The Bureau of Consumer Financial Protection (the “CFPB” or “the Bureau”) proposes to rescind regulations controlling certain loan practices that the Bureau previously pronounced to be unfair and abusive. These rules pertain to so-called “payday loans“, as well as vehicle title loans, and certain other immediate, short term, or high-cost installment loans (e.g., longer-term balloon payment loans). Public Comments on the proposed repeal of the regulations must be received by the Bureau on or before May 15, 2019 in order to be considered.
The Basics :
- The Bureau has authority (under the Dodd-Frank Act) to issue regulations to prevent unfair, deceptive, or abusive acts or practices in connection with transactions for consumer financial products or services, and that identify such acts and practices as unlawful.
- The Bureau can 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”; but only if the Bureau has a reasonable basis to conclude that “[t]he 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.”
- The Bureau can declare an act or practice “abusive”; but only if 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.
- In issuing final regulations in 2017 (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 is both unfair and abusive under applicable standards.
- In finding these lender practices unfair, the Bureau reasoned that where the consumer in fact lacks ability to repay, the consumer will face choices between 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 Rules leads to injury for many consumers.
- The Bureau determined lender practices to be abusive in part because the lender business model in the quick-cash segment of the loan industry consciously relies upon a high frequency of borrowers not paying their loans back on time, and consequently taking out further loans, incurring mounting debt for interest, and over a period of time and a sequence of loans paying money to the lender vastly in excess of the original loan amount.
- This business model is also (as the Bureau noted in issuing the 2017 Rules) “directly inconsistent with the manner in which the product is marketed to consumers.”
- The Bureau accordingly concluded that for many consumers (particularly those who lack the ability to repay their loans on time) “their ability to estimate accurately what will happen to them when they take out a payday loan is quite limited”; that “many consumers do not understand or perceive the probability that certain harms will occur”; and that therefore it would not be reasonable to expect consumers to take steps to avoid injury.
- The current CFPB has revisited these conclusions, and now finds the fact that lenders’ “business model—unbeknownst to borrowers—depends on repeated re-borrowing” not to be relevant to assessment of whether lender business practices are unfair or abusive.
- The Bureau now regards short-term and balloon-payment lender practices to be fair and non-abusive to consumers as long as those consumers understand the terms of their individual loans; irrespective of whether they comprehend the likelihood of financially adverse loan outcomes or whether that lack of comprehension may have been fostered by the manner in which lenders market their loan services.
- In reversing its position, the Bureau has not contradicted its previous factual findings, but rather proposes to alter the weight and significance accorded the facts of how the fast-cash loan market operates. The new CFPB proposal states 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…”
- Although the existing regulations were finalized and issued in 2017, during the Trump Administration, they had been proposed during the Obama Administration and were issued in final form while an Obama appointee remained in the position of Director of the Bureau.
- The regulations CFPB proposes to repeal have not yet been put into effect. They were originally scheduled to become effective in August of 2019, but that date has been delayed by the Trump Administration.
Summary of the Proposed Regulatory Action:
The regulations CFPB proposes to rescind relate to certain short-term, and longer-term ballon payment, loans — including so-called “payday” loans and vehicle title loans. Current regulations provide that it is an unfair and abusive practice for a lender to make certain types of short-term or longer-term balloon-payment loans, including “payday” and vehicle title loans, without reasonably determining that consumers have the ability to repay those loans according to their terms. They also prescribe mandatory underwriting requirements for making ability-to-repay determinations (except for certain loans exempted from those requirements). Additionally, the existing rules establish related definitions, as well as lender reporting and record-keeping requirements, associated with implementing the central provisions of the rules. If finalized, the Bureau’s new regulatory action would repeal all of these provisions — reinstating a former regulatory regime under which lenders are free to follow a business model premised on making loans to individuals who will not be able to repay the loans on time; will therefore be forced into a sequential series of high-interest, follow-on loans; and are likely to get trapped in a cycle of debt leading to interest payments that may substantially exceed the amount of the original loan.
The Bureau’s Justification for Proposing Repeal:
The BCFP’s stated justification for repeal of the Mandatory Underwriting Provisions of its 2017 regulations revolves around a revised interpretation of the statutory standard for what constitutes a practice that is “unfair” to consumers; a reassessment of the weight that should have been accorded to market factors (such as probable impacts on the short-term loan industry); and a new determination that the evidence underlying its earlier identification of unfair and abusive lender practices was not sufficiently “robust and reliable” to support the Bureau’s previous conclusions.
More specifically, the Bureau has substantially revised (downward) its assessment of the level of individualized understanding required to enable consumers to “understand the material risks, costs, and conditions of the loans” and to “reasonably avoid injury or protect their interests.” At the same time, it has significantly increased its assessment of the weight that should be given to “countervailing benefits” such as the availability of short-term and high-cost loans to consumers (irrespective of those consumers’ ability to repay the loans) and to “competition” in the marketplace of the loan industry. Under the Bureau’s revised rationale, the fact that the lender business model in this segment of the loan industry is admittedly predicated on making loans that will not be repaid on time and will lead to consumer default, delinquency, and reborrowing (while marketing of the loan services to consumers fails to reflect this fact) is essentially irrelevant, as long as the individual consumer understands the particular terms of his/her individual loan.
Additional Information and Resources :
The CFPB describes the three major elements of its proposal as: (1) revocation of the current 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) revocation of recordkeeping requirements associated with (1); and (3) revocation of current requirements concerning furnishing provisions and their associated requirements for registered information systems.
This proposed repeal of existing rules raises a general issue of what elements make loan practices predatory and what it means to take unreasonable advantage of consumers in the quick-cash loan industry. Under prior leadership (that is, when under the direction of a holdover from the Obama Administration) the Bureau concluded that lenders were engaging in predatory (that is, unfair and abusive) practices where their intentional business model consisted of marketing and making quick-cash loans to consumers who would not be able to repay the loans timely, and would therefore be drawn into a cycle of reborrowing and mounting debt from sequential loans and ever-increasing interest liability. However, under more recent leadership by Trump appointees, the Bureau regards it as irrelevant whether the lender business model consciously revolves around a high percentage of consumers’ inability to repay their loans, or whether borrowers have any awareness of that business model. Instead, the Bureau now considers consumers to be fairly treated as long as they understand the terms of their particular loans, irrespective of whether they accurately perceive the likelihood of those loans leading to a cycle of debt from which they will find it difficult to extricate themselves. In order to fully appreciate and contrast the logic of these two divergent views, you may wish to review the explanation offered by the Bureau in support of the Final Regulations published in 2017, and contrast it with the rationale for rescinding those rules, as stated in the current Notice of Proposed Rulemaking.
The Bureau based its findings in support of the 2017 Final Rule largely on 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. The present repeal proposal is not based upon any contradictory or more recent data. It is based, however, to a significant degree on the impact the Bureau expects implementation of the 2017 Final Rule to have on the quick-cash loan industry and marketplace.
According to the CFPB (but not based upon any actual data) limiting quick-cash loans to only borrowers assessed as likely to be able to repay their loans on time will result in a substantial downturn in the number of loans being made, as well as in the revenues received by lenders and the number of lenders staying in business. Today’s CFPB equates this potential, negative impact on certain lenders in the industry with a detrimental reduction in elements of the loan marketplace the Bureau considers beneficial. Specifically, the Bureau anticipates that “competition” between lenders will be diminished, as well as the availability of quick-cash loans to consumers who want them (including both borrowers who will be able to pay off their loans and those who predictably will not). On one hand, this reasoning is difficult to argue with. Elimination from the marketplace of lenders who can’t (or don’t wish to) stay in business, unless they are able to make predatory loans and suck unwary borrowers into a cycle of increasing indebtedness, would predictably diminish the number of quick-cash lenders competing for business. And fewer lenders remaining in business would presumably mean consumers would have fewer sources of loans available to them. On the other hand, it could be argued that increased availability of loans from unscrupulous lenders, whose business depends on trapping unwary borrowers in a sequence of high-cost loans, is not of real benefit to consumers; and that the public interest is not well-served by increased presence of and competition from such lenders in the marketplace.
When it issued the current regulations in the 2017 Final Rule, the Bureau regarded “[t]he heart of the matter… [to be] 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.” By contrast, the current Bureau believes those regulations improperly conflate 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. It asserts that the level of consumers’ understanding of a lender’s revenue structure does not determine whether they adequately understand the features of the loan that they choose to take out; and that it its own earlier assertion that the two are connected (because lenders’ business models are “directly inconsistent with the manner in which the product is marketed to consumers”) was invalid.
Newspaper articles that are accessible online and may help you to form an opinion about the proposed regulatory repeal have appeared in The New York Times, and The Washington Post. An earlier article in the Post — published in 2017 when the existing regulations were finalized — may also be helpful to understanding the issue and the interests that are at stake. Another article on the proposed regulatory roll-back appears on the website of National Public Radio (NPR). An informative and reasonably balanced article, quoting views both in favor of and opposed to the proposed repeal, has appeared in the publication American Banker.
If you are ready to comment on the CFPB’s proposed repeal of regulations limiting payday loans and other short-term, high-cost loans:
The easiest means of submitting comments is to go to the Comment Page for this proposal on the Government’s eRulemaking website, type your comments into the box provided for that purpose, and follow the other instructions on that page for comment submission.
Alternatively, comments can be submitted by Email to 2019-NPRM-PaydayReconsideration@cfpb.gov. (Include Docket No. CFPB-2019-0006 or RIN 3170-AA80 in the subject line of the message.); or by Mail, Hand Delivery, or Courier, addressed to: Comment Intake, Bureau of Consumer Financial Protection, 1700 G Street NW, Washington, DC 20552. (Note, however, that delivery of mail to federal office buildings in Washington DC is often delayed.) Any submission, via any of the available methods, must be identified by Docket No. CFPB-2019-0006 or RIN 3170-AA80.
Your comments must be received by the CFPB before midnight Eastern Time on May 15, 2019, in order to be considered.