Summary: Request for Information

Consumer Financial Protection Bureau (CFPB)
Payday Loans, Vehicle Title Loans, Installment Loans and Open-End Lines of Credit

Prepared by NASCUS Legislative & Regulatory Affairs Department
July 2016

The Consumer Financial Protection Bureau (CFPB) issued a “Request for Information” (RIF) on Payday loans, Vehicle Title Loans, Installment Loans and Open-End Lines of Credit.  The RIF focuses on practices and products that pertain to but may not be addressed in the Bureau’s recently published “Notice of Proposed Rulemaking on Payday, Vehicle Title and Certain High-Cost Installment Loans.”  Specifically, the Bureau is seeking comment on (i) the potential consumer protection concerns with loans that fall outside of the scope of those covered by the Bureau’s payday loan proposal but that are designed to serve similar populations and needs as those covered by the proposal and (ii) business practices concerning loans falling within the Bureau’s proposal coverage that raise potential consumer protection concerns not addressed by the Payday proposal.

The RIF can be accessed here. The notice of proposed rulemaking is here. Comments are due to the Bureau by October 14, 2016.

Summary

The Bureau’s payday loan proposal generally would cover two categories of loans:

  • Loans with a term of 45 days or less or loans with multiple advances if each advance is required to be repaid within 45 days
  • Loans with a term greater than 45 days, provided that they (i) have an all-in annual percentage rate greater than 36 percent and (ii) either are repaid directly from the consumer’s account or income or are secured by the consumer’s vehicle.

However, the Bureau is aware that the proposal falls short and does not cover the universe of loans made to consumers facing liquidity shortfalls.  As such, the Bureau is interested in learning more about potential consumer protection concerns that are not addressed by the payday proposal and is requesting the following:

  • Information about the scope, use, underwriting and impact of such products for purposes of determining what type of Bureau action may be appropriate;
  • Information about certain consumer lending practices to increase the Bureau’s understanding of whether there is a need and basis for additional efforts;
  • Information on other potentially problematic lender practices and consumer protection concerns regarding products that would be covered by the proposal, in order to determine if additional Bureau actions are warranted;
  • Information about other “high-cost products” where the risks to consumers may be similar to the harms detailed in the proposal.  Specifically, information about the scope, use, underwriting and impact of such products for purposes of determining what types of Bureau action may be appropriate; and
  • Information about certain consumer lending practices to increase the Bureau’s understanding of whether there is a need and basis for potential future efforts, including but not limited to future rulemakings, supervisory examinations or enforcement investigations.

Potential Consumer Protection Concerns with High-Cost Installment Loans and Open-End Lines of Credit not Covered by the Bureau’s Payday proposal

The Bureau’s payday proposal would not cover closed-end installment loans or open-end lines of credit with durations longer than 45 days with no vehicle title or leveraged payment mechanisms.  Also, the proposal would not cover loans that fall within the proposed exceptions including non-recourse pawn loans, certain money purchase loans, real-estate secured credit, student loans and credit card loans.  The Bureau is seeking additional information about these forms of non-covered credit including:

  • Information about the types, pricing structure, volume and lenders’ practices with regard to marketing, underwriting, servicing and collection of installment and open-end credit products that would not be covered by the proposal
  • Whether there is a viable business model in extending high-cost, non-covered loans for terms longer than 45 days without regard to the borrower’s ability to repay the loan as scheduled? If so, what are the essential characteristics of this business model and what consumer protection concerns, if any, are associated with such practices? In particular,
  • Are there non-covered loan products with particular payment structures that make it viable for a lender to extend loans without regard to the consumer’s ability to repay?
  • Are there non-covered loan products with security or possessory interests in products or documents other than the consumer’s vehicle (and without leveraged access to the consumer’s transaction account) that make it viable for a lender to extend loans without regard to the consumer’s ability to repay?
  • Are there particular collection practices that make is viable for lenders to make high-cost, non-covered loans without regard to the consumer’s ability to repay?
  • Are there other loan features/practices that make it viable for lenders to extend loans without regard to the consumer’s ability to repay?
  • To the extent there are loans made, how prevalent are such practices? How easy is it for consumers to find and obtain such products? To what extent are those loans leading to injury to consumers? To what extent are consumers aware of the costs and risks of such loans?
  • Are there changes in technology or the market that make such practices more likely to develop or spread in the future?
  • To the extent that certain business models enable lenders to extend non-covered loans to consumers facing liquidity shortfalls without regard to the consumer’s ability to repay, what factors might limit or encourage growth of these business models going forward?
    • What are the State and Federal regulations that affect their viability and growth?
    • What effect, if any, would the Bureau’s payday proposal, if finalized, have on their viability and growth?
    • Are technology, investment, and other market factors affecting their viability and growth?
    • What factors affect competition in these markets, particularly the emergence of new market players and development of new product alternatives?
  • To what extent are consumers able to protect themselves in the selection or use of products? For example:
  • What evidence, data or other information exists with respect to the ability of consumers to shop effectively for products of the type described above and for alternative products that may better serve consumers’ needs? Are there currently websites or other digital tools that facilitate effective price comparison among lenders offering products designed to serve the needs of liquidity-constrained borrowers, including comparison of prices, prior to surrendering personal information such as names, email addresses, and bank account numbers? Are consumers in search of a loan to meet a liquidity shortfall able to avail themselves of common internet search engines to effectively shop for loans to meet their needs?
  • Are new business entrants in the market for high-costs, non-covered loans able to offer loans at a lower cost than those offered by established lenders? What factors enhance or inhibit the ability of new market entrants to do so? Are new business entrants with lower pricing able to effectively raise customer awareness about the benefits of their products in comparison to established covered or non-covered loans?
  • Are there cognitive, behavioral, or psychological limitations that make it more difficult for consumers facing a liquidity crises to shop effectively for a non-covered loan to meet their needs?
  • Are there marketing practices or loan features that take advantage of these cognitive, behavioral of psychological limitations?
  • What evidence, data or other information exists with respect to the existence and prevalence of such limitations, marketing practices, or loan features?

Potential Consumer Harm from Garnishment Orders, Judgment Liens or Other Forms of Enhanced Collection

The Bureau anticipates that if the payday proposal is finalized, some consumers will nonetheless default on their loans.  As a result, the Bureau is concerned that there may be certain collection practices that are more prevalent with respect to high-cost loans.  The Bureau is requesting the following:

  • Information about possible alternatives to leveraged payment mechanisms and vehicle security interests that may exist currently or develop in response to the Bureau’s payday proposal and market or technology changes
  • Information about collection methods creditors may use in connection with loans covered under the payday proposal or with non-covered loan to seize wages, funds, vehicles or other forms of personal property from borrowers that face liquidity problems and obtain loans outside mainstream credit systems.
    • Are there practices in obtaining or using wage garnishment orders to collect covered or non-covered loans that raise consumer protection concerns? If so, what data, evidence or other information tends to show these concerns exist or are likely to emerge in the future?
    • Are there practices in obtaining or using attachment or garnishment orders to seize funds from deposit account, prepaid cards, or other consumer assets to collect covered or non-covered loans that raise consumer protection concerns? If so, what data, evidence, or other information tends to show these concerns exist or are likely to emerge in the future?
    • Are there practices in obtaining or using judgment liens on vehicles or other consumer goods that raise consumer protection concerns? If so, what data, evidence or other information tends to show these concerns exist or are likely to emerge in the future?
    • With respect to each of these questions, what is the prevalence of these practices in the current market? And, can the Bureau reasonably anticipate that these practices would increase or decrease if the Bureau were to finalize a rule along the lines of the Bureau’s payday proposal? If so, why?
    • Do particular Federal, State or local laws affect consumer protection concerns associated with enhanced collection practices that would not be addressed by the payday proposal?

Potential Consumer Harm from Loan Churning, Prepayment Penalties and Slowly Amortizing Credit in Covered and Non-Covered High-Cost Credit

The Bureau is concerned that lenders may have an incentive to encourage borrowers to refinance their loans in a way that is detrimental and seeks to better understand the use of incentives/sales practices that might encourage borrowers to refinance high-cost loans.  In addition, the Bureau is seeking information about the nature of consumer protection concerns associated with prepayment penalties in longer-duration, high-cost covered loans and whether similar concerns exist in non-covered loan products. The Bureau requests information on the following:

  • Whether consumer protection concerns may exist more generally with respect to prepayment penalties incorporated into longer duration covered and non-covered loans marketed to consumers facing liquidity crises
  • Whether there may be informal methods of imposing prepayment penalties, such as denial of a promised rebate, which would make it more costly for borrowers in either covered or non-covered longer duration high-cost loans to repay those loans?
  • The prevalence of prepayment penalties and potential consumer protection concerns associated with non-covered, longer-duration, high costs loans.
  • Are there marketing or other business practices with respect to lender incentives or encouragement of loan refinancing that raise consumer protection concerns?
    • If so, what specific business practices or contractual terms are associated with consumer harm?
    • What data, evidence, or other information tends to show the current or likely future prevalence of consumer harm associated with these practices?
  • Are there circumstances in which the imposition of prepayment penalties raises consumer protection concerns in non-covered loans marketed to consumers facing a liquidity crises?
    • If so, what specific contractual terms or business activities are associated with consumer harm?
    • What evidence, data, or other information tends to show the current or likely future prevalence of consumer harm associated with prepayment penalties in non-covered loans?
  • Are there methods of imposing informal penalties for prepayment, such as withholding a promised rebate, which raise consumer protection concerns in either covered or non-covered loans marketed to consumers facing liquidity crises?
    • If so, specifically what contractual terms or business activities are associated with consumer harm?
    • What evidence, data, or other information tends to show the current or likely future prevalence of consumer harm associated with such informal penalties for prepayment?
  • Are there circumstances in which excessively slow amortization of high-cost installment loans or open-end lines of credit raise consumer protection concerns?
    • If so, what specific contractual terms or business activities are associated with consumer harm?
    • To what extent are consumers aware of the costs and risks of such loans? Are there other factors that might frustrate the ability of consumers to protect their interests in using such loans?
    • Is there consumer harm from loan payment schedules where the bulk of repayment allocated to principal occurs in the final few payments of an even-payment loan? What specific criteria should the Bureau consider in identifying such consumer harm, if any?
  • What data, evidence or other information tends to show the current or likely future prevalence of consumer harm, if any, associated with payment schedules of this type?
  • With respect to each of these questions, what is the prevalence of these practices in the current market? And, can the Bureau reasonably anticipate that these practices would increase or decrease if the Bureau were to issue a final rule along the lines of the Bureau’s payday proposal? If so, why?

Potential Consumer Harm from Default Interest Rates, Late Payment Penalties, Teaser Rate Loans, or Other Back-End Pricing Practices

The Bureau notes that post-delinquency or default revenue terms such as late fees, default interest rates, or other contractual remedies can lead to consumer protection concerns. The Bureau is seeking information on the following:

  • Whether post-delinquency or default revenue terms such as late fees, default interest rates, other back-end pricing practices may create a mismatch between borrowers’ expectations and their actual experiences with their loans over time?
  • Whether covered or non-covered high-cost loans made to consumers facing liquidity crises are being offered with teaser rate features and whether these rates create consumer risks?
  • Other than circumstances identified in the payday proposal, under what circumstances do lenders’ use of post-delinquency or default revenue terms such as late fees, default interest rates, or other contractual provisions or remedies in either covered or non-covered loans marketed to consumers facing liquidity crises raise consumer protection concerns?
    • To what extent do lenders making covered loans or non-covered, high-cost loans to consumers facing cash shortfalls consider post-delinquency or default revenue generating terms such as late fees, default interest rates, or other contractual provisions or remedies when they perform underwriting? If they do so, how do they do it?
    • If lenders’ current underwriting practices do not include consideration of the borrowers’ ability to repay post-delinquency or default revenue generating terms, what would be a reasonable method of underwriting for this factor?
    • What evidence, data, or other information shows the current or likely future prevalence of consumer harm, if any, associated with post-delinquency or default revenue terms in covered or non-covered high-cost consumer loans?
  • Are there circumstances in which the use of teaser rates which reset to high-cost loans made to consumers facing liquidity crises raise consumer protection concerns?
    • If so, what specific contractual terms or business activities are associated with consumer harm?
    • Do teaser rate products, to the extent any exist, create a mismatch between borrowers’ repayment expectations and their actual experiences in either covered or non-covered loans?
    • If lenders offer teaser rate products in loans to consumers facing liquidity needs, do they consider recast interest rates in underwriting? If they do so, how do they do it?
    • What data, evidence or other information tends to show the current or likely future prevalence of consumer harm, if any, associated with adjustable interest rate products in covered or non-covered high-cost loans?
  • Are there other circumstances in which “back-end” pricing impedes the ability of consumers to afford or to understand and compare credit options marketed to consumers facing liquidity crises in a way that raises consumer protection concerns or impedes their ability to understand or anticipate the full cost of the loan to that consumer?
  • If so, what specific “back-end” pricing fees, contractual terms or other business activities exist in the marketplace or are likely to evolve in the future?
  • If so, what “back-end” pricing fees, contractual terms or other business activities are associated with consumer harm?
  • What data, evidence or other information tends to show the current or likely future prevalence of consumer harm, if any, associated with such “back-end” pricing in covered or non-covered high-cost loans?

Potential Consumer Harm from Ancillary Products

The Bureau is concerned that some ancillary products (such as credit insurance, debt suspension or cancellation and other credit related ancillary products) can lead to consumer protection concerns.  The Bureau is seeking information on the marketing of ancillary products to consumers that borrow outside of the mainstream, as well as information about the prevalence and affordability of “add-on” products in loans not covered by its payday proposal.  Specifically:

  • Aside from affordability, are there consumer protection concerns arising out of the marketing of ancillary products in covered payday, vehicle title, or similar loans? If so, what evidence, data or other information shows the current or likely future prevalence of these concerns?
  • To what extent do lenders making non-covered, high-cost loans consider the cost of ancillary products in determining whether borrowers have the ability to repay?
    • If they do so, how do they do it?
    • If lenders do not currently consider the affordability of such products, what would be a reasonable method of underwriting for this component of the loan?
    • What evidence, data or other information shows the current or likely future prevalence of unaffordable ancillary products in non-covered loans?
  • Are there other consumer protection concerns associated with the marketing or use of ancillary products in combination with covered or non-covered, high-cost credit? If so, what evidence, data or other information shows the current or likely future prevalence of such consumer protection concerns?

Potential Market Evolution and Other Topics Not Identified

The RIF notes that the market for high-cost consumer credit is currently in transition and lenders are developing new technological channels for delivering consumer financial products that could present consumer protection concerns.  As such, the Bureau is seeking information on the following:

  • Are there other marketing, origination, underwriting or collection practices that currently exist or, if the Bureau issues a final rule along the lines of the payday proposal, are likely to emerge, that pose risk to consumers and may warrant Bureau regulatory, supervisory, enforcement or consumer educational action?
  • Are there arrangements with brokers, credit service organizations, or other intermediaries in the marketing, origination, underwriting, collection or information-sharing practices associated with non-covered high-cost credit markets that pose risk to consumers and may warrant Bureau regulatory, supervisory, enforcement, or consumer educational action?
  • If so, what specific actions or policies should the Bureau consider in addressing such consumer harm? Other than usury limits applicable to an extension of credit, which Congress has not authorized the Bureau to establish, are there examples of existing law, regulations, or other policy interventions that the Bureau should consider?