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

Federal RegisterJul 22, 2020

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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1041

[Docket No. CFPB-2019-0006]

RIN 3170-AA80

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

AGENCY:

Bureau of Consumer Financial Protection.

ACTION:

Final rule.

SUMMARY:

The Bureau of Consumer Financial Protection (Bureau) is issuing this final rule to amend its regulations governing payday, vehicle title, and certain high-cost installment loans. Specifically, the Bureau is revoking provisions of those regulations that: Provide that it is an unfair and abusive practice for a lender to make a covered short-term or longer-term balloon-payment loan, including payday and vehicle title loans, without reasonably determining that consumers have the ability to repay those loans according to their terms; prescribe mandatory underwriting requirements for making the ability-to-repay determination; exempt certain loans from the mandatory underwriting requirements; and establish related definitions, reporting, recordkeeping, and compliance date requirements. The Bureau is making these amendments to the regulations based on its re-evaluation of the legal and evidentiary bases for these provisions.

DATES:

This rule is effective October 20, 2020.

FOR FURTHER INFORMATION CONTACT:

Joseph Baressi, Lawrence Lee, or Adam Mayle, Senior Counsels, Office of Regulations, at 202-435-7700. If you require this document in an alternative electronic format, please contact

CFPB_Accessibility@cfpb.gov.

SUPPLEMENTARY INFORMATION:

Summary of the Rule

On November 17, 2017, the Bureau published a final rule (2017 Final Rule or 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 (Dodd-Frank Act or Act).

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.

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,

establishing certain requirements and limitations with respect to attempts to withdraw payments on the loans from consumers' checking or other accounts.

These provisions are referred to herein as the “Payment Provisions” of the 2017 Final Rule.

82 FR 54472 (Nov. 17, 2017) (codified at 12 CFR part 1041).

Public Law 111-203, 124 Stat. 1376 (2010).

12 CFR 1041.4 through 1041.6, 1041.10, 1041.11, and portions of § 1041.12.

The 2017 Final Rule refers to all three of these categories of loans together as covered loans. 12 CFR 1041.3(b).

12 CFR 1041.7 through 1041.9, and portions of § 1041.12.

The Rule became effective on January 16, 2018, although most provisions (12 CFR 1041.2 through 1041.10, 1041.12, and 1041.13) had a compliance date of August 19, 2019.

On January 16, 2018, the Bureau issued a statement announcing its intention to engage in rulemaking to reconsider the 2017 Final Rule.

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.

On October 26, 2018, the Bureau issued a statement announcing it expected to issue notices of proposed rulemaking to reconsider certain provisions of the 2017 Final Rule and to address the Rule's compliance date.

82 FR 54472, 54814.

See

Bureau of Consumer Fin. Prot.,

Statement on Payday Rule

(Jan. 16, 2018),

https://www.consumerfinance.gov/about-us/newsroom/cfpb-statement-payday-rule/.

Cmty. Fin. Servs. Ass'n of Am.

Consumer Fin. Prot. Bureau,

No. 1:18-cv-295 (W.D. Tex. filed Apr. 9, 2018). On November 6, 2018, the court issued an order staying the August 19, 2019 compliance date of the Rule pending further order of the court.

See id.,

ECF No. 53. The litigation is currently stayed.

See id.,

ECF No. 66 (Dec. 6, 2019).

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/.

On February 14, 2019, the Bureau published a notice of proposed rulemaking (2019 NPRM) to revoke the Mandatory Underwriting Provisions of the 2017 Final Rule.

The 2019 NPRM did not propose to amend the “Payment Provisions” of the 2017 Final Rule.

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

84 FR 4252 (proposed Feb. 14, 2019). On the same day, the Bureau published a notice of proposed rulemaking to delay the compliance date for the Mandatory Underwriting Provisions of the 2017 Final Rule.

See Payday, Vehicle Title, and Certain High-Cost Installment Loans; Delay of Compliance Date,

84 FR 4298 (proposed Feb. 14, 2019). On June 17, 2019, the Bureau published a final rule delaying the compliance date for the Mandatory Underwriting Provisions.

See

84 FR 27907 (June 17, 2019).

The Bureau is finalizing the amendments to the regulations as proposed in the 2019 NPRM. Specifically, the Bureau is revoking: (1) The “identification” provision, which states that it is an unfair and abusive practice for a lender to make covered short-term loans or covered longer-term balloon-payment loans without reasonably determining that consumers will have the ability to repay the loans according to their terms;

(2) the “prevention” provision, which establishes specific underwriting requirements for these loans to prevent the unfair and abusive practice;

(3) the “principal step-down exemption” provision for certain covered short-term loans;

(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;

(5) those portions of the recordkeeping provisions related to the mandatory underwriting requirements;

and (6) the portion of the compliance date provisions related to the mandatory underwriting requirements.

The Bureau also is revoking the Official Interpretations relating to these provisions. The Bureau is making these changes to the regulations based on a re-evaluation of the legal and evidentiary bases for these provisions.

12 CFR 1041.4.

12 CFR 1041.5.

12 CFR 1041.6.

12 CFR 1041.10 and 1041.11.

12 CFR 1041.12(b)(1) through (3).

12 CFR 1041.15(d).

The Bureau revokes the 2017 Final Rule's determination that it is an unfair practice for a lender to make covered short-term loans or covered longer-term balloon-payment loans without reasonably determining that consumers will have the ability to repay the loans according to their terms. For the reasons discussed below, the Bureau withdraws the Rule's determination that consumers cannot reasonably avoid any substantial injury caused or likely to be caused by the failure to consider a borrower's ability to repay.

The Bureau also determines that, even if the Bureau had not revoked its reasonable avoidability finding, the countervailing benefits to

consumers and competition in the aggregate from the identified practice would outweigh any relevant injury.

See

12 U.S.C. 5531(c)(1)(A).

See

12 U.S.C. 5531(c)(1)(B).

Further, the Bureau revokes the 2017 Final Rule's determination that the identified practice is abusive. The Bureau determines that a lender's not considering a borrower's ability to repay does not take unreasonable advantage of particular consumer vulnerabilities.

The Bureau also withdraws the Rule's determination that consumers do not understand the materials risks, costs, or conditions of covered loans,

as well as its determination that consumers do not have the ability to protect their interests in selecting or using covered loans.

See

12 U.S.C. 5531(d)(2).

See

12 U.S.C. 5531(d)(2)(A).

See

12 U.S.C. 5531(d)(2)(B).

II. Background

The

Supplementary Information

accompanying the 2017 Final Rule contains a more comprehensive description of the payday and vehicle title markets

and of the consumers who use these products.

See

82 FR 54472, 54474-96.

Id.

at 54555-60.

A. The Market for Short-Term and Balloon-Payment Loans

Consumers living paycheck to paycheck and with little to no savings often use credit as a means of coping with financial shortfalls.

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.

According to a recent survey conducted by the Board of Governors of the Federal Reserve System (Board), one-quarter of adults are either just getting by or finding it difficult to get by; a similar percentage skipped necessary medical care in 2018 due to being unable to afford the cost. In addition, nearly 40 percent of adults reported they would either be unable to cover an emergency expense costing $400 or would have to sell something or borrow money to cover it.

Whatever the cause of these financial shortfalls, consumers in these situations sometimes seek what may broadly be termed a “liquidity loan.”

Id.

at 54474.

Id.

(citing Rob Levy & Joshua Sledge,

A Complex Portrait: An Examination of Small-Dollar Credit Consumers

(Ctr. for Fin. Servs. Innovation 2012),

https://www.fdic.gov/news/conferences/consumersymposium/2012/A%20Complex%20Portrait.pdf

Bd. of Governors of the Fed. Reserve Sys.,

Report on the Economic Well-Being of U.S. Households in 2018,

at 5, 23 (May 2019),

https://www.federalreserve.gov/publications/files/2018-report-economic-well-being-us-households-201905.pdf;

and Bd. of Governors of the Fed. Reserve Sys.,

Report on the Economic Well-Being of U.S. Households in 2018, Appendix A: Survey Questionnaire, https://www.federalreserve.gov/publications/appendix-a-survey-questionnaire.htm.

The 2016 survey relied upon in the 2017 Final Rule found that 44 percent of adults could not cover an emergency expense costing $400 or would cover it by selling something or borrowing money.

See

82 FR 54472, 54474 & n.9 (citing Bd. of Governors of the Fed. Reserve Sys.,

Report on the Economic Well-Being of U.S. Households in 2016,

at 2, 8 (May 2017),

https://www.federalreserve.gov/publications/files/2016-report-economic-well-being-us-households-201705.pdf

The Mandatory Underwriting Provisions focus specifically on short-term loans and a smaller market segment of longer-term balloon-payment loans. The largest categories of short-term loans are “payday loans,” which are generally short-term loans required to be repaid in a lump-sum single payment on receipt of the borrower's next income payment, and short-term vehicle title loans, which are also almost always due in a lump-sum single payment, typically within 30 days after the loan is made.

82 FR 54472, 54475.

1. Payday Loans

Eighteen States and the District of Columbia prohibit payday lending or impose interest rate caps that most payday lenders find too low to enable them to make such loans profitably.

The remaining 32 States have either created a carve-out from their general usury caps for payday loans or do not regulate loan interest rates.

Several States that previously authorized payday lending have, over the past several years, changed their laws to restrict payday lending.

The States that do permit payday lending have enacted a wide variety of regulations on payday lending practices—including limits on price, or loan term, all of which reflect the judgments of the various States.

While a few States have enacted general requirements that payday lenders consider a borrower's ability to repay or set loan-to-income percentages,

no State has adopted

mandatory underwriting requirements for payday loans that are similar to those in the 2017 Final Rule.

These jurisdictions are Arizona, Arkansas, Colorado, Connecticut, Georgia, Maryland, Massachusetts, Montana, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Pennsylvania, South Dakota, Vermont, West Virginia, and Washington, DC Ariz. Rev. Stat. section 6-632; Ark. Const. art. XIX, sec. 13;

see

Colo. Legislative Council Staff,

Initiative #126 Initial Fiscal Impact Statement, https://www.sos.state.co.us/pubs/elections/Initiatives/titleBoard/filings/2017-2018/126FiscalImpact.pdf; see also

Colo. Sec'y of State,

Official Certified Results—State Offices & Questions, https://results.enr.clarityelections.com/CO/91808/Web02-state.220747/#/c/C_2

(Proposition 111); Conn. Gen. Stat. 36a-558(d); Ga. Code Ann. 16-17-8; Md. Code Ann. Com. Law 12-306(a)(2)(i); 209 Mass. Regs. Code tit. 209, 26.01; Mont. Code Ann. 31-1-722(2); N.H. Rev. Stat. 399-A:13(XX); N.J. Stat. Ann. 2C:21-19; 2017 N.M. Laws ch. 110 (H.B. 347); N.Y. Penal Law 190.40; N.C. Gen. Stat. 53-281; Ohio Rev. Code Ann. 1321.35 to 1321.48; 7 Pa. Cons. Stat. Ann. 6201 to 6219; S.D. Codified Laws 54-4-44, as amended by Initiated Measure 21 2 (Nov. 8, 2016); Vt. Stat. Ann. tit. 9, 41a; W. Va. Code 32A-3-1(e), 46A-4-107 to 46A-4-113; District of Columbia Laws 17-42 (Act 17-115) 2 (Nov. 24, 2007).

See, e.g.,

82 FR 54472, 54477 & n.25. The 2017 Final Rule cited New Mexico and Ohio as payday authorizing States. At the time the rule was issued, New Mexico had enacted a law which had not yet taken effect, prohibiting short-term payday lending. As of April 27, 2019, Ohio effectively prohibited short-term payday and bans vehicle title lending. New Mexico and Ohio are no longer counted as payday authorizing States.

See

Ohio House Bill 123,

An Act to Modify the Short-Term Loan Act, https://www.legislature.ohio.gov/legislation/legislation-summary?id=GA132-HB-123; https://www.com.ohio.gov/documents/fiin_HB123_Guidance.pdf.

Oklahoma for purposes of this rulemaking is counted as a payday-authorizing State, but SB 720 established August 1, 2020 as the date after which payday loans are banned. Loans of $1,500 or less must have a minimum loan term of 60 days, be repaid in fully amortizing payments of substantially equal amounts, and carry maximum fees of 17 percent per month plus database verification fees,

http://www.oklegislature.gov/BillInfo.aspx?Bill=sb720&Session=1800.

After August 1, 2020, references herein to Oklahoma law may not be applicable. In addition, in 2021, Virginia will no longer be counted as a payday-authorizing State when HB 789 takes effect. Among other things, the bill sets a four month minimum loan term for “short-term” loans,

https://lis.virginia.gov/cgi-bin/legp604.exe?201+sum+HB789&201+sum+HB789.

See, e.g.,

82 FR 54472, 54485-86. In addition to New Mexico and Ohio, voters in Colorado approved a ballot initiative on November 6, 2018, to cap annual percentage rates (APRs) on payday loans at 36 percent. This initiative took effect February 1, 2019, shortly before the release of the 2019 NPRM. Colorado is counted here as a State that prohibits short-term payday lending.

See

Colo. Legislative Council Staff,

Initiative #126 Initial Fiscal Impact Statement, https://www.sos.state.co.us/pubs/elections/Initiatives/titleBoard/filings/2017-2018/126FiscalImpact.pdf; see also

Colo. Sec'y of State,

Official Certified Results—State Offices & Questions, https://results.enr.clarityelections.com/CO/91808/Web02-state.220747/#/c/C_2

(Proposition 111). Until the ballot initiative, Colorado law required that payday loans have a six-month minimum loan term. Colo. Rev. Stat. 5-3.1-103. There was no prohibition on lenders making a single-installment loan due in six months, but all payday lenders reported that they offered only installment loans. 4 Colo. Code Regs. 902-1, Rule 17(B) (2010); State of Colorado, Dep't of Law,

2016 Deferred Deposit/Payday Lenders Annual Report,

question 10,

https://coag.gov/office-sections/consumer-protection/consumer-credit-unit/uniform-consumer-credit-code/general-information/.

As described in note 29 above, Oklahoma will, as of August 1, 2020, prohibit payday lending. In addition, as of January 1, 2020, California caps rates on installment loans of $2,500 to $10,000 at 36 percent plus the Federal Funds Rate,

https://dbo.ca.gov/2019/12/11/new-requirements-for-cfl-licensees/.

California caps rates on smaller installment loans up to $2,500 at 30 percent APR, depending on the loan amount, and also caps payday loan fees as noted above.

See

Cal. Fin. Code section 9:22303.

See

84 FR 4252, 4254.

See

82 FR 54472, 54480-81, 54491. Community Financial Services of America, a trade association representing payday and small-dollar lenders,

includes among its best practices that its members should, before extending credit, “undertake a reasonable, good-faith effort to determine a customer's creditworthiness and ability to repay the loan.”

See

Cmty. Fin. Servs. of Am.,

Best Practices for the Small-Dollar Loan Industry, https://www.cfsaa.com/files/files/CFSA-BestPractices.pdf

(last visited Apr. 28, 2020).

The primary channel through which consumers obtain payday loans, as measured by total dollar volume, is through State-licensed storefront locations, although the share of online loan volume has grown while storefront loan volume has continued to decline. There were an estimated 13,700 storefronts in 2018, down from the industry's peak of over 24,000 stores in 2007.

The decline was due to several factors including industry consolidation, changes in State laws, increased consumer demand for alternative products such as installment loans, and a shift to greater online lending.

See

John Hecht,

State of the Industry: Innovating and Adapting Amongst a Complex Backdrop

(Mar. 2019) (Jefferies LLC, slide presentation) (on file) (Hecht 2019). In the 2017 Final Rule, the Bureau cited the same analyst's estimate of 16,480 payday storefronts in 2015.

See

82 FR 54472, 54480 & n.53.

Hecht 2019.

From 2009 to 2014, storefront payday lending generated approximately $30 billion in new loans per year; by 2018 the volume had declined to $15 billion,

although these numbers may include products other than single-payment loans. Combined storefront and online payday loan volume was $30.5 billion in 2017 and $29.2 billion in 2018,

down from a peak of about $50 billion in 2007.

The online payday loan industry generates about 50 percent of total payday loan revenue.

In 2018, storefront industry revenue (fees paid on payday loans) was $2.1 billion.

Combined storefront and online payday revenue was estimated at $4.8 billion in 2017 and $4.6 billion in 2018,

down from a peak of over $9 billion in 2012.

Reports from several States and publicly traded companies offering payday loans show a shift from payday loans to small-dollar installment loans and other credit products. For example, California and Texas payday loan volume decreased approximately 35 percent from 2015 to 2018; there was a corresponding increase in installment loan volume (of amounts at or below $2,500) of approximately 35 percent over the same period.

Two publicly traded companies offering payday loans reported a significant decrease in the percent of revenue contributed by single-payment or short-term credit products and simultaneous substantial increases in percent of revenue contributed by other credit products.

See id.

John Hecht,

The State of Short-Term Credit Amid Ambiguity, Evolution and Innovation

(2016) (Jefferies LLC, slide presentation) (on file) (Hecht 2016).

See

82 FR 54472, 54487; Hecht 2016.

See

Hecht 2019.

See id.

Hecht 2016.

Calculations were based on total reported volume of single payment transactions and installment transactions for amounts less than $2,500.

See

California Dep't of Bus. Oversight,

California Department of Business Oversight Annual Report and Industry Survey: Operation of Payday Lenders Licensed Under the California Deferred Deposit Transaction Law

for 2015 through 2018,

https://dbo.ca.gov/payday-lenders-publications/

and Texas Office of Consumer Credit Comm'r,

Credit Access Business Annual Data Report

for 2015 through 2018,

https://occc.texas.gov/publications/activity-reports.

At Enova International, a publicly traded online lender, revenue from installment, line of credit, and receivables purchase agreement (small business) products rose from 2 percent to 89 percent from 2009 to 2019, while short-term loan revenue fell from 98 percent to 11 percent. Similarly, at CURO, revenue from installment and open-end line-of-credit products rose from 19 percent to 78 percent from 2010 to 2019.

See

Enova Int'l,

Investor Presentation: November 2019,

at 9 (Nov. 2019),

http://ir.enova.com/download/Enova+Investor+Presentation+%2811-6-2019%29+-+FINAL.pdf

and CURO Group,

November 2019: Stephens Investment Conference,

at 7 (Nov. 13, 2019),

https://ir.curo.com/~/media/Files/C/Curo-IR/reports-and-presentations/stephens-conference-november-2019.pdf.

When the 2019 NPRM was issued, there were at least 12 payday lenders with approximately 200 or more storefront locations,

and, despite the storefront decline, these lenders continue to have significant market share.

The Bureau estimated in 2017 that over 2,400 storefront payday lenders are small businesses as defined by the Small Business Administration (SBA);

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.

84 FR 4252, 4255.

See

Hecht 2019.

82 FR 54472, 54479 & n.52.

See id.

at 54480 & n.53.

Estimates of the number of consumers who use payday loans annually range from 2.2 million households

to 12 million individuals.

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.

See

Fed. Deposit Ins. Corp.,

2017 FDIC National Survey of Unbanked and Underbanked Households,

at 41 (Oct. 2018),

https://www.fdic.gov/householdsurvey/2017/2017report.pdf

(FDIC 2017 Survey). This is a reduction from the 2015 numbers of 2.5 million households cited in the 2017 Final Rule;

see

82 FR 54472, 54479 & n.42 (citing Fed. Deposit Ins. Corp.,

2015 FDIC National Survey of Unbanked and Underbanked Households,

at 2, 34 (Oct. 20, 2016),

https://www.fdic.gov/householdsurvey/2015/2015report.pdf

). The FDIC used the United States Census Bureau's definition of “household” in the Current Population Survey.

See

FDIC 2017 Survey at 73;

https://www.census.gov/programs-surveys/cps/technical-documentation/subject-definitions.html#household.

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.

Community Financial Services of America, a trade association representing payday and small-dollar lenders, states that approximately 12 million Americans use small-dollar loans each year.

See https://www.cfsaa.com/

(last visited Apr. 28, 2020). The 2017 Final Rule pointed to one study estimating, based on administrate State data from three States, that the average payday store served around 500 customers per year. 82 FR 54472, 54480 & n.59 (citing Pew Charitable Trusts,

Payday Lending in America: Policy Solutions,

at 18 (Report 3, 2013),

https://www.pewtrusts.org/-/media/legacy/uploadedfiles/pcs_assets/2013/pewpaydaypolicysolutionsoct2013pdf.pdf

A small percentage of the up to 12 million consumers who take out payday loans each year complain to the Bureau about them. In 2016, for example, the Bureau handled approximately 4,400 complaints in which consumers reported “payday loan” as the complaint product.

The Bureau received approximately 2,900 payday loan complaints in 2017, approximately 2,300 in 2018, and approximately 2,100 in 2019.

Consumers have complained most frequently about unexpected fees

or interest associated with payday loans and in the last two years frequently selected the category “struggling to pay your loan.”

Bureau of Consumer Fin. Prot.,

Consumer Response Annual Report, Jan. 1-Dec. 31, 2016,

at 33 (Mar. 2017),

https://www.consumerfinance.gov/documents/3368/201703_cfpb_Consumer-Response-Annual-Report-2016.pdf.

Bureau of Consumer Fin. Prot.,

Consumer Response Annual Report, Jan. 1-Dec. 31, 2017,

at 34 (Mar. 2018),

https://www.consumerfinance.gov/documents/6406/cfpb_consumer-response-annual-report_2017.pdf;

Bureau of Consumer Fin. Prot.,

Consumer Response Annual Report, Jan. 1-Dec. 31, 2018,

at 62 (Mar. 2019),

https://files.consumerfinance.gov/f/documents/cfpb_consumer-response-annual-report_2018.pdf;

Bureau of Consumer Fin. Prot.,

Consumer Response Annual Report, Jan. 1-Dec. 31, 2019,

at 62 (Mar. 2020),

https://files.consumerfinance.gov/f/documents/cfpb_consumer-response-annual-report_2019.pdf.

To provide a sense of the number of complaints for payday loans relative to the number of complaints for other product categories, in 2019, approximately 0.6 percent of all consumer complaints the Bureau received were about payday loans, and 0.2 percent were about vehicle title loans. Bureau of Consumer Fin. Prot.,

Consumer Response Annual Report, Jan. 1-Dec. 31, 2019,

at 9 (Mar. 2020),

https://files.consumerfinance.gov/f/documents/cfpb_consumer-response-annual-report_2019.pdf.

There is some overlap across product categories, for example, a consumer complaining about the conduct of a debt collector seeking to recover on a payday loan would be in the debt collection product category rather than the payday loan product category.

Bureau of Consumer Fin. Prot.,

Consumer Response Annual Report, Jan. 1-Dec. 31, 2018,

at 64 (Mar. 2019),

https://files.consumerfinance.gov/f/documents/cfpb_consumer-response-annual-report_2018.pdf;

Bureau of Consumer Fin. Prot.,

Consumer Response Annual Report, Jan. 1-Dec. 31, 2019,

at 64 (Mar. 2020),

https://files.consumerfinance.gov/f/documents/cfpb_consumer-response-annual-report_2019.pdf.

2. Single-Payment Vehicle Title Loans

The second major category of loans covered by the Mandatory Underwriting Provisions is single-payment vehicle title loans. As with payday loans, the States have taken different regulatory approaches with respect to single-payment vehicle title loans. Sixteen States permit single-payment vehicle title lending at rates that vehicle title lenders will offer under their business models.

Another six States permit only title installment loans but those loans are not affected by the Mandatory Underwriting Provisions.

Three States (Arizona, Georgia, and New Hampshire) permit single-payment vehicle title loans but prohibit or substantially restrict payday loans.

Although a few States have enacted general requirements that single-payment vehicle title lenders consider a borrower's ability to repay or set loan-to-income percentages,

no State has adopted mandatory underwriting requirements for single-payment vehicle title loans that are similar to those in the 2017 Final Rule.

Alabama, Mississippi, New Hampshire, Oregon, and Tennessee authorize single-payment title lending and Arizona, Delaware, Georgia, Idaho, Louisiana, Minnesota, Missouri, Nevada, Texas, Utah, and Wisconsin authorize both single-payment or installment title lending.

See

Pew Charitable Trusts,

Auto Title Loans—Market Practices and Borrowers' Experiences

(2015),

https://www.pewtrusts.org/~/media/assets/2015/03/autotitleloansreport.pdf

(updated to reflect State law changes since 2015) (Pew Auto Title Loans). As noted in the 2017 Final Rule, New Mexico enacted a law in 2017, effective January 1, 2018, that prohibits single-payment vehicle title loans and allows only installment title lending.

See

82 FR 54472, 54490. As of April 27, 2019, Ohio prohibits lenders from making loans of $5,000 or less secured by a vehicle title or any other collateral.

See https://www.com.ohio.gov/documents/fiin_HB123_Guidance.pdf; see also

Ohio House Bill 123,

An Act to Modify the Short-Term Loan Act, https://www.legislature.ohio.gov/legislation/legislation-summary?id=GA132-HB-123.

See

82 FR 54472, 54490.

See also Credit Practices Rule,

The Bureau also determines that, contrary to the suggestion of some comments, following the approach in

International Harvester

does not require that consumers understand their individualized risk in order for injury to be reasonably avoidable. As noted in that case, reasonable avoidability depends on whether risks are “adequately disclosed.”

152

The Commission did not base its reasonable avoidability determination on whether consumers knew the probability that they would personally experience fuel geysering.

153

Instead, the Commission found the harm not reasonably avoidable because consumers “did not realize that a fuel geyser was possible” and might engage in a dangerous practice (

i.e.,

loosening the fuel cap on farm equipment) “without consciousness of any particular risk.”

154

Thus, the Bureau's current application of reasonable avoidability is consistent with

International Harvester

as it requires consumers to be aware of the particular risks associated with payday lending (such as extended loan sequences, default, etc.) sufficient to

take steps to avoid or mitigate harm from those risks.

152

Int'l Harvester,

104 F.T.C. at 1066.

153

Id.

154

Id.

(“Farmers may have known that loosening the fuel cap was generally a poor practice, but they did not know from the limited disclosures made, nor could they be expected to know from prior experience, the full consequences that might follow from it.”).

Moreover, aside from their criticisms of the Bureau's reading in the 2019 NPRM of certain FTC precedents (which the Bureau does not accept), commenters have not provided a compelling reason why the Bureau should interpret the reasonable avoidability element of section 1031(c)(1)(A) of the Dodd-Frank Act to require payday borrowers to have a specific understanding of their personal risks—such that they can accurately predict how long they will be in debt after taking out a covered short-term or longer-term balloon-payment loan. As the 2019 NPRM explained, the 2017 Final Rule's approach would mean that consumers cannot reasonably avoid injury even if they understand that a significant portion of payday borrowers experience difficulty repaying and that if such borrowers do not take reasonable steps they may either end up in extended loan sequences, default, or struggle to pay other bills after repaying their payday loan. The “focus on a consumer's ability to reasonably avoid injury `stems from the Commission's general reliance on free and informed consumer choice as the best regulator of the market.' ”

155

The Bureau is not persuaded that, if consumers have that level of understanding, they should be viewed as unable to take reasonable steps to avoid that harm. Accordingly, the Bureau does not believe that it should rely upon a legal standard that would treat such consumers as not knowing that they should consider taking steps to reasonably avoid injury.

155

84 FR 4252, 4271 n.242 (quoting

Orkin Exterminating Co.,

849 F.2d at 1365 (quoting

AFSA,

767 F.2d at 976)).

The Bureau also concludes, contrary to the suggestion of some commenters, that the 2019 NPRM did not mischaracterize the 2017 Final Rule's approach to reasonable avoidability. The Bureau acknowledges that the 2017 Final Rule at times used language that was similar to the 2019 NPRM when summarizing the reasonable avoidability standard at a high level of generality.

156

However, as explained in the 2019 NPRM, the 2017 Final Rule actually applied a different legal standard as it relates to payday borrowers. The 2017 Final Rule principally relied on the Bureau's interpretation of limited data from the Mann study regarding borrowers' abilities to predict personal likelihood of reborrowing in assessing whether consumers adequately understood the likelihood and severity of harms. The 2017 Final Rule determined that borrowers lacked requisite understanding because some borrowers were unable to predict their individual likelihood of reborrowing.

157

In other words, the 2017 Final Rule used the Bureau's interpretation of limited data from the Mann study about individual likelihood of reborrowing as a proxy for understanding that is sufficient to alert consumers of the need to take steps to protect themselves from potential payday loan harm. Thus, notwithstanding the 2017 Final Rule's use of some language similar to that used in the 2019 NPRM when generally summarizing the reasonable avoidability standard, in substance the 2017 Final Rule interpreted the standard to require all consumers to have a specific understanding of individualized risk.

156

Compare

82 FR 54472, 54596 (“[U]nless consumers have reason generally to anticipate the likelihood and severity of the injury, and the practical means to avoid it, the injury is not reasonably avoidable.”),

with

84 FR 4252, 4270 (“[I]njury is reasonably avoidable if payday borrowers have an understanding of the likelihood and magnitude of risks of harm associated with payday loans sufficient for them to anticipate those harms and understand the necessity of taking reasonable steps to prevent resulting injury.”).

157

See

82 FR 54472, 54597-98.

Moreover, contrary to the suggestions of some commenters, the 2019 NPRM did not omit the standard's requirement that consumers must appreciate the “likelihood and magnitude” of risk. The 2019 NPRM stated that the Bureau preliminarily concluded that injury is reasonably avoidable if payday borrowers have an understanding of the likelihood and magnitude of risks of harm associated with payday loans sufficient for them to anticipate those harms and understand the necessity of taking reasonable steps to prevent resulting injury.

158

The 2019 NPRM elaborated that this requires that consumers understand that a

significant portion

of payday borrowers experience difficulty repaying and that if such borrowers do not make other arrangements they either end up in

extended loan sequences, default, or struggle to pay other bills after repaying their payday loan.

159

The Bureau notes that if consumers understand that a significant portion of payday borrowers experience adverse outcomes, they grasp the likelihood of risk. If consumers understand the potential outcomes arising from difficulty repaying, they appreciate the magnitude of those risks.

158

84 FR 4252, 4270.

159

Id.

(emphasis added).

However, the Bureau agrees with comments that consumers must not only have a sufficient awareness of the risk of significant injury, but they also must have reasonable steps they can take to avoid that injury. The 2019 NPRM recognized that the means to avoid injury is a necessary component of the reasonable avoidability standard.

160

The Bureau discusses its application to covered loans below.

160

See id.

at 4269 (citing

Davis,

691 F.3d at 1168).

The Bureau does not regard as significant the considerations of the efficacy of disclosures discussed in

International Harvester.

161

What is significant is that

International Harvester

stands for the proposition that harm is reasonably avoidable if consumers have requisite understanding of risks related to a product. The Bureau's revised application of the reasonable avoidability standard is more consistent with

International Harvester

as it incorporates criteria that would indicate whether consumers have a requisite understanding.

161

See

104 F.T.C. at 1054.

International Harvester

is not entirely clear on whether the disclosure in question was efficacious.

See id.

at 1006 n.165 (the alternative disclosure “would have been the most effective [ ] warning up to that time, had it been adequately disseminated . . . . It did communicate the fact that a hazard existed and the principal steps an operator should take to avoid it.”).

Accordingly, the Bureau concludes that the 2017 Final Rule applied a problematic standard for reasonable avoidability under section 1031(c)(1)(A) of the Dodd-Frank Act and adopts the better interpretation of reasonable avoidability set forth in the 2019 NPRM.

Final Rule—Consumer Understanding of Risk of Harm

Applying the revised standard for reasonable avoidability pursuant to section 1031(c)(1)(A) of the Dodd-Frank Act, the Bureau concludes that there is not a sufficient evidentiary basis for the Bureau to conclude that consumers cannot reasonably avoid substantial injury from lenders making covered short-term and longer-term balloon-payment loans without assessing borrowers' ability to repay the loan according to its terms.

As discussed in part V.B.2 below of this preamble, the 2019 NPRM proposed and the Bureau finalizes a determination that evidence is only sufficient for purposes of finding that injury is not reasonably avoidable if that evidence is robust and reliable, in light of the dramatic impacts of the Rule on the payday market. Thus, the relevant question here is whether there is robust and reliable evidence for that finding, under the Bureau's revised standard for reasonable avoidability.

162

The Bureau does not make any comment as to the appropriate evidentiary standard that would apply to unfairness citations or claims brought through the enforcement or the supervisory process.

The Bureau concludes that the 2019 NPRM provided a reasoned explanation for reconsidering the 2017 Final Rule's finding on reasonable avoidability. Specifically, the 2017 Final Rule's determination that a significant population of consumers do not understand the risks of substantial injury from covered loans is not adequately supported. The Bureau's determination was primarily extrapolated from its own interpretation of limited data from the Mann study. In support of its finding of lack of understanding, the 2017 Final Rule emphasized that “consumers who experience long sequences of loans often do not expect those long sequences to occur when they make their initial borrowing decision.”

163

In its reasonable avoidability analysis, the 2017 Final Rule did not significantly rely on other evidence of consumer understanding with respect to covered loans. The 2017 Final Rule's broad pronouncement about consumer understanding is based on evidence that goes to the different question of whether consumers can predict their individual likelihood of reborrowing, rather than to the question of whether consumers understand the magnitude and likelihood of risk of harm associated with covered loans sufficient for them to anticipate that harm and understand the necessity of taking reasonable steps to prevent resulting injury. Thus, the evidence that the 2017 Final Rule presented on consumer understanding does not satisfy the reasonable avoidability analysis pursuant to the Bureau's better interpretation of section 1031(c)(1)(A).

163

82 FR 54472, 54617.

The Bureau concludes that other studies, such as the Martin study,

164

which found that most consumers cannot identify the precise APR or dollar cost of their payday loans, only suggest a lack of understanding as to specific features of payday loans. These studies do not ask the direct and relevant question of whether consumers understand the magnitude and likelihood of risk of harm associated with covered loans sufficient for them to anticipate that harm and understand the need to take steps to avoid injury.

164

Nathalie Martin,

1,000% Interest—Good While Supplies Last: A Study of Payday Loan Practices and Solutions,

52 Ariz. L. Rev. 563 (2010). This study is discussed further below.

Other lender behavior or structural or behavioral factors that can impact consumer understanding do not bear on the reasonable avoidability of the identified practice. Citing, among other things, Bureau enforcement and supervisory activities, numerous commenters identified covered lender behavior that may cause consumer harm or hinder consumer choice. The behavior that allegedly produces these effects included steering borrowers into unaffordable reborrowing, preventing borrowers from self-amortizing, engaging in deceptive advertising or marketing, and failing to comply with State laws. The Bureau notes that, depending on the facts and circumstances, some of this behavior could violate Federal consumer financial law. The Bureau has cited covered lenders for similar acts or practices in the past.

165

But there can be unlawful or harmful practices by some market participants in all markets, and that does not establish that other practices—specifically here lenders' failure to assess the ability to repay—in those markets is unlawful. The Bureau concludes that the existence of other practices in the markets for covered loans that could be harmful to consumers or violate other laws does not establish that the harm from a lender's decision to lend without assessing a borrower's ability to repay is itself not reasonably avoidable.

165

See, e.g., Consumer Fin. Prot. Bureau

Navient Corp.,

No. 3:17-cv-00101-RDM (M.D. Penn. Jan. 18, 2017),

https://www.consumerfinance.gov/documents/2297/201701_cfpb_Navient-Pioneer-Credit-Recovery-complaint.pdf.

The Bureau has also filed lawsuits against payday lenders for deceptive advertising.

See, e.g.,

Press Release, Bureau of Consumer Fin. Prot.,

CFPB Takes Action Against Moneytree for Deceptive Advertising and Collection Practices

(Dec. 16, 2016),

https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-moneytree-deceptiveadvertising-and-collection-practices/.

Further, the Bureau declines to infer from the conclusion that making payday loans without assessing the ability to repay causes or is likely to cause substantial injury (a conclusion from the 2017 Final Rule the Bureau assumed to be correct for purposes of the unfairness analysis in the 2019 NPRM) the further conclusion that consumers cannot reasonably avoid that injury. While the same facts in a rulemaking record may support conclusions as to each of the three elements of unfairness, to identify a practice as unfair the Bureau must separately analyze and find adequate support for each of these three elements. As discussed above, the Bureau based its conclusion on the evidence in the record that was the most direct and most probative on the question of reasonable avoidability. Having done so, the Bureau declines to rely on indirect and less probative evidence, including that drawn from inferences as some commenters have suggested.

The Bureau also declines to follow recommendations that it give further consideration to behavioral factors. The 2017 Final Rule considered whether behavioral economics factors make it difficult for consumers to understand the implications of taking out a covered loan.

166

However, these considerations did not form an independent basis for the 2017 Final Rule and, as set out in the 2019 NPRM, the Bureau need not address them.

166

The Bureau in the 2017 Final Rule cited research stating that certain consumer behaviors may make it difficult for them to predict accurately the future implications of taking out a covered short-term or longer-term balloon-payment loan. As the Bureau made clear, however, this research helped to explain the Bureau's findings from the Mann study but was not in itself an independent basis to conclude that consumers do not predict whether they will remain in reborrowing sequences. 82 FR 54472, 54571 (explaining that “[r]egardless of the underlying explanation, the empirical evidence indicates that many borrowers who find themselves ending up in extended loan sequences did not expect that outcome”).

With respect to the 2019 NPRM's preliminary determination that goes beyond withdrawing the 2017 Final Rule's reasonable avoidability determination and posited that consumers affirmatively have the requisite understanding of the likelihood and magnitude sufficient for any harm to be reasonably avoidable, the Bureau has decided it is not necessary to finalize this determination. As discussed above, the Bureau has concluded that robust and reliable evidence in the rulemaking record does not support the 2017 Final Rule's determination that payday borrowers cannot reasonably avoid substantial injury from lenders not assessing their ability to repay their loans.

Accordingly, the Bureau concludes that the Mandatory Underwriting Provisions at 12 CFR part 1041 must be revoked in light of the Bureau's determination to revoke the 2017 Final Rule's finding that consumers lack sufficient understanding of the likelihood and magnitude or risks of covered loans such that they cannot reasonably avoid substantial injury from lenders making covered short-term and longer-term balloon-payment loans without assessing borrowers' ability to repay.

Final Rule—Means To Avoid Harm

As explained above, the revised reasonable avoidability standard adopted by the Bureau in this final rule requires that covered loan borrowers have an understanding of the likelihood and magnitude of risks of harm associated with payday loans sufficient for them to anticipate those harms and understand the necessity of taking

reasonable steps to prevent resulting injury. The requirement that consumers “understand the necessity of taking reasonable steps to prevent injury” presupposes that reasonable steps exist and are available to the consumer,

i.e.,

there are practical means to avoid harm. The Bureau concludes that the evidence in the record does not support the conclusion in the 2017 Final Rule that, even assuming consumers were adequately aware of the risk of substantial injury from the failure of lenders to assess their ability to repay, consumers could not take reasonable steps to prevent or mitigate that injury. The Bureau reaches this conclusion in part based on the fact that consumers continue to have access to short-term credit in States where covered loans are prohibited or severely restricted as well as on the expanding availability of alternatives to payday and other covered loans in the marketplace.

The 2017 Final Rule found that “once borrowers find themselves obligated on a loan they cannot afford to repay,” the resulting injury is “generally not reasonably avoidable

at any point thereafter,”

because after that point the relevant long-term borrowers lack the means to avoid injury.

167

The Bureau has not sought to reconsider that determination in this rulemaking. However, the 2017 Final Rule did not assert that that determination was by itself

sufficient

to support its finding that injury was not reasonably avoidable

overall.

It is well-established that consumers can reasonably avoid injury through either “anticipatory avoidance” or “subsequent mitigation,” so a finding that consumers lack the means to avoid injury at a later time is not generally sufficient if they could do so at an earlier time.

168

And the 2017 Final Rule did not rest its reasonable avoidability analysis on a finding that consumers lack the means to avoid injury before they have taken out any covered loans. Instead, the 2017 Final Rule explained that the “heart of the matter here is consumer perception of risk,” and whether borrowers are in a position before taking out covered loans “to gauge the likelihood and severity of the risks they incur.”

169

It is that critical issue from the 2017 Final Rule that the 2019 NPRM reconsidered.

167

82 FR 54472, 54598 (emphasis added).

168

Orkin Exterminating Co.,

849 F.2d at 1365 (quoting

Orkin Exterminating Co.,

108 F.T.C. at 366).

169

82 FR 54472, 54597.

The Bureau does not find persuasive these arguments in these comments that before consumers have taken out any payday loans they lacked the ability to take reasonable steps to avoid injury from the lenders' failure to assess their ability to repay.

Consumers generally have viable alternatives to payday loans, which is evidenced by the fact that millions of consumers live in States where covered loans are prohibited or severely restricted and these consumers obtain access to other alternative forms of credit.

170

Evidence submitted by commenters that payday loan alternatives are consistently expanding are persuasive and confirmed by the Bureau's market monitoring. These alternatives include credit offered by fintechs, credit unions, and other mainstream financial institutions.

171

Consistent with their incentive to make a profit, creditors who offer products that compete with payday loans engage in marketing and advertising to make consumers aware of the availability of their products.

170

See

discussion at part II.A.1. For example, Colorado is one State where payday loans are restricted. Following its reform, the number of payday lenders in Colorado substantially contracted, but the lending volume remained stable and the cost of loans dropped.

See

Pew Charitable Trusts,

Trial, Error, and Success in Colorado's Payday Lending Reforms

(Dec. 2014),

https://www.pewtrusts.org/~/media/assets/2014/12/pew_co_payday_law_comparison_dec2014.pdf.

171

See, e.g.,

Fin. Health Network,

Financially Underserved Market Size Study 2019,

at 6 (2019),

https://finhealthnetwork.org/research/2019-financially-underserved-market-size-study/

(noting the transition in small-dollar credit markets away from payday and title loans toward installment loans); CURO Group,

Presentation at Jefferies Consumer Finance Summit,

at 9 (Dec. 2018),

https://ir.curo.com/events-and-presentations

(19 percent of a prominent payday lender's revenue came from multi-payment loans in 2010, but by the third quarter of 2018, that figure had quadrupled to 77 percent); Pew Charitable Trusts,

From Payday to Small Installment Loans: Risks, Opportunities, and Policy Proposals for Successful Markets

(Aug. 2016),

https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2016/08/from-payday-to-small-installment-loans

(noting that non-bank small-dollar lenders already offered installment loans in 26 of 39 States where they operated).

Consumers do not lack the practical ability to take advantage of these alternatives. Arguments based on behavioral factors that attempt to explain why borrowers may not seek out readily available covered loan alternatives are hypothetical and do not compellingly rebut available real-world evidence to the contrary. Further, that consumers may choose payday and other covered loans over other credit options because payday loans are ubiquitous and convenient is not evidence of a lack of alternatives. It is consistent with some consumers preferring payday or other covered loans based on speed and convenience of the borrowing process, easy loan approval, the ability to take out a loan without a traditional credit check, or other considerations as some commenters suggested.

And contrary to some comments, the Bureau's approach would not make any harm reasonably avoidable simply because a consumer can decline a product or service. The small-dollar loan market is not comparable to the circumstances addressed in

AFSA,

where the court found that industry-wide use of boilerplate provisions prevented consumers from making meaningful efforts to identify alternatives that did not feature those provisions.

172

Consumers in the market for covered loans do not face a take-it-or-leave-it choice; they can potentially access formal credit options with varied terms and conditions and other informal credit options, such as borrowing from family and friends.

173

172

AFSA,

767 F.2d at 977.

173

See

Pew Charitable Trusts,

Payday Lending in America: Who Borrows, Where They Borrow, and Why,

at 16-28,

https://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/pewpaydaylendingreportpdf.pdf.

Regarding comments that consumers cannot avoid injury after they take out a loan, are trapped in an extended sequence, and are unable to repay, the Bureau acknowledges, as it did in the 2017 Final Rule, that some borrowers in extended sequences suffer financial harm. But the identified unfair practice pertains to lender conduct when borrowers are making an initial decision to take out a new loan. The fact that some subgroup of borrowers may have limited options at a later point in a repayment cycle does not negate the fact that all consumers had alternatives to covered loans before taking out an initial loan, which is the relevant inquiry where the identified practice and related rule provisions apply to all covered loans to all consumers.

Conclusion

Accordingly, as discussed above, the Bureau is withdrawing the conclusion in the 2017 Final Rule that any substantial injury from lenders making covered short-term and longer-term balloon-payment loans without assessing borrowers' ability to repay the loan according to its terms is not reasonably avoidable.

2. Reconsidering the Evidence for the Factual Analysis of Reasonable Avoidability in Light of the Impacts of the Mandatory Underwriting Provisions

The Bureau has decided to adopt a different, better interpretation of the level of understanding that payday borrowers need in order to reasonably avoid injury, as discussed in part V.B.1.

But independent of that interpretive question, the Bureau has concluded that it should withdraw the 2017 Final Rule's determination regarding reasonable avoidability because it was supported by insufficiently robust and reliable evidence. The Bureau believes that more robust and reliable evidence for this key determination should be required, in light of the impacts of the Mandatory Underwriting Provisions would have on the market.

a. Background on the Impacts of the Mandatory Underwriting Provisions

Before reconsidering the evidence supporting the 2017 Final Rule's determinations below in parts V.B.2.c and V.B.2.d, the Bureau discusses the dramatic impacts of the Mandatory Underwriting Provisions that give rise to the Bureau's application of the robust and reliable evidence standard. The Bureau stated and explained in the 2019 NPRM its preliminary belief that the Mandatory Underwriting Provisions would have “dramatic impacts” on the market.

174

As the 2019 NPRM explained, the section 1022(b)(2) analysis for the 2017 Final Rule observed that the primary impacts of the Rule on covered persons derived mainly from the restrictions on who could obtain payday and single-payment vehicle title loans and the number of such loans that could be obtained. To simulate the impacts of the Mandatory Underwriting Provisions, the section 1022(b)(2) analysis for the 2017 Final Rule assumed, on the basis of a number of studies by the Bureau and outside researchers concerning payday borrowers, that only 33 percent of current payday and vehicle title borrowers would be able to satisfy the Rule's ability-to-repay requirements when initially applying for a loan and that for each succeeding loan in a sequence only one-third of borrowers would satisfy the mandatory underwriting requirement (

i.e.,

11 percent of current borrowers for a second loan and 3.5 percent for a third loan).

175

Applying these assumptions to data with respect to current patterns of borrowing and reborrowing, the section 1022(b)(2) analysis estimated that, absent the principal step-down exemption in § 1041.6, the Mandatory Underwriting Provisions of the Rule would reduce payday loan volume and lender revenue by approximately 92 to 93 percent relative to lending volumes in 2017 and vehicle title volume and lender revenue by between 89 and 93 percent.

176

Factoring in the expected effects of the novel principal step-down exemption, and assuming that payday lenders would endeavor to take full advantage of that novel exemption before seeking to qualify consumers for a loan under the mandatory underwriting requirements of § 1041.5, the analysis estimated that the Mandatory Underwriting Provisions would result in a decrease in the number of payday loans of 55 to 62 percent and, because of the step-down feature of the principal step-down exemption, a decrease in payday lender revenue of between 71 and 76 percent.

177

174

84 FR 4252, 4264.

175

82 FR 54472, 54826-34.

176

Id.

at 54826, 54834.

177

Id.

at 54826. Given that short-term vehicle title loans are not eligible for the principal step-down exemption, the analysis estimated that the Mandatory Underwriting Provisions would result in a decrease in the number of short-term vehicle title loans of between 89 and 93 percent, with an equivalent reduction in loan volume and revenue.

Id.

at 54834.

The section 1022(b)(2) analysis that accompanied the 2017 Final Rule stated that these revenue impacts would have a substantial effect on the market. The analysis projected that unless lenders were able to replace their reduction in revenue with other products, there would be a contraction in the number of storefronts of similar magnitude to the contraction in revenue,

i.e.,

a contraction of between 71 and 76 percent for storefront payday lenders and of between 89 and 93 percent for vehicle title lenders.

178

Id.

at 54835.

The section 1022(b)(2) analysis for the 2017 Final Rule identified a number of impacts that the Mandatory Underwriting Provisions would have on consumers' ability to access credit. Specifically, the analysis estimated that approximately 6 percent of existing payday borrowers would be unable to initiate a new loan because they would have exhausted the loans permitted under the principal step-down exemption and would not be able to satisfy the ability-to-repay requirement.

179

The section 1022(b)(2) analysis that accompanied the 2017 Final Rule identified, but did not quantify, certain other potential impacts of the Mandatory Underwriting Provisions on consumers' access to credit. Consumers seeking to borrow more than $500 after the 2017 Final Rule's compliance date may find their ability to do so limited because of the cap on the initial loan amount under the principal step-down exemption and because of the impact of the Rule on vehicle title loans, which tend to be for larger amounts.

180

Additionally, because of the principal step-down feature of the exemption, consumers obtaining loans under that exemption would be forced to repay their loans more quickly than they are required to do today. The analysis stated that 40 percent of the reduction in payday revenue estimated to result from the Mandatory Underwriting Provisions would be the result of the cap on loan sizes under the principal step-down exemption and the remainder would be the result of the restriction on the number of loans available to consumers under that exemption coupled with the mandatory underwriting requirement for any additional loans.

181

Finally, the analysis concluded, based on research concerning the implementation of various State regulations, that although the reduction in the number of storefronts would not substantially affect consumers' geographic access to payday locations in most areas, a small share of potential borrowers would lose easy access to stores.

182

179

Id.

at 54840. Vehicle title borrowers would be more likely to be unable to obtain an initial loan because the principal step-down exemption does not extend to such loans.

Id.

The analysis noted that while those borrowers could pursue a payday loan, there are three States that permit some form of vehicle title loans (either single-payment or installment) but not payday loans and that 15 percent of vehicle title borrowers do not have a checking account and thus may not be eligible for a payday loan.

Id.

180

Id.

at 54841.

181

Id.

182

Id.

at 54842 & n.1224. Research conducted by the Bureau had found that in one State where regulatory restrictions resulted in a substantial contraction of payday stores, the median distance between stores in counties outside of metropolitan areas increased from 0.2 miles to 13.9 miles. Supplemental Findings at 87.

The section 1022(b)(2) analysis that accompanied the 2017 Final Rule went on to observe that consumers who are unable to obtain a new loan because they cannot satisfy the Rule's mandatory underwriting requirement or cannot qualify for a loan under the principal step-down exemption will have reduced access to credit. They may be forced at least in the short term to forgo certain purchases, incur high costs from delayed payment of existing obligations, incur high costs and other negative impacts by defaulting on bills, or they may choose to borrow from sources that are more expensive or otherwise less desirable.

183

Some borrowers may overdraft their checking accounts; depending on the amount borrowed, an overdraft on a checking account may be more expensive than taking out a payday or single-payment vehicle title loan.

184

Similarly, “borrowing” by

paying a bill late may lead to late fees or other negative consequences like the loss of utility service.

185

183

See

82 FR 54472, 54841.

184

Id.

185

Id.

b. The Bureau's Decision To Require Robust and Reliable Evidence of the Reasonable Avoidability Element in Light of the Potential Dramatic Impacts of the Mandatory Underwriting Provisions at 12 CFR Part 1041

The Bureau's Proposal

As explained above, were compliance with the Mandatory Underwriting Provisions of the 2017 Final Rule to become mandatory,

186

the provisions would have the effect of eliminating most covered short-term and longer-term balloon-payment loans. In the 2019 NPRM, the Bureau stated its preliminary view that if a rule could have such dramatic impacts on consumer choice and access to credit, then it would be reasonable under the Dodd-Frank Act and prudent to have robust and reliable evidence to support the key finding that consumers cannot reasonably avoid injury (for purposes of the unfairness standard in Dodd-Frank Act section 1031(c)).

187

Similarly, the 2019 NPRM set forth the Bureau's preliminary view that it would be reasonable under the Dodd-Frank Act and prudent to have robust and reliable evidence to support key findings of consumers' lack of understanding (for purposes of the abusiveness standard in Dodd-Frank Act section 1031(d)(2)(A)) and inability to protect their own interests (for purposes of the abusiveness standard in section 1031(d)(2)(B)).

188

186

As noted above, the Bureau published in June 2019 a final rule delaying the compliance date for the Mandatory Underwriting Provisions to November 19, 2020.

See

84 FR 27907.

187

84 FR 4252, 4264.

188

Id.

Comments Received

In comments on the 2019 NPRM, consumer groups and others stated that the 2017 Final Rule will not have a dramatic impact on consumers' access to credit, because loan providers will respond to the rule by shifting from providing short-term loans to providing longer-term installment loans, which are not covered by the 2017 Final Rule's Mandatory Underwriting Provisions.

189

Notably, these comments from consumer groups support the Bureau's point in part V.B.1 above that consumers in these markets have alternatives to payday loans and as a result have the means to avoid any harm from the loans.

Industry commenters and others stated that a shift from short-term loans to longer-term installment loans would itself be a dramatic impact on how credit is provided, consumer choice, and consumer access to credit, sufficient to justify the Bureau's policy decision to adopt the robust and reliable standard. These commenters also noted that payday loans have traditionally been regulated by State law, and the 2017 Final Rule therefore raises federalism issues. These commenters stated that these federalism issues constitute another reason to require robust and reliable evidence in support of the 2017 Final Rule.

Consumer group commenters and others stated that the 2017 Final Rule is a final rule adopted by the Bureau and, as such, is now the baseline for determining the impact of Bureau rulemakings on a going-forward basis. And, they stated, revoking the 2017 Final Rule is itself a full rulemaking action that has the same magnitude of impact as the 2017 Final Rule, except in the opposite direction. They reason that the Bureau cannot finalize the 2019 NPRM unless the evidence on which the Bureau now relies satisfies the “robust and reliable” standard the Bureau cited in the 2019 NPRM for re-evaluating the evidence supporting the 2017 Final Rule. Further, these commenters stated, the 2019 NPRM did not provide evidence sufficient to support revocation of the Mandatory Underwriting Provisions pursuant to the rulemaking requirements of the APA, and that action would, if finalized, be arbitrary and capricious under the APA.

Consumer groups and others also stated that a Bureau determination to require robust and reliable evidence for rules that have a dramatic impact on consumer choice and access to credit will make it harder for the Bureau to adopt consequential rules addressing consumer harm in the future.

Final Rule

After reviewing the comments received, the Bureau finds that its preliminary determination that the Mandatory Underwriting Provisions of 12 CFR part 1041 would eliminate most covered short-term and longer-term balloon-payment loans was correct. The Bureau also concludes that eliminating such loans would have a dramatic impact on consumer choice and access to credit. Accordingly, the Bureau determines that the 2017 Final Rule would have a dramatic impact on consumer choice and access to credit that consumers prefer.

In light of this dramatic impact, the Bureau determines that it is reasonable and prudent to have robust and reliable evidence to support the key finding that consumers cannot reasonably avoid injury (for purposes of the unfairness standard in Dodd-Frank Act section 1031(c)). Similarly, the Bureau determines that it is reasonable and prudent to have robust and reliable evidence to support key findings of about consumers' lack of understanding (for purposes of the abusiveness standard in Dodd-Frank Act section 1031(d)(2)(A)) and inability to protect their own interests (for purposes of the abusiveness standard in section 1031(d)(2)(B)). Those abusiveness determinations are further addressed in part VI below.

In making these determinations, the Bureau has not relied upon the federalism concerns about the 2017 Final Rule raised by some commenters. (Of course, the effect of the Bureau's decision to revoke the Mandatory Underwriting Provisions for the reasons set forth herein is to leave existing State approaches in place, some of which reflect a preference to allow their citizens' access to payday loans.)

The Bureau does not agree with some commenters' characterization of the Bureau's policy choice in requiring robust and reliable evidence as being arbitrary and capricious. The Bureau makes this policy choice in the context of Dodd-Frank Act section 1031(c)(1)(A), which provides that the Bureau cannot identify an unfair practice unless there is substantial injury that is “not reasonably avoidable by consumers.” As the 2019 NPRM notes, this element is premised on the fact that “[n]ormally we expect the marketplace to be self-correcting, and we rely on consumer choice—the ability of individual consumers to make their own private purchasing decisions without regulatory intervention—to govern the market.”

190

As a policy matter, the Bureau believes that this principle of respecting consumer choice is especially important where, as here, regulatory action by the Bureau could result in dramatic impacts on consumer choice and access to the credit that consumers prefer. Thus, in exercising the Bureau's discretion to determine whether there is sufficient evidence that consumers cannot reasonably avoid injury here, the Bureau believes that such evidence should be robust and reliable. (And, although abusiveness is a much newer standard than unfairness, the Bureau believes that similar reasoning applies in this rulemaking to abusiveness' “lack of understanding” and “inability to protect” elements. Those abusiveness elements are similarly threshold determinations of consumer vulnerability that must be made before regulatory intervention is

appropriate. The Bureau discusses those abusiveness elements in part VI.C below.) In doing so, the Bureau need not and has not attempted to provide an abstract definition of the terms “robust” or “reliable” beyond their commonly understood meanings. The measure of whether evidence is robust and reliable is whether, as a practical matter, the evidence gives the Bureau a level of confidence in the Bureau's conclusion that is commensurate with the dramatic impacts on consumer choice and access to credit that are at stake here.

190

See

FTC Unfairness Policy Statement,

Int'l Harvester,

104 F.T.C. at 1074.

The Bureau disagrees with the argument by some commenters that requiring robust and reliable evidence in this context will make it harder for it to adopt consequential rules addressing consumer harm in the future. In this final rule, the Bureau has made a determination to require robust and reliable evidence to satisfy the “not reasonably avoidable,” “lack of understanding,” and “inability to protect” elements in the context of regulatory provisions that would have a dramatic impact on consumer choice and access to credit. The policy considerations underpinning this rulemaking might, or might not, be relevant to evaluation of the evidence in future Bureau rules. The Bureau has made this determination consistent with the requirements of the Administrative Procedure Act and the evidentiary record and is explaining its basis for that determination after a full notice-and-comment process.

The comments suggesting that the Bureau needs to have robust and reliable evidence to prove that consumers

can

reasonably avoid injury in order to finalize this rule misunderstand the Bureau's approach. The Bureau is reconsidering the evidentiary basis for its prior determination that consumers cannot reasonably avoid injury, not seeking to establish that consumers can reasonably avoid injury. Further, this approach is entirely consistent with the statutory scheme. Under that scheme, consumers' choices in the marketplace are respected, absent a determination that they cannot reasonably avoid injury. And the Bureau's policy of requiring robust and reliable evidence is based on caution about potentially interfering with consumers' decision-making in the payday market on a massive scale.

Nor are commenters correct that the Bureau is violating the APA by not offering sufficient

new

evidence in support of this final rule. The Bureau is reconsidering the conclusions regarding unfairness (and abusiveness) that it previously drew from the evidentiary record, and the Bureau is explaining the basis for that reconsideration after a full notice-and-comment process, consistent with the APA. Under section 1031 of the Dodd-Frank Act, consumers' choices in the marketplace are respected, absent a threshold determination that they cannot reasonably avoid injury (or lack understanding or are unable to protect their own interests).

c. The Mann Study and the Findings Based On It

The Bureau's Proposal

In the 2019 NPRM, the Bureau preliminarily found that the 2017 Final Rule's interpretation of limited data from the Mann study was not sufficiently robust and reliable, in light of the 2017 Final Rule's dramatic impacts in restricting consumer access to payday loans, to be the linchpin for the 2017 Final Rule's conclusion that consumers could not reasonably avoid harm. Specifically, this limited data does not support the determination that many payday loan consumers lack a specific understanding of their personal risks and cannot accurately predict how long they will be in debt after taking out covered short-term or longer-term balloon-payment loans.

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The 2017 Final Rule's finding that consumers do not have a specific understanding of their personal risks of reborrowing was a necessary predicate to its determination that consumers cannot reasonably avoid the substantial injury that the 2017 Final Rule asserted that consumers incur from payday loans (per the unfairness standard set forth in Dodd-Frank Act section 1031(c)(1)(A)). The finding was also a necessary predicate to the 2017 Final Rule's determination that consumers do not understand the material risks, costs, or conditions of such loans (per the abusiveness standard set forth in Dodd-Frank Act section 1031(d)(2)(A)).

The 2019 NPRM preliminarily found that the Bureau's interpretation of limited data from the Mann study was not sufficiently reliable because the Mann study involved a single payday lender in just five States and was administered at a limited number of locations.

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The 2019 NPRM stated that a study focusing on a single lender or limited number of lenders may not be representative of the variety of payday lenders across the United States. In addition, it stated, these five States also are not necessarily representative of payday lending nationally.

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Because consumer understanding and expectations may be informed by the information consumers are provided—and because that information can vary from lender to lender and State to State

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—the 2019 NPRM preliminarily concluded that the Bureau's interpretation of limited data from the Mann study is not a sufficiently robust and reliable basis to make general findings about all lenders making payday loans to all borrowers in all States.

192

See

Mann study at 116.

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The Mann study noted that rollover loans are technically prohibited in all five of the States in which payday borrowers were surveyed.

Id.

at 114. Further, same-day rollover transactions are not possible in Florida, which has a 24-hour cooling-off period, and are limited in Louisiana, which permitted rollovers only upon partial payment of the principal.

Id.

Over half of the survey participants were in Florida and Louisiana alone.

Id.

at 117 & tbl. 1.

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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).

Comments Received

Industry commenters and others stated that the single lender and the five States represented in the limited data from the Mann study are not representative of payday lending nationally and that the Bureau's interpretation of that data is not sufficiently robust and reliable to serve as the basis for findings about all lenders and all borrowers in all States. These commenters (including Professor Mann himself) also stated that the 2019 NPRM correctly interpreted the Mann study as indicating that most payday loan consumers have a reasonable understanding of their loans. They also stated that, because longer-term reborrowers are typically more financially distressed consumers, it is plausible that they are more constrained in their credit options and less able to accurately predict when or if they can repay a loan. Thus, even if longer-term borrowers generally have the same level of understanding of the costs and risks of payday loans as shorter-term borrowers, their predictions of their loan-sequence length will reflect a greater amount of error than will those of shorter-term borrowers.

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Additionally, at least one commenter stated that the Mann study participants with long loan sequences were only 12 percent of sampled borrowers, or 62 people, and that that number was not an adequate sample to support the 2017 Final Rule's position that consumers lack understanding of payday loans. However, the share of borrowers who gave an answer to how long they expected to borrow is not relevant, because all consumers who ended up in sequences more than 200 days long failed to make a numeric prediction at the beginning of their debt cycle. Further, these commenters were incorrect as factual matter. Specifically, the actual number of borrowers in question was 12 percent of the 1,300 borrowers sampled, or about 156 borrowers (plus the consumers in sequences more than 200 days long, none of whom provided responses). The commenter improperly multiplied that 12 percent of 1,300 (or 156) by 40 percent, which was the 40 percent of borrowers who said they expected to continue borrowing after their current loan's initial due date.

Consumer group commenters and others stated that the Mann study is

sufficiently robust and reliable to support the conclusion that consumers cannot reasonably avoid harm from the identified practice, for the following reasons. First, lenders tend to be uniform in relevant ways: Loan structure, marketing, encouragement of rollovers, and concentration of revenue from those borrowers who engage in extended loan sequences. Also, these commenters stated, the Mann study itself notes that the payday loan products of the one lender the study involved are typical of large storefront lenders. Thus, they said, the fact that the Mann study involved a single lender is not necessarily problematic. Second, the five States included in the study comprise over a quarter of the nation's payday loan market. The five States account for over $1 billion in payday fees annually or roughly 27 percent of total fees collected by payday lenders each year. Further, the population of these five States represents 32 percent of the population of the States that authorize payday lending. Third, the Mann study itself discusses the five States' rollover bans and crafts its survey question to control for the fact that the States prohibited rollovers. Fourth, rollover bans are common in payday loan States and the bans do not change consumer behavior;

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it is therefore unlikely that they would affect the accuracy of consumers' predictions. And fifth, consumer group commenters stated that the Bureau could have tested the representativeness of the data from the Mann study by reviewing data in its possession. Specifically, these commenters said, the Bureau has loan-level data from multiple lenders and should have analyzed whether or not sequence lengths or renewal rates vary significantly across lenders before asserting that consumer outcomes at one lender's outlets are not representative. These commenters noted that the Bureau's March 2014 payday lending data point analyzed borrower outcomes across States with different restrictions on rollovers and found virtually no difference in renewal rates between States that had no restrictions and those that either prohibited rollovers or required waiting periods between loans. These findings, the commenters stated, indicate that greater geographic coverage beyond the five States in question would not have led to different findings than using the data from the Mann study.

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The commenters stated that approximately 16 States ban rollovers (approximately half of the States that permit short-term payday lending) while approximately another 10 States limit rollovers or have similar restrictions. They further stated that rollover bans and short cooling-off periods between loans demonstrably have little impact on reborrowing rates. And, rollover bans are particularly irrelevant in the five States in the Mann study, because none of those States has a meaningful cooling-off period, meaning that their ban on rollovers has particularly little effect limiting long loan sequences.

With respect to the substantive question at issue—whether the Bureau's interpretation of data from the Mann study indicates that payday loan consumers do not have a specific understanding of their personal risks and cannot accurately predict how long they will be in debt—consumer group commenters acknowledged that the Mann study found that consumers of payday loans are generally able to predict in advance the length of the payday loan sequence that they are entering into, a finding they stated is largely driven by the fact that many study participants accurately predicted that they would not remain in debt for longer than one or two loans. Consumer groups stated, however, that the 2017 Final Rule's analysis relied on a portion of the Mann study data that, they stated, indicates that consumers with long payday

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