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1 Via Federal Rulemaking Portal: Size Standards Division Small Business Administration 409 Third Street., S.W. Mail Code 6530 Washington, DC Re: Small Business Size Standards: Finance and Insurance and Management of Companies and Enterprises; Proposed Rule; RIN 3245-AG45, 77 Fed. Reg. 55,737 ( Sept. 11, 2012) Dear Dr. Sharma: The following comments are submitted by the Online Lenders Alliance (OLA), an organization that represents the growing industry of companies offering online consumer short-term loans and related products and services. OLA s members include online lenders, as well as vendors and service providers to lenders, such as consumer reporting agencies. OLA members are subject to federal consumer protection requirements. OLA member companiess have also agreed to Best Practices and a Code of Conduct developed by OLA thatt goes beyond compliance with existing legal requirements to ensure that consumers are fully informed and fairly treated. OLA appreciates the Small Business Administration s (SBA) acknowledgment that [b]ecause of changes in the Federal marketplace and industry structure since the last comprehensive size standardss review, SBA recognizes that current data may no longer support some of its existing size standards (77 Fed. Reg. at 55,737). OLA welcomes the SBA ss inclusion of North American Industry Classification System (NAICS) Sector 52, Finance and Insurance, within the scope of that needed review and its proposal that the sizee standard for NAICS code (Consumer Lending) should be increased from $7 millionn to $35.5 million. The size standards for financial institutions are decades old, and do not recognize new market realities. Because size standards dictate commercial access to important government benefits and preferences, it is vitally important that they reflect the actual state of the market. In addition, as explained below, the size standards have taken on added importance for financial institutions: they have been used to determinee the supervisory jurisdiction of the new Consumer Financial

2 Page 2 Protection Bureau ( CFPB ) and also to delineate whichh companies are permitted to participate in small business panels in certain CFPB rulemakings. Moreover, as set forth in more detail below, OLA submits that the SBA should rethink the size standardss for Sector 52 more broadly. Because depository and non-depository institutions operate in the same marketplaces and compete with one another directly, the size standards should be commensurate, so as not to give one type of entity an unfair advantage over the other. Differences Among Services Offered by Different Financial Institutions Have Diminished Far More Than The Proposal Articulates. The SBA s proposed rule notes that the differences among services offered by different financial [institutions] (such as commercial banks, savings institutions, and credit card issuing companies) have greatly diminished over the recent decades, [and therefore] SBA has analyzed these financial institutions as one industry group, id. at 55,745. This observation is equally true with respect to other types of financial industry participants besides the depository institutions that the SBA has traditionally classified in NAICS codess (commercial banking), (savings institutions) ), (credit unions) ), (other depository credit intermediation), and (credit card issuing), using the current $175 million in assets size standard. In the last twenty years, the financial marketplace has seen an explosion of non-depository financial services providers that offer consumer loans (and other types of financial services) in direct competition with the depository institutions listed above. These include finance companies, mortgage bankers, payday lenders (both brick and mortar and online), auto finance companies, and many other specialty finance companies.. These specialized consumer lenders offer direct competition to the traditional lenders that aree captured in NAICS codes , and The fact that some of these competitors are permitted to accept deposits from customers is a distinction without a difference withh regard to the critical factors in the modern marketplace. What is important is that these traditional bank lenders directly compete for the same customers in the same markets as do the specialty finance companies, and most importantly, they offer the same types of products. Consumers have the choice today of getting a mortgage loan from a bank or a mortgage company. They can get an automobile loan directly from a bank or from a company that specializes in making auto loanss such as Ford Motor Credit. They can get a small unsecured loan from a finance company, a payday lender or a credit union. Depository institutions are competing directly with specialty finance companies in every aspect of consumer lending today. The convergence of financial services and the need to level the playing field among competing financial services providers both depository and non-depository institutions is one of the most oft-repeated justifications for Congressional legislation creating the new Consumer

3 Page 3 Financial Protection Bureau (CFPB). 1 This justification focused on the fact that lenders offering the same products should not be subject to differing regulatory schemes based upon the charter that they happen to have. Therefore, the CFPB has under its jurisdiction for consumer matters, large banks regulated by the OCC, the FDIC, or the Federal Reservee Board, as well as such specialized lenders as mortgage bankers, private student lenders, payday lenders, and any other financial services provider that the CFPB views as beingg a larger participant in the consumer financial services marketplace. The CFPB also receivedd responsibility over almost every law that governs how consumer loans are made, the so-calledd enumerated consumer laws such as the Truth in Lending Act, the Equal Credit Opportunity Act, and the Electronic Funds Transfer Act, to name a few. Yet, the proposed rule would perpetuate this unfounded dichotomy in the Size Standards Table, in which depository institutions are consideredd small businesses if their assets are less than $ 175 million the current ceiling, which would change to $500 million under the proposal while their non-depository competitors must meet a far more stringent test to qualify as small businesses: $7 million in receipts under the current Standard, which would increase to $35.5 million under the proposal. Depository institutions and specialty finance companies are very similar in the way their businesses operate, yet under the Size Standards Table they are judged by entirely different criteria. The asset-based test the Size Standards Table uses for depository institutions is unrelated to whether an institution is a depository or nonn depository entity, since deposits are counted not as assets, but as liabilities on a depository institution s balance sheet. A bank obtains funds from depositors with which to make loans.. Similarly, a specialty lender uses either its own capital to make loans or obtains money from a warehouse lender. Regardless of the source of their funds, both depository institutions and specialized lenders are measured only by their asset size both have the same assets on their balance sheet, i.e., consumer loans. Particularly similar to specialized consumer lenders are credit unions, whose assets consist predominantly of consumer loans. The receipts test, currently used for consumer lenders, is particularly inapposite, since it uses terminology and concepts that do not translate to the lending business generally, including consumer lending. Specifically, the receipts test includes in its formula the manufacturing- based notion of cost of goods sold, which in the lending context makes no sense, since both depository institutions and specialized lenders are in the business of lending money, a concept 1 See, e.g., Reuters, Bernanke: Dodd-Frank Should Level Playingg Field for Small Banks, (March 23, 2011), at tzg3pm39bh/bernanke+ +Dodd+Frank+ +Level+Playing+Field+Small; Tonetti: CFPB Supervision to Create Level Playing Field for Credit Market Participants, (Aug. 13, 2012), available at http: :// collection-news/accounts-receivables-management/tonetti-cfpb-supervision-to-create-level-playing-field-for-creditmarket-participants/.

4 Page 4 not captured in the cost of goods sold criterion. Therefore, it is extremely difficult even to calculate what the receipts of a consumer lender are when the good it sells is money. For thesee reasons, using the assets-based testt only for depository institutions and not for nonn depository institutions that offer the same products is illogical, ignores the modern financial services marketplace e and needs to be revised to reflect reality. These Size Standards Disparities Have Consequencess for SBREFA Panels. While there may have been some justification for the disparate treatment of depository and non- continuing to categorize these competitive entities differently in the Size Standards Table now, after the formation of the CFPB in 2011, has consequences far beyond what could have possibly been contemplated when the size standards for consumerr lenders were established decades ago. depository institutions at some point in the past, prior to these significant changes in the market, As you are aware, the size standards for financially related concerns are now in the forefront of the CFPB regulatory process since they are the key factor in determining which small entities qualify as potential participants in the formation of panels under the Small Business Regulatory Enforcement Fairness Act (SBREFA). 2 Although SBREFA did not exist when the SBA Size Standards Table was created, or even when it was last comprehensively updated, 3 the Table has become the default basis for defining what constitutes a small entity under SBREFA, which the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) made applicable to the new CFPB. 4 Thus, if a panel was formed for a proposed rule that affected both depository and non depository institutions that competedd with one another, it could have the anomalous composition of some participants qualifying as small att a ceiling as high as $175 (or $500) million in assets, and others held to a standard of less than $7 (or $35.5) million in receipts. In fact, this situation occurred in the TILA-RESPA rule, in which a SBREFA panel had six representatives drawn from the part of the Size Standards Table with a $ 175 million threshold for small entities, and ten members from sectors subject to a $7 million size standard. 5 2 Pub.L. No , 110 Stat. 847, amended by 5 U.S.C. 601 note (1994 & Supp. IV 1998) Fed. Reg. at 55, Dodd-Frank Act, 1100G, Pub.L. No , 124 Stat (2010). 5 See, Final Report of the Small Business Review Panel on CFPB s Proposals Under Consideration for Integration of TILA and RESPA Mortgage Disclosure Requirements, at 16 (Apr. 23, 2012), available at Bureau of Consumer Financial Protection; Integrated Mortgage Disclosures under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z); Proposed Rule, 77 Fed. Reg. 51,116, 51,286 (Table 1) (Aug. 23,

5 Page 5 This unequal treatment is contrary to the principle of leveling the playing field among competing entities in the modern financial services marketplace. The CFPB s Director, Richard Cordray, has repeatedly emphasized the importance of this principle in carrying out the new Bureau s mission: Our new role in the regulatory landscape is to create a marketplace for consumer finance that is stronger and more resilient so that honest businesses can succeed. I would like to talk with you today about how we are doing this by promoting transparency, lowering consumer risks, and ensuring a level playing field between banks and their non-bank competitors. 6 And it clearly applies in rulemaking subject to SBREFA. In the CFPB s press release announcing its plans for proposed rules for mortgage loan originations including its decision to convene a SBREFA panel the CFPB stressed its intentionn to regulate the full array of loan originators equally, whether they work for a bank, thrift, mortgage brokerage, or nonprofit organization. While the SBA s Size Standards Table classifiess some of these institutions under its current $175 million threshold and others under the $7 million standard, the CFPB s explicit goal is aimed inn the opposite direction: to help level the playing field for different types of loan originators.. 7 These contrary approaches undermine the objectives of SBREFA, and the Size Standards Table must be changed to avoid 8 this divergent result. The Proposed Approach Does Not Make Sense and Must Be Modified. Among the comments the SBA s notice specifically solicits are whether there are alternative or additional factors that SBA should consider; whether SBA s approach to small business size 2012), available at /files.consumerfinance.gov/f/201207_cfpb_proposed-rule_integrated-mortgage- available at disclosures.pdf. 6 Prepared Remarks by Richard Cordray before the Consumer Bankers Ass n (March 21, 2012), association/ (emphasis added). 7 CFPB, Press Release: Consumer Financial Protection Bureau considers rules to simplify mortgage points and fees (May 9, 2012), available at / activity. Here also there does not seem to be a meaningful difference between depository and non-depository institutions. The proposed rule notes that under SBA s methodology, Federal contracting was not a significant factor for establishing a size standard for these [depository institutions] industries.. 77 Fed. Reg. at 55, And bureau-considers-rules-to-simplify-mortgage-points-and-fees/ (emphasis added). 8 It appears that one of the SBA s key factors for differentiating among industry groupings is Federal contracting as noted in Table 3 and accompanying text, Consumer Lending and 21 of 29 industries in NAICS Sector 52 have zero or minimal values listed as their Federal contractt factor percentages. Id. at 55,743.

6 Page 6 standardss makes sense in the current economic environment; and whether there are other data, facts, and/or issues that SBA should consider. 77 Fed. Reg. at 55,738. The dramatic changes to the marketplace described above go far beyond the diminishing differences among some players in the financial services market that the notice acknowledges. Recent legislation like the Dodd- the Frank Act takes into account these transformative changes in the financial marketplace and need for regulatory fairness among competing entities. The SBA s revisions to the Size Standards Table must do likewise if they are to make sense in the current economic environment and reflect the reality of the consumer financial services industry in the United States today. Conclusion As the notice states, the last comprehensive overhaul of all size standards was in the late 1970s and early 1980s. Since that time, the financial services market has changed in substantial ways that weree never anticipated when the Size Standards Table was created. Also since that time, SBREFA became law and the CFPB becamee subject to it. These major differences in the economicc environment and the ways the Size Standards Table is now used obligate the SBA to reconsider its outmoded dichotomy between depository and non-depository institutions, recognizing the significant potential for unfairness and prejudice that will otherwise result. We urge the SBA to treat consumer lenders the same way it does depository institutions so that each willl be subject to the same $500 million in assets standard. * * * * We thank you again for the opportunity to comment on this important rulemaking. If you have questionss or need additional information, please feel freee to contact me at LMcGreevy@onlinelendersalliance.org. Very Truly Yours, Lisa S. McGreevy President and CEO