October 7, By electronic delivery to:

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1 Virginia O Neill Senior Vice President Center for Regulatory Compliance Phone: voneill@aba.com October 7, 2016 By electronic delivery to: Monica Jackson Office of the Executive Secretary Bureau of Consumer Financial Protection 1275 First Street, N.E. Washington, DC Re: Notice and Request for Comment Regarding Payday, Vehicle Title, and Certain High-Cost Installment Loans ; 81 Fed. Reg (July 22, 2016) [Docket No. CFPB ; RIN 3170-AA40] Dear Ms. Jackson: The American Bankers Association 1 (ABA) appreciates the opportunity to provide comment on the Bureau of Consumer Financial Protection s (Bureau) request for comment on its proposed rule regarding Payday, Vehicle Title, and Certain High-Cost Installment Loans. 2 ABA shares the Bureau s goal to preserve and expand the role banks play in providing small dollar credit to consumers that need it to pay for unexpected expenses and to manage income disruptions and fluctuations. Because borrowers needs are diverse, there should be a vibrant credit market with many choices for small dollar credit, including credit cards, installment loans, single payment loans, and overdraft protection services, among others. ABA believes that the banking industry can and should continue to be a major participant in this market, but the costs, complexity, and compliance risks presented by the proposed rule can restrict banks from making these loans. The demand for these credits, however, will not go away. Customers in need of short-term, small dollar credit, but unable to find that credit, can be plunged into desperation. Desperate people do desperate things. It does not have to be that way. I. Summary of Comment The proposed rule is sweeping in the products it covers and the limitations it imposes. It would impact nearly every small dollar loan made in the United States. 3 1 The American Bankers Association (ABA) is the voice of the nation s $16 trillion banking industry, which is composed of small, regional and large banks that together employ more than 2 million people, safeguard $11 trillion in deposits and extend more than $8 trillion in loans. 2 Proposed Rule with Request for Public Comment, Payday, Vehicle Title, and Certain High-Cost Installment Loans, 81 Fed. Reg. 47,864 (proposed July 22, 2016) (to be codified at 12 C.F.R. pt. 1041) [hereinafter Proposed Rule]. 3 As described in section II, lenders must determine, for each loan they make, whether the duration or total cost of credit of that loan subjects it to the restrictions and prohibitions in the proposed rule. The proposed rule does not

2 The length of the proposed rule demonstrates how excessive it is. It suggests that the Bureau s case for reform is difficult to make and its solution not easy to explain or justify. A clearer and more direct approach is preferable and less vulnerable to harming consumers. The proposed rule spans a jaw-dropping 1,341 pages to regulate loans that, according to the Bureau, average only $350, 4 and whose terms are clear and simple. Indeed, the proposal dwarfs the proposed Volker rule in length, an initiative (itself a model of ambiguity and obscurity of purpose) that involved five different federal agencies and a significantly more complex undertaking. 5 The proposed rule is exceedingly and unnecessarily complex. It imposes prescriptive underwriting requirements that mandate that a lender document, verify, and project the borrower s income, major financial obligations, housing costs, and basic living expenses. And it would impose these requirements even though the Dodd-Frank Act did not authorize the Bureau to mandate specific underwriting standards for these loans. 6 It seeks to impose mortgage-like standards on the making of very small, short-term loans. The proposed rule also includes an excessively complex set of restrictions on making a small dollar loan when the borrower has, or recently had, another loan outstanding. A borrower is presumed not to have the ability to repay a short-term loan under one set of conditions, but that presumption can be overcome if other conditions are met. If the rule is finalized as proposed, the costs and compliance risks will be disproportionate to any reasonable return on these loans. Banks could no longer make these loans on a safe, sound, and cost-effective basis. Regulatory costs and risks would overwhelm the business costs and risks of these credits. The Bureau has proposed three conditional exemptions from its prescriptive underwriting requirements, out of a belief that these exemptions will protect small dollar lending made by banks and other depository institutions. We acknowledge and appreciate the Bureau s recognition that banks can and do offer useful products to meet the needs of small dollar borrowers. Banks would like to do even more. Unfortunately, the conditional exemptions in the proposal will not protect or permit this lending. Although exempt from the rule s underwriting requirements, a loan made under one of these exemptions must still comply with the proposed rule s other extensive requirements regarding record retention, maximum number of unsuccessful withdrawal attempts, and development of written policies and procedures. In addition, the terms of the exemptions require the lender to manage to a defined fixed maximum default rate and to comply with limits on re-borrowing and maximum origination fees. The significant costs of these additional requirements will drive banks from the market. For banks to continue to offer the successful small dollar loans that serve so many customers each year, they apply to certain purchase money security interest loans, real estate loans, credit cards, student loans, non-recourse pawn loans, or overdraft services or overdraft lines of credit. Id. at 48, , Id. at 47, Id. at 47, The Volcker rule is 960 pages. 6 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No , 124 Stat (2010). 2

3 must be excluded from these new mandates designed to solve problems not present in the bank small dollar programs. The excessively prescriptive proposal also will stifle innovation in consumer lending, reduce consumer choice, and directly harm the very borrowers the rule was intended to protect. Thus, it is inconsistent with the objectives articulated by President Obama s Council of Economic Advisers who called on our government to promote policies, technologies, and regulations that go beyond protecting consumers from the harms of small-dollar credit to provide new ways in which more Americans can access safe and affordable financial services. 7 In addition, ABA would argue that The Bureau has exceeded its statutory authority in its assertion that making certain small dollar loans without conducting a prescriptive ability to repay analysis constitutes an unfair or abusive act. The case is in no way made that small dollar loans originated or serviced by banks injure consumers. These loans are neither unfair nor abusive. They are appropriately underwritten, contain simple and clear terms, and are designed to be repaid and are repaid according to their terms, with low default rates. The Bureau s remedy goes far beyond the elimination of specific acts or practices that are alleged to be unfair or abusive. For example, the proposal ignores solutions such as enhanced disclosures that might achieve the Bureau s goal of protecting consumers at lower costs to consumers, lenders, and our collective goals of encouraging innovation and competition. Instead, the Bureau proposes to prohibit outcomes rather than practices that it does not like, stepping outside of its authority to write rules to prevent unfair, deceptive, and abusive acts and practices. The proposed rule imposes an unlawful cap on interest rates. The proposed rule would regulate insurance in violation of the Dodd-Frank Act. The Bureau discounts the substantial costs that the rule will impose on consumers and lenders, in violation of the Dodd-Frank Act s requirement to conduct a fulsome costbenefit analysis. The Bureau has failed to account for the significant costs that banks will incur to understand and comply with the proposed rule, and that these costs will drive banks and other lenders from the market. Moreover, the Bureau fails to examine the impact on consumers from driving banks and other lenders from offering small dollar credits. 7 COUNCIL OF ECONOMIC ADVISERS ISSUE BRIEF, FINANCIAL INCLUSION IN THE UNITED STATES 6 (June 2016), available at 3

4 The demand for small-dollar credit is significant: nearly half of Americans 47% could not cover an emergency expense that costs $400 without selling a possession or borrowing money. 8 This demand cannot be regulated away by government action that restricts the credit supply to meet the demand. The proposed regulation will only influence and restrict the choices available for borrowers. If banks and other licensed providers are not able to offer short-term credit, consumers will be forced to meet their needs through informal sources of funds. We appreciate that the Bureau has repeatedly stated that it would like banks to make small dollar loans. We share the Bureau s goal to preserve and expand small dollar lending by banks. A bank s success is tied to its customers financial well-being. Small dollar loans provide an opportunity for a bank to deepen its relationship with its customers, provide an opportunity for those customers to improve their credit scores and graduate to other credit products, while also providing financing that funds local economic activity. Approximately three-quarters of banks provide small dollar loans to their customers, either as part of an established program or as an accommodation to serve a customer who requested a loan, according to a 2015 ABA survey. 9 However, banks will be able to provide small dollar loans only if they can use a simple, streamlined underwriting process to evaluate and provide credit, in a manner that is both fair and convenient for customers, and where there are no arbitrary limits on re-borrowing. One step to help protect the ability of community banks to continue to meet small dollar lending needs of their customers, the Bureau should exempt, from the definition of lender under the proposed rule entities that make no more than 2,500 loans that would otherwise be subject to the proposed rule, if the revenue from such loans comprises no more than 10% percentage of the bank s gross annual revenue. These thresholds would preserve the ability of community banks to make small dollar loans at current levels and allow for expansion of this lending. Comparably proportionate exclusions should be developed to facilitate the ability of larger banks to serve the needs of small dollar borrowers. In addition, to encourage banks to re-enter the market for small dollar lending and develop new and innovative ways to meet the demand for small dollar credit, we urge the Bureau to call on the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) to modify the guidance issued by those agencies in 2013 that has discouraged banks from offering small dollar loan programs. With unnecessary regulatory barriers removed, banks will be able design products that provide fair, convenient, and sustainable small dollar loans to customers. 8 FED. RESERVE SYS. BD. OF GOVERNORS, REPORT ON THE ECONOMIC WELL-BEING OF U.S. HOUSEHOLDS IN (May 2016), available at pdf. 9 For background on the survey, see section III.B.1. The ABA survey s findings are consistent with a report released in fall 2016 by the Federal Reserve Board of Governors and the Conference of State Bank Supervisors that found that 76% of community banks offered small dollar unsecured loans. BD. OF GOVERNORS OF THE FED. RESERVE SYS. & CONFERENCE OF STATE BANK SUPERVISORS, COMMUNITY BANKING IN THE 21 ST CENTURY 16 (2016), available at [hereinafter Federal Reserve/CSBS Study]. 4

5 II. Summary of Proposed Rule A. Loans Subject to Proposed Rule The Bureau has identified two practices it considers to be both abusive and unfair : First, for a lender to make certain small dollar loans (Covered Loans) without reasonably determining that the borrower will have the ability to repay the loan. Second, for a lender to attempt to withdraw payment from a customer s account to repay a Covered Loan after the lender s second consecutive attempt has failed due to a lack of sufficient funds, unless the lender obtains a new authorization from the customer. A Covered Loan is defined as closed-end or open-end consumer credit that meets the following criteria, without regard to amount of the loan: A loan that has a term of 45 days or less (short-term loans); or A loan that has a term of more than 45 days, has a total cost of credit (all-in annual percentage rate (APR)) that exceeds 36%, and provides the lender with a leveraged payment mechanism or vehicle security (longer-term loans). The total cost of credit includes any application fee; finance charges; charge for credit insurance; or charge for a credit-related ancillary product, service, or membership. B. Requirements to Make a Covered Loan To make a covered short-term or longer-term loan, the lender must comply with a prescriptive set of underwriting requirements to determine the borrower s ability to repay (ATR) the loan or fall within one of three conditional exemptions to this ATR requirement. To fall within one of these exemptions a loan must be structured to comply with specific criteria described below. The effect is that the proposed rule prescribes four product models that Bureau officials have designed for permissible small dollar lending. Under the ATR requirement, the lender 10 must reasonably determin[e] that the borrower has the ability to repay the loan by documenting, verifying, and projecting the borrower s income, major financial obligations, housing costs, and basic living expenses. For longer-term loans, the lender must also account for the possibility of volatility in the borrower s income, obligations, and expenses. In addition to the ATR requirement, the proposed rule creates a complex set of restrictions on making a short-term or longer-term loan if the borrower has currently, or had recently, another loan outstanding. 10 As a general matter, the Bureau s references to lender include the lender s affiliate(s). 5

6 C. Additional Requirements of the Proposed Rule 1. Registered Information Systems The proposed rule would establish a process for registering entities that would provide a reasonably comprehensive record of a consumer s recent and current borrowing (Registered Information System). Before making a loan subject to the proposed rule using an ATR evaluation or under the conditional exemption for certain short-term loans, a lender would be required to obtain and review a consumer report from a Registered Information System. A lender would also have to furnish information to these systems about each Covered Loan. 2. Retention of Records Under the proposed rule, lenders must retain, for 36 months, the loan agreement and all related documentation regarding each small dollar loan. The proposal further prescribes the form in which these records must be retained, requiring a lender to maintain electronic records in tabular format (e.g., in an excel spreadsheet) that identifies the loan, borrower, type of loan, consummation date, principal amount borrowed, payment date(s), amount due on each payment date, payment history, loan performance, and any changes to this information. 3. Written Policies and Procedures A lender must develop written policies and procedures that are reasonably designed to ensure compliance with this requirement and appropriate to the size and complexity of the lender as well as the nature and scope of its small dollar lending. III. The Proposed Rule Exceeds the Bureau s Authority to Regulate Unfair or Abusive Acts or Practices. This proposal is the Bureau s inaugural exercise of its authority under 1031 of the Dodd-Frank Act to regulate acts or practices that it deems to be unfair, deceptive or abusive (UDAAP). It will set fundamental precedent for the agency s future exercise of its rulemaking authority under that section. Consequently, it is critical that, in any final rule, the Bureau identify unfair or abusive acts only for which it has evidence establishing the unfairness or abusiveness of the act. The Bureau has not met that standard in the proposed rule with respect to small dollar installment loans, single payment loans, and lines of credit offered by banks (collectively, Traditional Loan Products). The proposed rule has failed to identify an unfair or abusive act of banks that make small dollar loans. The record is devoid of evidence that bank small dollar lending causes harm to consumers requiring redress by a new regulation. These loans are underwritten, contain simple and clear terms, and are designed to be repaid and are repaid according to their terms. What limited evidence that the Bureau has produced in support of its UDAAP claim relates to non-bank products. 6

7 The proposal suffers from at least three significant flaws. First, the Bureau s failure to base the Rule on deception appears to be little more than an effort to evade disclosure-based solutions to the Bureau s concerns. Second, the Bureau s reliance on unfairness is misplaced, as the Bureau s own record shows that any consumer injury from a small dollar loan is reasonably avoidable by the consumer. Third, the Bureau s use of the prohibition on abusive acts or practices evinces the Bureau s interest in regulating the judgment of borrowers who obtain these loans rather than regulating those borrowers understanding of the loans terms, in contravention of the statute. Overall, the Bureau has overreached in its proposed prescriptions for preventing the unfair and abusive practices it alleges. The proposed remedies go far beyond the elimination of specific unfair or abusive practices and do not include alternative solutions including ones that are disclosure-based that more squarely address the allegedly unfair and abusive practices and that do not impose harm on borrowers. A. The Bureau s Decision Not to Identify the Origination of Certain Small Dollar Loans as a Deceptive Act or Practice Impermissibly Avoids Its Consideration of Less Intrusive Options for Regulating the Small Dollar Loan Market. Despite repeatedly expressing the concern that consumers routinely are deceived into taking out small dollar loans, the Bureau does nothing in the proposed rule to solve these allegedly deceptive acts, nor does the Bureau seek to regulate small dollar loans using its authority to prevent deceptive acts or practices. The Bureau s decision to forego use of its deception authority and instead regulate small dollar loans using its authority to identify unfair and abusive acts leads the Bureau to propose a much more extensive and prescriptive remedy that goes far beyond correcting an allegedly deceptive act. This makes it hard to escape the conclusion that the Bureau s use of its UDAAP authority is driven by a regulatory strategy, rather than by basing UDAAP exercises on an objective analysis of the marketplace as required by the Dodd-Frank Act. For example, the Bureau claims that [l]enders position the purpose of the loan as being for use until the next payday in order to encourage unrealistic, overly optimistic thinking. In particular, the Bureau asserts that lenders often use advertising that focuses on how quickly and easily consumers can obtain a loan, which may exploit borrowers sense of urgency. 11 According to the Bureau, [a]fter lenders attract borrowers in financial crisis, [and] encourage them to think of the loans as a short-term solution... lenders then actively encourage borrowers to reborrow and continue to be indebted. 12 Presumably, the Bureau seeks to portray this as the classic bait and switch that has served as the basis for deception cases brought by the Federal Trade Commission (FTC). In addition, the Bureau cites a study that found that small dollar loans 11 Proposed Rule, supra note 2, at 47, Id. at 47,924. 7

8 are advertised as short-term, small-dollar credit intended for emergency or special use, even though, in the study s view, they often turn into long-term debt used for recurring expenses. 13 Despite this focus on alleged deception and consumer misunderstanding of short-term lending, the proposed rule does nothing to solve this problem. A plausible explanation for this decision is that use of deception authority compels the issuance of a rule that focuses on ensuring that consumers have accurate information about these loans, such as the risk and likelihood that the consumer would engage in re-borrowing. The Bureau has acknowledged but does not follow the well-established principle that there must be a reasonable relation between the act or practice identified as unlawful and the remedy chosen by the agency. 14 By refusing to identify the problem as deception, the Bureau impermissibly attempts to free itself to do more than ensure that consumers understand the terms and risks of small dollar loans. Instead, the Bureau has proposed a prescriptive and sweeping regulatory framework that will impact all aspects of the origination and servicing of small dollar loans and render many of them impossible to offer. By so doing, the proposed rule violates the Administrative Procedure Act 15 and will harm consumers who will have fewer sources and options of small dollar credit. B. The Origination and Servicing of Traditional Loan Products Are Not Unfair Practices. Instead of deception, the Bureau grounds the proposed rule in unfairness under its UDAAP authority provided in the Dodd-Frank Act. To declare an act or practice unfair, the Bureau must have a reasonable basis to conclude that (A) the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers; and (B) such substantial injury is not outweighed by countervailing benefits to consumers or to competition. 16 In addition, the Bureau may not allow public policy considerations [to] serve as a primary basis for [its] determination that the making of certain small dollar loans is an unfair practice. 17 The Bureau has failed to provide evidence that the origination and servicing of Traditional Loan Products by banks causes injury thus, clearly failing to establish the substantial injury predicate for extending the proposed rule to banks. Neither has the Bureau shown that consumers cannot reasonably avoid the alleged injury. Nor does the Bureau evaluate whether loss of countervailing 13 Pew Charitable Trusts, Payday Lending In America: Who Borrows, Where They Borrow, and Why, available at pp [hereinafter Pew Payday Lending Study]. 14 Proposed Rule, supra note 2, at 47,900 (citing Am. Fin. Servs. Ass n v. FTC, 767 F.2d 957, 988 (D.C. Cir. 1985)). 15 See, e.g., Motor Veh. Mfrs. Ass n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 48 (1983) ( At the very least this alternative way of achieving the objectives of the Act should have been addressed and adequate reasons given for its abandonment. ); Allied Local & Reg l Mfrs. Caucus v. EPA, 215 F.3d 61, 80 (D.C. Cir. 2000) ( To be regarded as rational, an agency must... consider significant alternatives to the course it ultimately chooses. ). 16 Dodd-Frank Act, 1031(c)(1) (codified at 12 U.S.C. 5531(c)(1)). 17 Id. at 1031(c)(2) (codified at 12 U.S.C. 5531(c)(2)). 8

9 benefits to consumers and to competition, caused by the proposal, would far outweigh any alleged injury to consumers. In short, the Bureau s proposed exercise of UDAAP authority in the proposal is abusive of the law. 1. The Proposal is Devoid of Evidence Showing that Traditional Loan Products Cause Injury to Consumers. The Bureau claims that the injury to customers of small dollar loans results primarily from the lender s failure to assess the customer s ability to repay the loan, and that this failure leads to unacceptably high rates of default. 18 This argument is without merit with respect to Traditional Loan Products offered by banks. The record, readily available to the Bureau but ignored in the justification for the proposal, is clear that banks do underwrite these loans, which is reinforced by the fact that their default and rollover rates are very low. Two surveys that ABA recently conducted of its member banks small lending practices demonstrate these points. The first survey, conducted in fall 2015, surveyed 97 banks to gather data about small dollar accommodation lending within the banking industry (the 2015 ABA survey). The second survey, conducted in summer 2016, surveyed 60 banks (the 2016 ABA survey) and focused specifically on the proposed rule s impact on banks ability to originate Covered Loans. The data from the 2016 ABA survey revealed that 60% of surveyed banks that made Covered Loans in 2015 charged off no such loans, and another 23% charged off no more than 1% of such loans. The 2015 ABA survey revealed similar data: one-third (34%) of surveyed banks that made small dollar loans in 2014 charged off no such loans; another 61% of banks charged off no more than 3% of such loans. ABA made the 2015 study available to the Bureau prior to the Bureau s proposal. Roll over rates of Traditional Loan Products are similarly low. The 2016 ABA survey found that one-third of surveyed banks that made Covered Loans in 2015 rolled over no such loans. Overall, the median roll over rate of Covered Loans made by surveyed banks was 5%. The ABA data are not refuted in the Bureau s justification of its proposal. The data demonstrate an overall strongly positive experience for customers who accessed Traditional Loan Products made by banks and exhibit the adequacy of banks underwriting standards for small dollar credit products. Most borrowers are long-time customers. Unlike non-banks that make small dollar loans, a bank can underwrite the loan by reviewing the borrower s incoming credits to the borrower s deposit account with the bank, as well as past loan repayment performance. Automatic recurring payments is a common feature of Traditional Loan Products that banks small dollar loan customers request and benefit from. This feature allows the borrower to make 18 Proposed Rule, supra note 2, at 47,997. 9

10 timely payments with minimal effort and without risk of missing a payment, which can enhance the likelihood of loan approval. 19 Even the Bureau acknowledges that Traditional Loan Products offered by banks do not cause the alleged harm targeted by the proposed rule. In the supplemental information, the Bureau states that the proposed rule will have a minimal effect on banks, credit unions, and certain other lenders because these institutions already engage in substantial underwriting. 20 We appreciate this recognition by the Bureau and the intent of the Bureau that the proposal not inhibit the ability of banks to continue to provide their Traditional Loan Products to customers. Unfortunately, the proposal as drafted would have a profoundly negative impact on the ability of banks to provide these credits to their customers. The proposal would in fact regulate bank small dollar credit products within the definition of a Covered Loan. It is impermissible for the Bureau to rely on evidence relating to non-banks as a justification for regulating bank products, and it is unwise if the purpose of the regulation is to help not harm consumers. 21 It is surprising that the proposed rule includes no reference to, or discussion of, studies demonstrating that the origination and servicing of Traditional Loan Products by banks does not cause injury to customers that would justify the proposal. For example, the proposed rule provides no evidence regarding the number or percentage of these bank loans made that end in default or must be extended or the number or percentage of loans that involve re-borrowing. All of the evidence that the Bureau asserts in support of its injury claim relates to loans made by 19 The Bureau demonstrates no awareness of the benefits to borrowers of automatic recurring payments. In the Bureau s view, lenders have a reduced incentive to underwrite carefully when they have obtained a leveraged payment mechanism since the lender will have the ability to extract payments even from some consumers who cannot afford to repay and will in some instances be able to profit from the loan even if the consumer ultimately defaults. Id. at 47,912. This argument is without merit with respect to bank small dollar loans because, as stated above, these loans are underwritten and have very low charge-off and roll over rates. 20 Id. at 47, See Motor Veh. Mfrs. Ass n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (agency action arbitrary and capricious if agency fails to examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made, or if agency offer[s] an explanation for its decision that runs counter to the evidence before the agency (alteration added, quotation marks omitted)). 10

11 non-banks, 22 and even that evidence is weak, as the Bureau readily admits. 23 The paucity of evidence relating to banks makes the proposed rule unlawful in its application to bank small dollar lending The Bureau Fails to Demonstrate that Harm Is Not Reasonably Avoidable. The Bureau must also demonstrate that injury is not reasonably avoidable by consumers. 25 The Bureau has failed to make that showing. To conclude that customers are not making a choice when they seek a small dollar loan from their bank is both paternalistic and unsupported by any evidence offered by the Bureau with respect to these customers. The conclusion is also at odds with the FTC s guidance on the Federal Trade Commission Act (FTC Act), which finds an injury is not reasonably avoidable only if that circumstance results from the action of the lender or other business. With small dollar bank credits, the customer initiates the transaction. 3. Small Dollar Loans Provide Significant Benefit to Customers and to Competition. Compounding the Bureau s failure to demonstrate harm that is not reasonably avoidable, there is ample evidence that banks Traditional Loan Products provide significant benefit to customers and contribute to the competitive market for small dollar credit. As explained in the FTC Policy Statement on Unfairness, the Bureau s analysis must consider whether the alleged unfair practice is outweighed by offsetting benefits to consumers or competition. Indeed, the FTC Policy recognizes 22 The evidence that the Bureau asserts in support of its injury claim all of which relates to non-banks is the following (emphasis added in each): roughly half of payday loan sequences consist of at least three rollovers (Proposed Rule, supra note 2, at 47,936); for vehicle title loans, the Bureau found that more than half, 56 percent, of single-payment vehicle title sequences consist of at least four loans in a row; over a third, 36 percent, consist of seven or more loans in a row; and 23 percent had 10 or more loans (id. at 47,883); 20 percent of payday loan sequences end in default, while 33 percent of vehicle title sequences end in default (id. at 47,936); lenders that do not determine ability to repay commonly have default rates of 30 percent and as high as 55 percent (id. at 47,997); the Bureau s research with respect to online payday and payday installment loans found that following an NSF fee, 36 percent of accounts were closed within 30 days (id. at 47,997); and evidence shows that over one in ten vehicle title installment loan sequences leads to repossession (id. at 47,997). 23 The Bureau acknowledges that it is not able to directly observe the harms borrowers suffer from making unaffordable payments. Id. at 47,931. Instead of first obtaining evidence of harm, the Bureau summarily concludes that the presence of a leveraged payment mechanism or vehicle security make it highly likely that borrowers will suffer harm from making payments that the Bureau deems unaffordable. Id. at 47, See 5 U.S.C. 706(2) (agency action unlawful if unsupported by substantial evidence ); Ass n of Data Processing Serv. Organizations, Inc. v. Bd. of Governors of Fed. Reserve Sys., 745 F.2d 677, (D.C. Cir. 1984) (ADPSO) (courts will strike down, as arbitrary, agency action that is devoid of needed factual support ). 25 Dodd-Frank Act, 1031(c). 11

12 Most business practices entail a mixture of economic and other costs and benefits for purchasers. A seller s failure to present complex technical data on his product may lessen a consumer s ability to choose, for example, but may also reduce the initial price he must pay for the article. The Commission is aware of these tradeoffs and will not find that a practice unfairly injures consumers unless it is injurious in its net effects. 26 Consumers use Traditional Loan Products to pay for unexpected hospital bills, a broken car, or other emergency expenses. In other cases, consumers seek credit to manage the misalignment in the timing of their expenses and income, or to cover a transition period between jobs. In addition, consumers holding low-paying, highly seasonal jobs rely on short-term loans to get through the lean months and cover disruptions. 27 Without such small dollar credit, consumers may turn to informal funding sources or forego necessary goods and services or the payment of important bills. Inasmuch as consumers needs are varied, their options for short-term, small dollar credit should also be varied, and regulations should encourage a competitive marketplace with a number of different products. The proposed rule would significantly impair competition by curtailing, if not eliminating, the ability of banks to make small dollar loans. Competition in the short-term credit market will be fundamentally altered. The Bureau fails to account for lenders likely withdrawal from the small dollar credit market, inaccurately concluding that the costs to competition from the proposed rule are minimal. Furthermore, the Bureau s assessment of the proposed rule s impact on competition fails to discuss the rule s detrimental impact on innovation. This is a key consideration in the FTC s analysis under the FTC Act, but it is missing entirely from the proposed rule. The proposed rule significantly reduces the incentives of banks to design innovative products or more streamlined and predictive underwriting methods. In effect, the proposed rule would narrowly prescribe the range of available products, limiting those products to four designed by Bureau staff: one product that uses the ability-to-repay evaluation specified by the Bureau, and three products (under the three exemptions) that contain limits on loan size and re-borrowing. C. The Origination and Servicing of Traditional Loan Products Are Not Abusive Acts or Practices. This rulemaking represents the Bureau s inaugural regulatory use of its authority under Dodd- Frank Act section 1031(d) to declare certain acts or practices as abusive. As such, it will set fundamental precedent for the Bureau s future exercise of its rulemaking under that section. It is 26 Fed. Trade Comm n, FTC Policy Statement on Unfairness (Dec. 17, 1980), available at [hereinafter FTC Policy Statement]. 27 The Appendix contains testimonials provided by customers of Traditional Loan Products on why they value the small dollar loan they received from their bank. Comment letters submitted by individual ABA member banks contain additional testimonials. 12

13 critical that the Bureau, when exercising a new authority, clearly define its parameters and specify which acts and practices fall within those parameters and why. As a threshold concern, we note that the Bureau has failed to make the case that it should exercise its abusive authority to regulate small dollar loans. As Director Cordray has acknowledged, identifying an abusive act or practice is a fact and circumstances issue that the Bureau is not likely to be able to define in the abstract. 28 However, rather than illuminating the standards that will guide its future rulemakings, the Bureau has obscured those standards by discussing abusiveness in ways that are not supported by the text of the authorizing statute. In addition, the Bureau states that abusive acts or practices may overlap with unfair and deceptive acts or practices, but does not explain where that overlap occurs. 29 Turning to the specific factual findings the Bureau must make to declare an act or practice abusive, the Bureau must find that the act or practice (1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or (2) takes unreasonable advantage of (A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; (B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or (C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer. 30 The Bureau has not satisfied any of these statutory requirements, particularly with respect to Traditional Loan Products offered by banks. In fact, the Bureau describes the category of abusive loans as payday, vehicle title, hybrid payday, payday installment, and vehicle title installment loans. 31 The Bureau does not identify Traditional Loan Products offered by banks as abusive. Consequently, the Bureau has exceeded its statutory authority by including such loans in a rule presented as addressing abusive practices. 28 How Will the CFPB Function Under Richard Cordray? Hearing before the Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs of the Committee on Oversight and Government Reform, 112 th Cong. 69 (2012) (statement of Richard Cordray, nominee to serve as Director, Bureau of Consumer Fin. Prot.). 29 Proposed Rule, supra note 2, at U.S.C. 5531(d). 31 Proposed Rule, supra note 2, at 47,936 & 47,

14 Because of the importance to the banking industry of the Bureau s initial regulatory exercise of its abusive authority, ABA offers the following comments on the proposed application of the standard to banks small dollar loan products. 1. The Record Does Not Demonstrate a Lack of Consumer Understanding. The Bureau contends that small dollar loans are abusive, under prong (2)(A) above, because, in making these loans, the lender allegedly takes unreasonable advantage of the borrower s lack of understanding of the loan. To the contrary, the record does not show that borrowers lack understanding of these loans, or that lenders take unreasonable advantage of any purported lack of consumer understanding. The Bureau largely concedes that small dollar borrowers understand the terms and conditions of their loans. The Bureau states borrowers know that they are incurring a debt which must be repaid within a prescribed period of time and that if they are unable to do so, they will either have to make other arrangements or suffer adverse consequences. 32 The Bureau s description of single-payment small dollar loans makes clear that such loans involve a single fee, a single date for payment, and a relatively simple application process. 33 And the Bureau s discussion of reborrowing demonstrates that many consumers of small dollar loans have considerable personal experience with such loans, which belies any contention that these consumers do not understand the loan product. Furthermore, the Bureau acknowledges that several studies suggest that consumers are able to predict their borrowing patterns, and that [m]easuring consumers expectations about reborrowing is inherently challenging. 34 Two studies the Bureau cites found 94-96% of borrowers well understood how long it would take them to completely pay back a loan. 35 Despite these studies, the Bureau asserts that borrowers do not understand the likelihood of reborrowing, relying heavily upon a study by Professor Ronald Mann. 36 However, Professor Mann has written that, in fact, the empirical evidence suggests that borrowers understand the consequences of their actions more accurately than the Bureau s paternalistic mindset implies. 37 The Bureau discounts those studies that show that consumers understand the terms and conditions of small dollar loans by advancing a definition of understanding that is not a plausible reading of the term. The Bureau asserts that understanding in this context... mean[s] more than a mere awareness... that a... negative consequence may follow Id. at 47, Id. at 47, Id. at 47, Id. at 47, Id. (citing Ronald Mann, Assessing the Optimism of Payday Loan Borrowers, 21 Supreme Ct. Econ. Rev. 105 (2014)). 37 Ronald Mann, Trust Payday Loan Borrowers to Make Decisions for Themselves, AM. BANKER (Sept. 22, 2015). 38 Proposed Rule, supra note 2, at 48,

15 Instead, the Bureau indicates that understanding requires an accurate assessment of both the probability and depth of potential adverse outcomes. 39 This definition of understanding, however, is inconsistent with commonly accepted definitions of the term. Merriam-Webster s dictionary defines understand to mean, to know the meaning of (something, such as the words that someone is saying or a language) ; to know how (something) works or happens ; or to know how (someone) thinks, feels, or behaves. 40 The definition that is most relevant in this context is the second one to know how (something) works or happens. As described above, the Bureau concedes that customers of small dollar loans know how a small dollar loan works or happens, in that customers know the terms and conditions of their loans. The Bureau s definition of understanding, however, goes well beyond the customer s knowledge of how a small dollar loan works or happens. It would require that the borrower become an expert on the lending industry, comparable to requiring someone be a nutritionist before understanding the consequences of consuming an egg. That is not an appropriate definition of understanding from a consumer s perspective. Effectively, the Bureau considers that consumer understanding is achieved only when the consumer sees things the way that Bureau officials do. 2. The Proposed Rule Does Not Correct the Alleged Lack of Understanding. The proposed rule, moreover, does not address the Bureau s own notion of lack of understanding. It does not address consumers lack of understanding by mandating, for example, strengthening consumer understanding via disclosures of the terms, conditions, and historical reborrowing patterns of these loans. Instead, the rule focuses on the lender s understanding, proposing an extensive set of underwriting conditions imposed on lenders. The result would be that the proposed rule sorts consumers by their financial circumstances and not by their understanding. The rule would prevent some consumers from taking out a short term, small dollar loan even though they fully understand the risks involved. Conversely, other consumers would be allowed to take out a loan even if they are wholly ignorant of its terms. The mismatch between the Bureau s lack of understanding rationale and the proposed rule s prohibition of loans to certain consumers, and not others, demonstrates that the Bureau is attempting to correct the judgment of borrowers. For example, the Bureau expresses concern about consumers who have tunnel-vision, unrealistic expectations, or an optimism bias; 41 who do not factor into their decision the many negative collateral consequences of default; or who focus on their immediate liquidity needs. 42 None of these concerns relate to consumers understanding of relevant facts. Instead, they relate to a beef that the Bureau has with the way that consumers process facts and make decisions. In the guise of regulating small dollar loans, the Bureau is in fact seeking to regulate consumers. 39 Id. 40 Understanding, Merriam-Webster Dictionary. 41 Id. at 47, Id. at 47,

16 Recognizing the difference between understanding and judgment lays bare the paternalism of the proposed rule. Rather than focusing on what consumers know, the Bureau focuses on how consumers use that information in their decision-making. In particular, the Bureau identifies certain attitudes towards borrowing including both optimism about the future and a focus on present needs and seeks to ensure that they do not play a role in consumers financial decisions. Such a use of the Bureau s abusive authority is inconsistent with the plain language of the statute, and it is a far cry from previous interpretations of the prohibitions on unfair and deceptive practices, which were designed to promote consumer choices, not second-guess those choices. 43 In short, the Bureau would seek to label as abusive the actions of a lender to accommodate the preferences of its customers if those consumer preferences differ from the judgment of Bureau officials. It is also inconsistent with prior assurances by senior Bureau officials that, as long as consumers understand a product or service, they should be allowed freely to choose to purchase that product or service. 44 D. The Proposed Rule Overreaches in Its Proposed Prescriptions. The Bureau also overreaches in its proposed prescriptions for preventing the unfair and abusive acts and practices it allegedly has identified. Unlike UDAP rulemakings by the FTC and the banking agencies, 45 the Bureau s rule does not merely ban an identified practice. The Bureau s proposed remedies go far beyond what is necessary to prevent the alleged unfairness or abusiveness. The rule uses the identified practice as a pretext for imposing new mandates to structure lending markets and products. Such remedies include imposing specific detailed underwriting methodologies, restricting repeat re-borrowing, reporting to registered information systems, and prescribing alternative loan products, much of which would have no corrective impact on the identified abuses. The proposal, however, is devoid of evidence showing that alternative underwriting approaches are less predictive and cause harm to consumers. And, as discussed previously, the proposal 43 Remarks by J. Howard Beal, The FTC s Use of Unfairness Authority: Its Rise, Fall and Resurrection, May 30, 2003, available at The Bureau s discussion of non-recourse pawn loans further illuminates the Bureau s doubts about consumers decision-making abilities. Because such loans involve the consumer physically relinquishing control of the item securing the loan, the Bureau believes consumers may be more likely to understand and appreciate the risks of the transaction. Proposed Rule, supra note 2, at 47,918. The Bureau does not explain why it believes that more abstract reasoning is difficult for such consumers. 44 See The Semi-Annual Report of the Consumer Financial Protection Bureau: Hearing Before the H. Fin. Services Comm. (2012) (testimony of Richard Cordray, Director, Consumer Fin. Prot. Bureau) ( People can make their own decisions, and nobody can or should try to do that for them. ); Remarks at American Banker s Regulatory Symposium (2011) (remarks by Raj Date, Special Advisor to the Secretary of the Treas. for the Consumer Fin. Prot. Bureau) ( No one denies that borrowers have to be responsible for their financial decisions. In fact, that is a bedrock premise of the Bureau s approach to markets. ); Financial Stability Board, Consumer Finance Protection with Particular Focus on Credit, Oct. 26, 2011, at 3 ( Consumer protection is not about protecting consumers from bad decisions but about enabling consumers to make informed decision in a marketplace free of deception and abuse. ). 45 See, e.g., Reg. AA, 12 C.F.R. Part 227 (prohibiting, as unfair practice, use of specific contractual provisions in consumer credit products). 16

17 ignores solutions such as enhanced disclosures that might achieve the Bureau s goal of protecting consumers at lower costs to consumers, lenders, and our collective goals of encouraging innovation and competition. Moreover, many of the proposed prescriptions for example, the proposal to create and require reporting to a registered information system have a tenuous relationship, at most, with the alleged unfair and abusive practices the Bureau has identified. While it is true that Congress granted the Bureau the authority to write rules to prevent unfair, deceptive, and abusive acts, this authority is not a blank check the Bureau can wield to put an end to small dollar lending as it currently exists and remake the industry to its liking. Rather, Congress drafted clearly defined UDAAP standards for the Bureau to apply to remedy only the specific unfairness or abusiveness identified through the rulemaking process. We urge the Bureau to tailor the proposed remedies to prevent only the specific unfair or abusive practice that has been shown to cause harm to consumers. 46 IV. The Bureau Exceeds its Statutory Authority Under the Dodd-Frank Act by Imposing an Interest Rate Cap and Ability-to-Repay Requirement, and By Regulating Insurance Products. Federal agencies are creatures of statute. They may exercise only those powers delegated to them by statute. 47 In proposing this rule, the Bureau has exceeded the authority delegated to it under the Dodd-Frank Act. The proposed rule imposes an unlawful cap on interest rates, imposes an ability to repay requirement without authorization by Congress, and impermissibly regulates insurance products. A. The Proposed Rule s Regulation of Certain Small Dollar Loans Constitutes an Unlawful Cap on Interest Rates. Dodd-Frank Act section 1027(o) prohibits the Bureau from establish[ing] a usury limit applicable to an extension of credit offered or made by a covered person to a consumer, unless explicitly authorized by law. 48 Thus, the Bureau is prohibited from placing a restriction on the extension of credit that is based on the credit s interest rate. The proposed rule does precisely that it restricts the extension of credit based on the credit s interest rate. 46 In addition to the views expressed in this section of ABA s comment letter, ABA shares the concerns that The Clearing House raises in its comment letter that the Bureau s attempt to use its UDAAP authority to regulate payment withdrawal attempts could unfairly impose liability on banks for processing payments of third parties, including non-bank lenders, and could undermine the current operational structure that allows banks to process payments in a consistent and predictable way. 47 See, e.g., La. Pub. Serv. Comm n v. FCC, 476 U.S. 355, 374 (1986) ( [A]n agency literally has no power to act... unless and until Congress confers power upon it. ); FTC v. Dean Foods Co., 384 U.S. 597, 605 (1966); see also W. Minnesota Mun. Power Agency v. FERC, 806 F.3d 588, 593 (D.C. Cir. 2015) U.S.C. 5517(o). 17