwriting approach and principal step-down approach. Those
estimates were based on simulations, and the estimated effects on
lender revenue were far more substantial than the increase in
compliance costs from implementing the requirements.
    In order to simulate the effects of the 2017 Final Rule, 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 Bureau
conducted three simulations of the potential impacts of the 2017 Final
Rule on payday loan volumes--one each under the assumptions that loans
are only made using the mandatory underwriting approach, that loans are
made only under the principal step-down approach, and what the Bureau
believed to be the most realistic assumption, that loans are made under
both approaches--and a single vehicle title simulation.\332\ 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.\333\ None of the underlying data, assumptions, or
structures have changed in the Bureau's analysis of the impacts of this
proposal. As such, the description in the 2017 Final Rule also
describes the simulations used here. Moreover, the estimated effects on
loan volumes of rescinding the underwriting requirements are simply the
effects as determined in the 2017 Final Rule of implementing these
requirements. To assist the agency in doing a Section 1022 analysis for
any proposed final rule revoking the 2017 Final Rule, the Bureau seeks
comment on the structure, assumptions, and data the agency used in
these simulations.
---------------------------------------------------------------------------
    \332\ As vehicle title loans are not eligible for the principal
step-down approach, simulating the effects on this market was more
straightforward than for payday. As alternative assumptions about
the prevalence of loans issued via the principal step-down vs.
mandatory underwriting approaches were not appropriate, only a
single structure for the vehicle title simulations was assumed.
    \333\ 82 FR 54472, 54824.
---------------------------------------------------------------------------
    The Bureau's simulations suggest that storefront payday loan
volumes would increase between 104 percent and 108 percent under this
proposal relative to the 2017 Final Rule baseline. The Bureau estimates
that revenues of storefront payday lenders would be between 204 percent
and 213 percent higher if they do not have to comply with the
requirements in the 2017 Final Rule.\334\ While these simulated results
are based on data from storefront payday lenders, the Bureau explained
in the 2017 Final Rule that the impacts are likely to be similar for
online payday lenders;\335\ the Bureau believes that to be the likely
case with the proposal as well. Using the most recent estimated
revenues for payday lenders by Center for Financial Services
Innovation's (CFSI), lenders not having to comply with the requirements
in the 2017 Final Rule would translate to an increase in their annual
revenues of approximately $3.4 billion to $3.6 billion.\336\
---------------------------------------------------------------------------
    \334\ 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).
    \335\ Id. at 54833.
    \336\ Based on pre-2017 Final Rule estimated revenues for payday
lenders of approximately $5.3 billion, reported in Eric Wilson & Eva
Wolkowitz, 2017 Financially Underserved Market Size Study, at 44
(Ctr. for Fin. Serv. 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.
---------------------------------------------------------------------------
    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 would increase under the proposal
by between 809 percent and 1,329 percent, with a corresponding increase
in revenues for vehicle title lenders.\337\ Using CFSI's most recent
estimated revenues for vehicle title lenders, this would mean the
proposed elimination of the Mandatory Underwriting Provisions of the
2017 Final Rule would translate into an increase in annual revenues for
these lenders of approximately $3.9 billion to $4.1 billion.\338\ It is
also possible the impact on vehicle title lending would be even larger
than the simulations suggest. If the industry were not able to survive
as a result of complying with the Mandatory Underwriting Provisions of
the 2017 Final Rule, the proposal could effectively resurrect the
vehicle title lending industry relative to the baseline. In this case,
the increased revenues from the proposal would be equal to the entire
vehicle title lending industry's estimated annual revenue of
approximately $4.4 billion.\339\
---------------------------------------------------------------------------
    \337\ 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.
    \338\ 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. Serv. 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.
    \339\ Id. In a similar vein, if the 2017 Final Rule had not
contained the principal step-down exemption it too could have
affected the survival of the payday loan industry.
---------------------------------------------------------------------------
    A notable impact of this increase in loan volumes and revenues is
that many storefronts would likely exist under the proposal 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
[[Page 4288]]
follows that, under the proposal, there would 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 requirements of 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.\340\ This was considered in the
2017 Final Rule as well.\341\ To the extent these lenders have already
made these adaptations, and would not shift their business practices
back if this proposal were adopted, the loan volume and revenue
estimates above may be somewhat overstated.
---------------------------------------------------------------------------
    \340\ Since the issuance of the 2017 Final Rule, Florida and
Alabama have amended their laws to open the door to longer-term
loans at interest rates above the standard usury limit. See Ala.
Code sec. 5-18A; 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).
    \341\ 82 FR 54472, 54835.
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2. Benefits and Costs to Consumers
a. Benefits to Consumers and Access to Credit
    The operational requirements of the Mandatory Underwriting
Provisions of the 2017 Final Rule would make the process of obtaining a
loan more time consuming and complex for some borrowers (e.g., online
borrowers and vehicle title borrowers who may not currently be required
to provide any documentation of income). The restrictions on lending in
the 2017 Final Rule will reduce the availability of storefront payday
loans, online payday loans, single-payment vehicle title loans, longer-
term balloon-payment loans, and other loans covered by the Mandatory
Underwriting Provisions of the Rule. Borrowers will likely experience
reduced access to new loans--i.e., loans that are not part of an
existing loan sequence--from these restrictions. Some borrowers also
will be prevented from rolling loans over or reborrowing shortly after
repaying a prior loan under the 2017 Final Rule. Some borrowers might
still be able to borrow, but for smaller amounts or with different loan
structures, and might find this less preferable to them than the terms
they would have received absent the 2017 Final Rule. The proposal would
reverse each of these 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) will prevent between 5.9 and 6.2 percent of payday borrowers
from initiating a sequence of loans that they would have initiated
absent the Rule.\342\ That is, since most consumers take out six or
fewer loans each year, and are not engaged in long sequences of
borrowing, the Rule as a whole will not limit their borrowing. However,
if the proposal is adopted, consumers would be able to extend their
sequences beyond three loans and would not be required to repay one-
third of the loan each time they reborrow. As a result, many loans
would 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.
---------------------------------------------------------------------------
    \342\ The section-by-section analysis accompanying the 2017
Final Rule identified three categories of borrowers based upon their
ex post behavior: Repayers (those who take out a single loan and
repay it without the need to reborrow within 30 days); defaulters
(those who default after taking out a single loan or at the end of a
sequence of loans); and reborrowers (those who take out a sequence
of loans which ends with repayment). 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.
---------------------------------------------------------------------------
    Revocation of Operational Requirements. The Bureau is proposing to
rescind the operational requirements associated with underwriting loans
originated via the mandatory underwriting approach, and the various
recordkeeping procedures associated with the principal step-down
approach. As such, under the proposal, the process of obtaining funds
should be faster for consumers compared to the baseline of the 2017
Final Rule. Consumers obtaining loans that would have been subject to
the Rule's mandatory underwriting requirements would see the most
significant gains under the proposal. Estimates of the time required to
manually process an application suggest that eliminating the mandatory
underwriting requirements would subtract 15 to 45 minutes from the
borrowing process, a consideration many of these consumers may find
important given than convenience is an important product feature on
which payday lenders compete for customers.\343\ Additionally,
borrowers would not need to obtain and provide to the lender certain
documentation mandated under the mandatory underwriting requirements;
the proposal would 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 been subject to the mandatory underwriting requirements. The
proposal would thus decrease both the complexity and length of the
process used for consumers who are seeking to obtain a covered short-
term or longer-term balloon-payment loan that otherwise would have been
subject to the mandatory underwriting requirements.
---------------------------------------------------------------------------
    \343\ 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. For those
borrowers seeking loans from these lenders, the time savings under
the proposal would be substantially smaller.
---------------------------------------------------------------------------
    Improved Access to Initial Loans. As this proposal would remove the
restrictions on obtaining a loan stemming from the 2017 Final Rule's
Mandatory Underwriting Provisions' requirements consumers would 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. Under
the 2017 Final Rule, borrowers might be unable to take out new loans
(those originated more than 30 days after their last loan) for at least
two reasons: They may only have access to loans made under the
mandatory underwriting requirements and be unable to demonstrate an
ability to repay the loan under the Rule, or they may be unable to
satisfy any additional underwriting requirements adopted by lenders in
response to, though not required by, the Rule.
    If lenders had to comply with the 2017 Final Rule, payday borrowers
would not be likely to face the prescribed mandatory underwriting
requirement unless and until they have exhausted the limits on loans
available to them under the principal step-down
[[Page 4289]]
approach, or unless the borrower is seeking a loan in excess of $500 or
secured by a vehicle title (as the costs and restrictions associated
with the principal step-down approach are generally lower compared to
the mandatory underwriting approach, so loans under the principal step-
down approach are likely to be used prior to loans under the mandatory
underwriting approach, all else being equal). However, to obtain loans
under the Rule's principal step-down approach, lenders might elect to
require borrowers to satisfy more exacting underwriting requirements
than would be applied by lenders if the proposal is adopted. This is
because under the proposal lenders would be able to obtain more revenue
from loans that are reborrowed in excess of the limits that would be
imposed by the principal step-down approach, and would thus be willing
to continue issuing loans to somewhat riskier borrowers. Moreover,
after exhausting the limits on principal step-down approach loans in
the Rule, borrowers would be required to satisfy the mandatory
underwriting requirement to obtain a new loan; under the proposal,
however, those more stringent requirements would no longer apply.
    Based on the simulations contained in the 2017 Final Rule, the
Bureau estimates that under the proposal about five percent more
initial payday loans (i.e., those that are not part of an existing
sequence) would occur due to the revocation of the annual loan limits,
and roughly six percent more borrowers would be able to initiate a new
sequence of loans that they could not start under the 2017 Final Rule.
That is, under the proposal five percent more payday loans that likely
reflect a new need for credit would be allowed (based on the proposed
removal of the annual limits on borrowing) and six percent of payday
borrowers would have access to new sequences of loans as compared to
the chosen baseline. Vehicle title borrowers are likely to realize
greater benefits from increased access to loans relative to payday
borrowers.
    Consumers who would be able to obtain a new loan because of the
proposal would not be faced with the effects of the 2017 Final Rule,
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 would they
face the need to borrow from sources that are more expensive or
otherwise less desirable. 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.
    Survey evidence provides some information about what borrowers are
likely to do if they do not have access to these loans. Using the data
from the CPS Unbanked/Underbanked supplement, researchers found that
the share of households using pawn loans increased in States that
banned payday loans, to a level that suggested a large share of
households that would otherwise have taken out payday loans took out
pawn loans instead.\344\ A 2012 survey of payday loan borrowers found
that a majority indicated that if payday loans were unavailable they
would reduce expenses, delay bill payment, borrow from family or
friends, and/or sell or pawn personal items.\345\ Under the proposal,
these consumers would not lose access to payday loans where it is their
preferred method of credit.
---------------------------------------------------------------------------
    \344\ Neil Bhutta et al., Consumer Borrowing after Payday Loan
Bans, 59 J. of L. and Econ. 225 (2016).
    \345\ Pew Charitable Trusts, Payday Lending in America: Who
Borrows, Where They Borrow, and Why, at 16 (Report 1, 2012), https:/
/www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/
pewpaydaylendingreportpdf.pdf (reporting $375 as the average).
---------------------------------------------------------------------------
    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 conditional exemption from the mandatory underwriting approach
for covered short-term loans. These limits are $500 for the initial
loan, with each subsequent loan in a sequence decreasing by at least
one-third the amount of the original loan. For example, a $450 initial
loan would mean borrowers are restricted to no more than $300 for a
second loan, and no more than $150 for a third loan. By eliminating
these restrictions, the proposal would allow borrowers (specifically,
borrowers who cannot satisfy the mandatory underwriting requirements
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 Rule,\346\ around 40 percent of the
increase in payday loan revenues described in part VIII.B.1.c above
would be the result of eliminating the $500 cap on initial loans and
step-down requirements on loans issued via the principal step-down
approach.
---------------------------------------------------------------------------
    \346\ In the 2017 Final Rule, the Bureau describes the results
from simulations under three sets of assumptions. This proposal
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.
---------------------------------------------------------------------------
    Elimination of Limits on Reborrowing. For storefront payday
borrowers, most of the increase in the availability of credit if the
proposal is adopted would 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 and principal step-
down provisions in the 2017 Final Rule impose limits on the frequency,
timing, and amount of reborrowing and the proposal if adopted would
lift these limitations.
    The lessened constraints on reborrowing would additionally benefit
consumers who wish to reborrow loans that would have been made via the
principal step-down approach under the Rule but are unable to decrease
the principal of their loans. For example, consider a borrower who has
a loan due and is unable to repay one-third of the original principal
amount (plus finance charges and fees) as required to obtain a second
loan under the principal step-down approach, but who anticipates an
upcoming influx of income. Under this proposal, such a borrower would
experience the benefit of being able to reborrow the full amount of the
loan until such time as the borrower realizes that income.\347\ This
improved access to credit could result in numerous benefits, 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 would
[[Page 4290]]
result from the proposal's lifting of the reborrowing restrictions,
rather than its removal of the initial loan size cap and the forced
step-down features of loans made via the principal step-down approach.
---------------------------------------------------------------------------
    \347\ Necessarily mitigating this benefit is the fact that
defaulting on a payday loan has relatively few direct costs, while
there are non-trivial direct costs associated with each instance of
reborrowing. As such, this benefit would be most significant for
those consumers with a high likelihood of the necessary influx of
income being realized after fewer instances of reborrowing.
---------------------------------------------------------------------------
    The Bureau does not believe the proposal, if adopted, would lead to
a substantial decrease in instances of borrowers defaulting on payday
loans, in part because the 2017 Final Rule's principal step-down
provisions likely would encourage many consumers to reduce their debt
over subsequent loans, rather than to default. It is necessarily true,
however, that some borrowers who would be able to reborrow the full
amount of the initial loan under the proposal may avoid a default that
would have occurred under the Mandatory Underwriting Provisions of the
Rule. This would be true for borrowers who would not have been able to
successfully make the step-down payment on the principal step-down
schedule, but can afford to pay just the fees (i.e., the reborrowing
cost) and then eventually repay the loan in full when they experience a
positive income shock. These borrowers will thus avoid the costs of
default as discussed below and enjoy the benefit of remaining in good
standing with their lender and eligible for future borrowing when
needed.
    Increased Geographic Availability of Covered Short-Term Loans.
Consumers would also have somewhat greater physical access to payday
storefront locations under the proposal relative to the 2017 Final Rule
baseline. As explained in the 2017 Final Rule, Bureau research on
States that have enacted laws or regulations that led to substantial
decreases in the overall revenue from storefront lending indicates that
the number of stores has declined roughly in proportion to (i.e., by
roughly the same percentage as) the decline in revenue.\348\ It follows
that the proposal's impact on increasing the revenue of payday lenders
relative to the 2017 Final Rule baseline should lead to a corresponding
increase in the number of stores. This benefit is somewhat mitigated by
the way payday stores locate, however. Nationwide, the median distance
between a payday store and the next closest payday store is only 0.3
miles. When a payday store closes in response to laws that reduce
revenue, there is usually a store nearby that remains open. For
example, across several States with regulatory changes, between 93 and
95 percent of payday borrowers had to travel fewer than five additional
miles to find a store that remained open. This is roughly equivalent to
the median travel distance for payday borrowers nationwide. Using the
loan volume impacts previously calculated above for storefront lenders,
the Bureau forecasts that a large number of storefronts will remain
open under the proposal that would have closed under the 2017 Final
Rule, but that consumers' geographic access to stores will not be
substantially affected in most areas.\349\ 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.\350\
---------------------------------------------------------------------------
    \348\ 82 FR 54472, 54487.
    \349\ The positive effects of increased storefront access are
likely to be relatively larger in more rural areas; the impacts of
this proposal on rural areas are considered in more detail below.
There may also be benefits to consumers from other ``convenience
factors'' associated with increased competition. Examples could
include longer hours during which a nearby payday store is open,
shorter wait times, etc. However, the Bureau lacks data or evidence
that would allow for a conclusion that such benefits would result
from the proposal, if adopted.
    \350\ 82 FR 54472, 54817, 54834-35.
---------------------------------------------------------------------------
b. Costs to Consumers
    Relative to the 2017 Final Rule baseline, the available evidence
suggests that the proposal 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.\351\
---------------------------------------------------------------------------
    \351\ 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.
---------------------------------------------------------------------------
    Extended Loan Sequences. As discussed in greater detail in the 2017
Final Rule, the available evidence suggests that, absent that Rule, a
material percentage of borrowers who take out storefront payday loans
and single-payment vehicle title loans often end up taking out many
loans in a row. This evidence came from the Bureau's own work, as well
as analysis by independent researchers and analysts commissioned by
industry. This proposal's removal of 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 would enable borrowers
to continue to borrow in these longer sequences of loans. As discussed
above, some consumers who would choose under the proposal to reborrow
beyond the limits imposed by the 2017 Final Rule might realize
benefits, but would not be able to do so in the baseline. The evidence
suggests, however, that the majority of consumers who would choose
under the proposal to reborrow beyond the limits imposed by the 2017
Final Rule would incur costs, costs they would not incur under the
baseline. 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.\352\ (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.)
---------------------------------------------------------------------------
    \352\ 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.
---------------------------------------------------------------------------
    However, these observed seemingly negative outcomes do not
necessarily imply a decrease in consumer surplus. A conclusion that
these impacts result in negative consumer surplus requires not just
that the apparent impacts on consumers are negative, but also that
these impacts were not accurately anticipated by the consumers and that
consumers would have made different choices with more complete
information. If these are the impacts of initiating a loan sequence for
a significant share of consumers, and these impacts are not accurately
anticipated (e.g., if consumers do not fully understand how long they
are likely to be in debt), then economic analysis would suggest the
effect on consumer surplus is likely negative. If, on the other hand,
consumers making their initial borrowing decisions accurately
anticipate the potential for these impacts, then the effect on consumer
surplus is likely to be (at least weakly) positive, as there would be
unobserved, unquantifiable, offsetting benefits.
    The Bureau weighed these possible outcomes in the 2017 Final Rule
in part
[[Page 4291]]
VII.F.2 noting that the evidence on the impacts of the availability of
payday loans on consumer welfare varies; that most studies focused on
what happens when all access to payday loans is eliminated as opposed
to restricted; and that within that body of literature studies have
provided evidence that access to payday loans can have positive,
negative, or no effects on various consumer outcomes. The Bureau's
synopsis of the available evidence presented there (and above) is 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 unanticipated long sequences of loans. The Bureau further
concluded that the available evidence suggests that consumers who end
up engaging in long sequences of reborrowing generally do not
anticipate those outcomes ex ante \353\ 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.\354\
---------------------------------------------------------------------------
    \353\ See 82 FR 54472, 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).
    \354\ For a discussion of alternative sources of credit, see 82
FR 54472, 54609-11, 54841.
---------------------------------------------------------------------------
    As this proposal's increase in access to credit is concentrated in
long durations of indebtedness where the, albeit limited, evidence
suggest the welfare impacts are negative on average, the estimated
effect on average consumer surplus from these extended loan sequences
would be negative relative to the chosen baseline.
    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 (two percent in the data the Bureau analyzed).\355\ 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 similar 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.\356\ It is reasonable to assume a
return to these market conditions under the proposal.
---------------------------------------------------------------------------
    \355\ 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.
    \356\ Paige Marta Skiba & Jeremy Tobacman, Payday Loans,
Uncertainty, and Discounting: Explaining Patterns of Borrowing,
Repayment, and Default, at tbl. 2 (Vand. L. and Econ. Sch., Research
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 some borrowers
who would be able to reborrow the full amount of the initial loan under
the proposal may avoid a default that would have occurred if lenders
had to comply with the Mandatory Underwriting Provisions of the Rule.
This would be the result for borrowers who would not have been able to
successfully make the step-down payment on the principal step-down
schedule, but could afford to pay just the fees, i.e., the reborrowing
cost, and then eventually repay the loan in full when they experience a
positive income shock. This also would be the result for borrowers who
are able to obtain an initial loan, cannot demonstrate an ability to
repay when seeking to reborrow, but would in fact be able to repay
after experiencing a positive income shock. However, the Bureau
believes that some borrowers taking out payday loans may experience
additional defaults under the proposal than they would under the 2017
Final Rule. This would occur in instances where the principal step-down
requirement would have resulted in borrowers not reborrowing relatively
larger amounts that could lead to an eventual default. As discussed in
the 2017 Final Rule, the Bureau believes the consequences of defaults
can be harmful to at least some consumers, or in specific
circumstances. If this proposal were to increase defaults on net, this
would represent a potential cost to consumers.\357\ 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.\358\
---------------------------------------------------------------------------
    \357\ For a more detailed discussion of the costs of defaults
and delinquencies, as well as the reasoning behind their likely
increased prevalence under this proposal, see 82 FR 54472, 54838.
    \358\ See Paige Marta Skiba & Jeremy Tobacman, Payday Loans,
Uncertainty, and Discounting: Explaining Patterns of Borrowing,
Repayment, and Default (Vand. L. and Econ. Sch., Research Paper No.
08-33, 2008) for a structural model examining reborrowing behavior
including potential default costs.
---------------------------------------------------------------------------
    The source of those perceived default costs is unclear. Defaulting
on a payday loan may initially appear to be relatively low cost for
consumers, given that lenders generally do not report to the major
credit bureaus and may not choose to pursue collection litigation if
the amount owed is small. However, as lenders take a post-dated check
(or account access) to secure the loan, and will seek to obtain payment
by that method if the consumer fails to return to the store to repay
(or reborrow), default can only occur when the consumer's account
balance (inclusive of any overdraft buffer) has less than the amount
owed. Default, as defined as a failed presentment of the post-dated
check, therefore often results in NSF assessments. This could lead to
negative balances and ultimately may lead or contribute to involuntary
account closures which can decrease a consumer's access to checking
accounts in the future. For example, in data analyzed by the Bureau,
half of all identified online payday borrowers' accounts have at least
one presentment from an online payday lender that results in overdraft
or failure due to NSF during the 18-month observation period, resulting
in an average of $185 in fees.\359\ Note, however, there are many
potential debits or attempted debits that can contribute to account
closures, and the Bureau has not disentangled the effects of attempts
to collect on payday loans from other potential contributing causes to
account closures.
---------------------------------------------------------------------------
    \359\ Bureau of Consumer Fin. Prot., Online Payday Loan Payments
(Apr. 2016), https://files.consumerfinance.gov/f/201604_cfpb_online-payday-loan-payments.pdf.
---------------------------------------------------------------------------
    In addition to default costs resulting from lenders' access to
consumers' checking accounts, the 2017 Final Rule also noted that
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.\360\
---------------------------------------------------------------------------
    \360\ 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
[[Page 4292]]
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. The Bureau seeks additional information on the
expected change in the prevalence of default and the costs associated
therewith.
    For borrowers who would take out short-term vehicle title loans
under the proposal, the impacts would be greater. As previously noted,
the 2017 Final Rule will end virtually all such lending. Default rates
on single-payment vehicle title loans are higher than those on payday
loans. Additionally, as there will be a relatively greater increase in
vehicle title loans compared to payday loans, the increase in defaults
on vehicle title loans that would result from this proposal would be
relatively larger compared to payday. In the data analyzed by the
Bureau for the 2017 Final Rule, the default rate on all loans is nine
percent, and the sequence-level default rate is 31 percent.\361\ In the
data the Bureau has analyzed, five percent of all single-payment
vehicle title loans lead to repossession, and 18 percent of sequences
of loans end with repossession. So, at the loan level and at the
sequence level, slightly more than half of all defaults lead to
repossession of the borrower's vehicle.
---------------------------------------------------------------------------
    \361\ There is also evidence that the default rates on longer-
term balloon-payment title loans are high. The Bureau has data for a
single lender that made longer-term vehicle title loans with both
balloon and amortizing payment schedules. Those loans with balloon
payments defaulted at a substantially higher rate. See Supplemental
Findings at 30.
---------------------------------------------------------------------------
    The range of potential ancillary impacts on a borrower of losing a
vehicle to repossession depends on the transportation needs of the
borrower's household and the available transportation alternatives.
According to two surveys of vehicle title loan borrowers, 15 percent of
all borrowers report that they would have no way to get to work or
school if they lost their vehicle to repossession.\362\ Fully 35
percent of borrowers pledge the title to the only working vehicle in
the household.\363\ Even those with a second vehicle or the ability to
get rides from friends or take public transportation might experience
inconvenience or even hardship from the loss of a vehicle. The Bureau
seeks additional information on the prevalence and costs of the
possible ancillary effects of repossession.
---------------------------------------------------------------------------
    \362\ Kathryn Fritzdixon et al., Dude, Where's my Car Title?:
The Law Behavior and Economics of Title Lending Markets, 2014 U.
Ill. L. Rev. 1013, 1038 (2014); Pew Charitable Trusts, Auto Title
Loans--Market practices and borrower experiences, at 14, tbl. 3
(2015), http://www.pewtrusts.org/~/media/assets/2015/03/
autotitleloansreport.pdf.
    \363\ Pew Charitable Trusts, Auto Title Loans--Market practices
and borrowers' experiences, at 14 (2015), http://www.pewtrusts.org/
~/media/assets/2015/03/autotitleloansreport.pdf.
---------------------------------------------------------------------------
    Similarly, to the extent the proposal would increase the number of
payday and vehicle title loans and length of loan sequences relative to
the 2017 Final Rule, the proposal likely would increase the frequency
of delinquencies. Borrowers who become delinquent may incur penalty
fees, late fees, or NSF fees, which can have associated indirect costs
(e.g., delinquencies on other bills, difficulty meeting their basic
living expenses, etc.). Late payments on payday loans (defined as a
payment that is sufficiently late that the lender deposits the
borrower's check or attempts to collect using ACH authorization) appear
to range from seven \364\ to over 10 percent.\365\ These late payments
can be costly for borrowers. If a lender deposits a check or submits a
payment request and it is returned for insufficient funds, the
borrower's bank or credit union will likely charge the borrower an NSF
fee of approximately $35, and the lender may charge a returned-item
fee. It should be noted, however, that the harm from NSF will be
mitigated by the limitations on payment practices and related notices,
as required by the Payment Provisions described in the section-by-
section analysis of the 2017 Final Rule. The Bureau does not know the
total potential cost of potential increased delinquencies from the
proposal, and it therefore seeks additional information about these
costs.
---------------------------------------------------------------------------
    \364\ ``For the years ended December 31, 2011 and 2010, we
deposited customer checks or presented an Automated Clearing House
(ACH) authorization for approximately 6.7 percent and 6.5 percent,
respectively, of all the customer checks and ACHs we received and we
were unable to collect approximately 63 percent and 64 percent,
respectively, of these deposited customer checks or presented ACHs.
Total charge-offs, net of recoveries, for the years ended December
31, 2011 and 2010 were approximately $106.8 million and $108
million, respectively.'' Advance America, 2011 Annual Report (Form
10-K), at 27, available at http://www.sec.gov/Archives/edgar/data/1299704/000104746912002758/a2208026z10-k.htm.
    \365\ Paige Marta Skiba & Jeremy Tobacman, Payday Loans,
Uncertainty, and Discounting: Explaining Patterns of Borrowing,
Repayment, and Default (Vand. L. and Econ. Sch., Research Paper No.
08-33) (2008).
---------------------------------------------------------------------------
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. As noted
earlier, the evidence in these studies did not alter the Bureau's views
based on earlier evidence; however, it is important to include these in
this discussion of the evidence that bears on the benefits and costs of
the proposal. The Bureau seeks comment on any additional relevant
research, information, or data that has arisen since the 2017 Rule was
published.
    Studies of the Direct Effects of Payday Loans and Small Dollar Loan
Regulations. As was the case with the studies described in the 2017
Final Rule, the new evidence about the benefits and costs of payday
loans discussed here is not uniform in its welfare implications.
Bronson and Smith (2018) surveyed 48 payday loan borrowers in Southeast
Alabama to assess their satisfaction with payday loans.\366\ The
authors ask a limited number of questions, but find that 87.5 percent
of respondents are ``extremely'' or ``very'' satisfied with payday
loans on average, but that only 41.7 percent are ``extremely'' or
``very'' satisfied with their most recent loan.\367\ They also show
that 71 percent of payday borrowers, were they to not have access to a
payday loan, would seek an alternative loan (e.g., credit card, borrow
from family or friend).\368\ Finally, the authors show that fewer than
21 percent of respondents support limits on the number or dollar amount
of loans available, and that none of the respondents support an
outright ban of payday loans.\369\ The authors note the limited scope
of their study, which focuses on few customers in a very specific
geographic region. Additionally, the methodology employed leads to a
self-selected, likely non-representative sample of respondents,
limiting the usefulness of these results for informing this analysis of
benefits and costs.\370\
---------------------------------------------------------------------------
    \366\ Christy A. Bronson & Daniel J. Smith, Swindled or Served?:
A Survey of Payday Lending Customers in Southeast Alabama, 40 S.
Bus. & Econ. J. 16 (2017).
    \367\ Id. at 22-23.
    \368\ Id. at 25.
    \369\ Id. at 23-24.
    \370\ Respondents were solicited by surveyors standing in public
places who asked if the respondent had taken a payday loan and was
willing to complete a survey. No validation of actual experience
with payday loans was attempted for respondents, let alone non-
respondents.
---------------------------------------------------------------------------
    Lukongo and Miller (2017) found that Arkansas' binding interest
rate cap creates additional costs for consumers of small-dollar
installment products.\371\ The authors show that Arkansas' interest
rate cap did not decrease demand for small-dollar installment loans,
noting that many Arkansans in
[[Page 4293]]
counties adjacent to States allowing these loans take small-dollar
installment loans. The authors also document an ``installment loan
credit desert'' in the interior of Arkansas (noting that nearly 97
percent of Arkansans holding these loans reside in perimeter counties),
and that transportation costs increase the effective APR for those
borrowers who are able to travel in order to obtain such loans. While
not directly related to payday (small-dollar installment loans have a
different structure that is not affected by the 2017 Final Rule or this
proposal), this study documents that demand for credit is not
eliminated by restrictions on the supply of that credit, and that
customers in border counties are better able to travel across State
lines to obtain loans, and do so with some frequency.
---------------------------------------------------------------------------
    \371\ Onyumbe Enumbe Lukongo & Thomas W. Miller, Adverse
Consequences of the Binding Constitutional Interest Rate Cap in the
State of Arkansas (Mercatus Working Paper, 2017), https://www.mercatus.org/system/files/lukongo_wp_mercatus_v1.pdf.
---------------------------------------------------------------------------
    Ramirez (2017) shows that when Ohio constrained interest rates on
payday loans in 2008, licenses for pawn brokers, precious metal buyers,
alternative small-loan, and second-mortgage lending increased.\372\ The
author concludes that demand for the credit previously satisfied by
payday loans persisted after the reducing in the availability of those
loans, and that supply-side effects evolved in order to partially meet
this demand. The author's implication is that these alternatives to
payday loans are substitutes (though likely imperfect ones). The Bureau
notes there may be other likely imperfect substitutes for payday loans
available to consumers, such as borrowing from relatives, decreasing
expenses, borrowing from an unlicensed lender, but the Bureau does not
have data concerning to what extent these alternatives are available
and at what prices as well as the ancillary benefits and costs
associated with these possible alternatives.
---------------------------------------------------------------------------
    \372\ Stefanie Ramirez, Payday-Loan Bans: Evidence of Indirect
Effects on Supply (SSRN Working Paper, 2017).
---------------------------------------------------------------------------
    Studies Describing the Links Between Payday Loans and Health
Issues. The 2017 Final Rule described in general terms that payday loan
use could be associated with non-pecuniary benefits or costs, but did
not present empirical evidence of these impacts.\373\ A newer payday-
related literature shows correlations between payday loan access or use
and health outcomes.\374\
---------------------------------------------------------------------------
    \373\ The Bureau was aware of at least one of these papers prior
to the 2017 Final Rule. At the time, the paper was a working paper
with preliminary results. As such, the Bureau chose not to discuss
its findings in the 2017 Final Rule.
    \374\ However, the Bureau underscores that correlation between
two variables does not necessarily imply causation, specifically,
that payday loan access or use is the cause of these health
outcomes.
---------------------------------------------------------------------------
    Cuffe and Gibbs (2017) explore the relationship between payday loan
access and liquor sales.\375\ The authors find a persistent reduction
in liquor sales resulting from payday lending regulations that
restricted access for frequent payday loan users. They also show that
this decline in sales is nearly three times larger for liquor stores
closest to payday lenders. Importantly, the authors also find no
corresponding decline in overall expenditures from the restricted
access to payday loans. The authors imply these finding could have
public health impacts, though they do not provide estimates of these
impacts, and the direction of any overall welfare impacts is not
clear.\376\
---------------------------------------------------------------------------
    \375\ Harold E. Cuffe & Christopher G. Gibbs, The Effect of
Payday Lending Restrictions on Liquor Sales, 85(1) J. Banking & Fin.
132-45 (2017).
    \376\ The authors also note specific behavioral biases with
which their findings are consistent. However, they are unable to
test for any specific biases that actually are at play. As such, the
Bureau's analysis is not informed by this aspect of the paper.
---------------------------------------------------------------------------
    Eisenberg-Guyot et al. (2018) assess the impact of ``fringe banking
services'' on health outcomes.\377\ Using Current Population Survey
data and propensity score matching, the authors show ``fringe loan''
use is associated with 38 percent higher prevalence of reporting poor
health. The authors imply that the magnitude suggests that at least
some fringe loan use may cause a decline in perceived health. However,
the authors do not compellingly address the possibility of reverse
causality: i.e., the possibility that individuals suffering (or
reporting to suffer) poor health are more likely to use payday loans.
Additionally, if payday borrowers affected by this proposal would be
using other ``fringe loans'' absent the proposal, the proposal's
increase in payday and vehicle title access would have no effect on
their health.
---------------------------------------------------------------------------
    \377\ Jerzy Eisenberg-Guyot et al., From Payday Loans To
Pawnshops: Fringe Banking, The Unbanked, And Health, 37(3) Health
Aff. 429 (2018).
---------------------------------------------------------------------------
    Sweet et al. (2018) use data from a small, non-random survey of
debt and health to test whether short-term loans are associated with
emotional and physical health indicators.\378\ They find that having
ever used a short-term loan is associated with a number of risk
factors, including poor physical health and anxiety, even after
controlling for several socio-demographic covariates. However, the
survey used is small (n=286), they do not distinguish between types of
loans, frequency of use, or when a loan was used, and their sample
comes from one metropolitan statistical area (MSA) in a State with an
interest rate cap that does not allow for traditional payday lending
(Boston, MA).
---------------------------------------------------------------------------
    \378\ Elizabeth Sweet et al., Short-term lending: Payday loans
as risk factors for anxiety, inflammation and poor health, 5 SSM--
Population Health, 114-121 (2018), https://doi.org/10.1016/j.ssmph.2018.05.009.
---------------------------------------------------------------------------
    In the only study regarding health effects of payday loan access
using a causal identification strategy, Lee (2017) explores the link
between payday loans and household welfare by estimating the impact of
payday loan access on an extreme measure of household distress:
Suicide.\379\ The author uses a distance to border and difference-in-
difference identification approach to provide evidence consistent with
payday loans increasing the risk of suicide attempts for low- and
moderate-income borrowers and employed workers. The author also shows
that completed suicides increase by relatively more than attempts. The
estimated magnitudes are quite high. Notably, the author does not
estimate whether the increase in suicide risk associated with initial
access to payday loans is reversed (or possibly even exacerbated) by
the removal of some of that access and as such, the implication for
this proposal's effective reinstatement of access to more borrowing is
unclear.
---------------------------------------------------------------------------
    \379\ Jaeyoon Lee, Credit Access and Household Welfare: Evidence
From Payday Lending (SSRN Working Paper, 2017).
---------------------------------------------------------------------------
    Studies Describing the Links Between Financial Education and Payday
Loan Use. An expanding literature deals with the impact of financial
education and literacy on the use of payday loans.
    For example, Harvey (2017) shows that financial education mandates
significantly reduce the likelihood and frequency of payday
borrowing.\380\ Specifically, the author finds that individuals who
were mandated to take personal finance classes in high school are less
likely to have used payday loans, and used fewer payday loans compared
to those individuals who did not have a mandated personal finance
class. Kim and Lee (2017) explore whether financial literacy impacts
payday loan use and find, using the 2012 National Financial Capability
Study, that increased financial literacy is negatively associated with
payday loan use.\381\ In slight contrast, Alyousif and Kalenkoski
(2017) use a self-selected sample to find that seeking financial advice
about savings and investment is associated with less
[[Page 4294]]
payday loan use, but that seeking debt counseling is correlated with a
higher chance of payday loan use.\382\
---------------------------------------------------------------------------
    \380\ Melody Harvey, Impact of Financial Education Mandates on
Younger Consumers' Use of Alternative Financial Services (SSRN
Working Paper, 2017).
    \381\ Kyoung Tae Kim and Jonghee Lee, Financial literacy and use
of payday loans in the United States, 25(11) Applied Econ. Letters
781 (2017).
    \382\ Maher Alyousif & Charlene M. Kalenkoski, Asking for
Action: Does Financial Advice Improve Financial Behaviors? (SSRN
Working Paper, 2017).
---------------------------------------------------------------------------
    While the relationship between financial education and literacy and
payday loan use has only indirect implications for the impacts of
payday loan use on consumers, the apparent finding that consumers with
greater financial education and literacy use payday loans less may
imply that the use of these loans is at least somewhat driven by the
information consumers have about these loans. This, in turn, could have
implications for the consumer surplus that would result from use of
these loans. But perhaps the more direct implication is that improved
financial education programs and opportunities could be a viable
alternative to more direct market interventions such as issuing
regulations.
    Summary of Research Findings on the Welfare Effects of Consumers of
Payday Loan Use. The Bureau believes the new research described here
supplements, and does not contradict, the research described in the
2017 Final Rule. The Bureau welcomes comment on these new studies and
other new research concerning the effect on consumers from using payday
loans.
C. Potential Benefits and Costs of the Proposal 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 proposed
revocation of the Mandatory Underwriting Provisions would eliminate the
recordkeeping requirements set forth in the 2017 Final Rule that are
not related to payment withdrawal attempts.
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 under the
proposal to be small as well. Specifically, the Bureau estimates the
benefits to be less than $50 per lender if they purchased additional
storage themselves (e.g., a portable hard drive) to comply with the
2017 Final Rule, or $10 per month if they leased storage (e.g., from
one of the many online cloud storage vendors). Lenders would also avoid
the need to develop procedures and train staff to retain records under
this proposal; 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 proposed revocation of
mandatory underwriting-related recordkeeping requirements.
D. Potential Benefits and Costs of the Proposal 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 would be eliminated by this proposal, as would the
potential benefits and costs from the existence of, and reporting to,
every RIS.
1. Benefits and Costs to Covered Persons
    The proposal, if adopted, would eliminate the benefits, described
in the 2017 Final Rule, that are afforded to firms that apply to become
RISes by eliminating 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.
    The proposal, if adopted, would also eliminate the benefits to
lenders from access to RISes described in the 2017 Final Rule. 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 proposal's elimination
of these benefits would represent a cost to lenders.
2. Benefits and Costs to Consumers
    The proposed elimination of the RIS-related requirements would 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 underwriting requirements of the Rule. This benefit
would be moot, given the proposed revocation of the Rule's Mandatory
Underwriting Provisions. The remaining benefits this proposal would
eliminate are small.
E. Other Unquantified Benefits and Costs
    Some of the proposal's impacts noted above are difficult if not
impossible to quantify, because their magnitudes or values are unknown
or unknowable. One of the most notable of these is the consumer welfare
impact of increased access to short-term vehicle title loans. While the
structure of these loans is somewhat similar to payday loans, there are
no direct studies of the impact of these loans on consumer welfare.
Additionally, there is no obvious way to sign or scale the welfare
effects of access to vehicle title loans relative to payday loans. For
example, it is possible that the larger loan amounts available from
vehicle title lenders enable consumers to better handle more
substantial financial shocks and that the risk of losing a vehicle in
the event of default provides consumers with greater incentives to
become more fully informed before initiating loans. This would result
in relatively more positive welfare effects relative to payday loans.
However, it is also possible that the larger loan amounts may result in
more repossessions after defaults that may have additional adverse
consequences for some consumers. If this possibility were the reality,
the welfare effects of the proposal would be more negative for vehicle
title consumers than for payday consumers. However, within the set of
17 States that permit short-term vehicle title lending, 12 also permit
longer-term lending; \383\ so the substitution of longer-term lending
for short-term lending has significant potential to mitigate the
negative welfare impacts of the proposal. Absent reliable evidence
about the welfare effects of access to short-term vehicle title loans,
the Bureau does not attempt to quantify these effects here.
---------------------------------------------------------------------------
    \383\ One of the States that only allows short-term vehicle
title lending is Ohio, but recent legislation will eliminate such
lending in April 2019. Note that an additional 6 States only allow
longer-term vehicle title lending, and those would be unaffected by
this proposal.
---------------------------------------------------------------------------
    There are other, less direct effects of the proposal 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
[[Page 4295]]
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 would not
occur under the proposal; 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.). If there exist credible quantitative estimates of these impacts,
the Bureau welcomes comments providing those estimates.
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 proposal would have minimal impact on these
institutions.
    However, it is possible that the removal of the 2017 Final Rule's
restrictions would 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).\384\ To the
extent these products are developed and successfully marketed, they
would represent a benefit of this proposal for these institutions.
---------------------------------------------------------------------------
    \384\ 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
proposal that would have been inviable under the 2017 Final Rule).
---------------------------------------------------------------------------
G. Potential Impact on Consumers in Rural Areas
    Under the proposal, consumers in rural areas would 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 would likely lead to a substantial increase in the
markets for storefront payday loans and storefront single-payment
vehicle title loans. In the 2017 Final Rule, the Bureau analyzed how
the adoption of State laws restricting payday lending in Colorado,
Virginia, and Washington led to significant contraction in the number
of payday stores. In those States, nearly all borrowers living in non-
rural areas (MSAs) still had access to a bricks-and-mortar payday
store. However, the Bureau noted that a substantial minority of
borrowers living outside of MSAs no longer had a payday store readily
available following the contraction in the industry. In Colorado,
Virginia, and Washington, 37 percent, 13 percent, and 30 percent of
borrowers, respectively, would need to travel at least five additional
miles to reach a store that remained open. In Virginia, almost all
borrowers had a store that remained open within 20 miles of their
previous store. And, in Washington 9 percent of borrowers would have to
travel at least 20 additional miles.\385\
---------------------------------------------------------------------------
    \385\ 82 FR 54472, 54853.
---------------------------------------------------------------------------
    While many borrowers who live outside of MSAs do travel that far to
take out a payday loan, many do not. As such, the expected increase in
bricks-and-mortar stores that would result from this proposal 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.\386\ For those consumers who are unable or
unwilling to seek loans from an online lender, the proposal would
provide more, and potentially more desirable, borrowing options.
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    \386\ 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.
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    The Bureau expects that the relative impacts on rural and non-rural
consumers of vehicle title loans would be similar to what would occur
in the payday market. That is, rural consumers would 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 Proposal indicating that some online payday lenders operate in
rural areas and comprise large shares of their local economies. Given
that the proposal would allow these lenders to operate at their pre-
2017 Final Rule capacities, it is likely that at least some rural
lenders would be substantially and positively impacted by the proposal,
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 would not experience substantially different effects of the
proposal than other consumers.\387\
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    \387\ 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. 82 FR 54472, 54853.
Corresponding effects may result from this proposal 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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IX. Regulatory Flexibility Act Analysis
    The Regulatory Flexibility Act \388\ as amended by the Small
Business
[[Page 4296]]
Regulatory Enforcement Fairness Act of 1996 \389\ (RFA) 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.\390\ The RFA defines a ``small
business'' as a business that meets the size standard developed by the
Small Business Administration pursuant to the Small Business Act.\391\
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    \388\ Public Law 96-354, 94 Stat. 1164 (1980).
    \389\ Public Law 104-21, section 241, 110 Stat. 847, 864-65
(1996).
    \390\ 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).
    \391\ 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.\392\ 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.\393\
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    \392\ 5 U.S.C. 601 through 612.
    \393\ 5 U.S.C. 609.
---------------------------------------------------------------------------
    As discussed above, this proposal would rescind the Mandatory
Underwriting Provisions of the 2017 Final Rule. The section 1022(b)(2)
analysis above describes how, if adopted, this proposal would 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 proposal would reverse.\394\ 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, would remain
available to small entities should this proposal be adopted. Thus, a
small entity that is in compliance with the law at such time when this
proposal might be adopted would not need to take any additional action
to remain in compliance. Based on these considerations, the proposed
rule would not have a significant economic impact on any small
entities.
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    \394\ 82 FR 54472, 54853.
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    Accordingly, the undersigned hereby certifies that this proposed
rule, if adopted, would not have a significant economic impact on a
substantial number of small entities. Thus, neither an IRFA nor a small
business review panel is required for this proposal. The Bureau
requests comments on this analysis and any relevant data.
X. Paperwork Reduction Act
    Under the Paperwork Reduction Act of 1995 (PRA),\395\ 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. The
collections of information related to the 2017 Final Rule were
previously submitted to OMB in accordance with the PRA and assigned OMB
Control Number 3170-0065 for tracking purposes, however this control
number is not yet active as OMB has not approved these information
collection requests. This proposed rule would substantially revise or
remove several of the information collection requirements contained in
the Rule and, as such, a new information collection request seeking a
new OMB control number has been submitted to OMB for review under PRA
Section 3507(d).
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    \395\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
    A revised Supporting Statement detailing the changes to the
information collections and their effects on the Rule's overall burden
will be made available for public comment on the electronic docket
accompanying this proposed rule.
    Comments are specifically invited 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. Comments on these issues may be sent to the
Office of Information and Regulatory Affairs of OMB, Attention: Desk
Officer for the Bureau of Consumer Financial Protection. Comments may
also be sent to the addresses identified in the ADDRESSES section
above. All comments will become a matter of public record.
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 proposes to amend 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, and Severability
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
[[Page 4297]]
requirements in this paragraph (b), a lender must retain or be able to
reproduce an image of the loan agreement for each covered loan that the
lender originates.
* * * * *
0
8. In appendix A to part 1041, remove Model Forms A-1 and A-2 and add
reserved Model Forms A-1 and A-2 and headings for Model Forms A-3
through A-5 and Model Clauses A-6 through A-8 to read as follows:
Appendix A to Part 1041--Model Forms
A-1 Model Form
    [Reserved]
A-2 Model Form
    [Reserved]
A-3 Model Form
* * * * *
A-4 Model Form
* * * * *
A-5 Model Form
* * * * *
A-6 Model Clause
* * * * *
A-7 Model Clause
* * * * *
A-8 Model Clause
* * * * *
0
9. 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 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
[[Page 4298]]
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: February 6, 2019.
Kathleen L. Kraninger,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2019-01906 Filed 2-11-19; 4:15 pm]
 BILLING CODE 4810-AM-P