Monica Jackson Office of the Executive Secretary Consumer Financial Protection Bureau 1700 G Street NW Washington, DC 20552. Cooperative Credit Union Association, Inc. Comments on Proposed Rule Payday, Vehicle Title, and Certain High-Cost Installment Loans Docket No. CFPB-2016-0025 BY EMAIL ONLY Dear Ms. Jackson: On behalf of the member credit unions of the Cooperative Credit Union Association, Inc. ( Association ), please accept this letter relative to the Consumer Financial Protection Bureau s ( CFPB ) request for comments on its proposed rule on Payday, Vehicle Title, and Certain High- Cost Installment Loans. The Association is the state trade association representing credit unions collectively located in the states of Delaware, Massachusetts, New Hampshire and Rhode Island, serving approximately 195 credit unions which further serve approximately 3.8 million consumer members. This proposed rule is aimed at addressing the use of harmful practices by lenders in making small dollar loans. The proposal covers two types of loans: short term loans with terms of 45 days or less, as well as short term vehicle title loans; and longer term loans with terms of more than 45 days that have both a total cost of credit that exceeds 36% and either a lien or other security interest in the consumer s vehicle or a form of leveraged payment mechanism, such as through payroll deduction or direct access to the consumer s paycheck. The concern is not with the premise of the rule itself. Credit unions support curbing abuses that occur in the market. Some lenders have developed business models that deviate from credit union practices, fail to assess consumers ability to repay loans, and engage in harmful practices in withdrawing payments from consumers accounts. Consumer harm is the result, and many consumers struggle to repay loans in these conditions. Often due to this inability to repay, the consumer will take out additional loans, default on the original loan, or pay the loan with money that would normally go towards other major financial obligations or living expenses.
Page 2 However, the concern of member credit unions is the that this proposal sweeps in the safe and affordable small dollar loans that credit unions have made since their inception in an attempt to address harmful practices perpetrated by institutions other than credit unions. The overly broad, complex, and lengthy proposal will result in credit unions not being able to provide the safe and important products and services that their members need, rely on, and ask for. Additionally, the biggest challenge faced by member credit unions is the ever-increasing regulatory burden and accompanying compliance issues. This proposal, with its multiple layers of complexity, will only increase the compliance burden of member credit unions. It is the observation of the Association that regulatory compliance is a major factor underlying credit union mergers especially amongst mid-size credit unions. The Association strongly supports protection for consumers from abusive financial practices and the efforts of the CFPB in this area. However, credit unions provide sound and extensive financial services to their members. It is critical that the CFPB tailor its supervisory and regulatory requirements to reflect this fact. In preparation for the development of the present comment letter, to foster a consensus, and to assist in providing detailed comments, the Association conducted a survey of all credit union members in order to assess the impact that this proposal would have on our member credit unions. This letter incorporates these views. I. Credit Unions Lend Responsibly The unique structure of credit unions as cooperative institutions requires scrutiny as to the effects of the provisions of this proposal. Credit unions are member-owned cooperatives which have a long tradition of protecting their members interests. They are democratic organizations owned and controlled by their members, and which operate with a goal of promoting thrift, providing credit, and providing other financial services to members. Credit unions are also committed to providing services intended to support community development. Credit unions differ from other financial institutions in that their community-oriented mission is to serve people, not profit. Credit unions place member service above all else, and are committed to helping members improve their financial situation. The demand for small dollar, short-term credit is very high, and credit unions have seen firsthand how their members have been taken advantage of and experienced challenging financial situations exacerbated further by predatory lenders claiming to offer a solution. The abuses in the small dollar, short term lending market need to be addressed, but responsible lenders, like credit unions, should be subject to a separate standard that recognizes their structural differences and history of consumer protection, and encourages them to meet the very significant demand for this type of lending.
Page 3 Credit unions play an important role in meeting the needs of distressed members. When asked the reasons for which credit union members request loans that would be regulated under this proposal, the most often cited reason was that the member needed a relatively small amount of money for an emergency situation, such as an unexpected car repair. Other reasons included to cover expenses before the members next paycheck, as financial assistance while the member is temporarily out of work, and for household needs. One member credit union noted that it serves municipal employees in one of the lowest incomeper-capita cities in the state in which it is located. The credit union offers smaller, minimum loan amounts to assist its members, including school cafeteria and custodial employees through the summer months when work is unavailable. Another credit union operates in a community which is comprised of low to moderate-income individuals who live paycheck to paycheck. Many come from outside the continental United States to make a better life for themselves, and to send money home to their families. This creates the need for short term, small dollar loans to help these individuals manage until their next paycheck. This credit union does not view these loans as payday lending. Rather, they are viewed as a product that the credit union offers solely to help the members needs in its community. The Association s survey revealed that of the member credit unions that participate in a small dollar, payday loan substitute program, all indicated that they have detailed policies and procedures in place that have safely and effectively administered the program without the need for additional regulatory requirements. Additionally, of the credit unions that responded as having a viable small dollar, payday loan substitute program, each credit union indicated that it performs some combination of the following practices prior to originating one of these loans: verify the members income; verify the members major financial obligations; check the members borrowing history; and make a determination that the member s income is sufficient to cover the loan costs and his/her estimated living expenses. This analysis is incorporated directly into the regular business model of credit unions and are typical of the types of safeguards in place which are lacking amongst those whom the CFPB should be targeting and redirecting the application of this proposal. Credit union members come to credit unions when they need a small loan to manage a financial emergency or unplanned situation. In fact, often these loans result in no profit to the credit union, and even sometimes cause the credit union to lose money. A significant portion of credit unions, 33%, who responded to the Association s survey indicated that their credit union actually loses money on its small dollar loans. These types of loans are offered within the not-for-profit credit union financial services model as a service to members. Aspects of this proposal place this approach in jeopardy, and will present credit unions with the dilemma of either choosing to make a loan that might not comply with the rule, or being forced to turn away a borrower that the credit union otherwise has the capacity to help.
Page 4 II. Any Final Rule Should Exempt Credit Unions While the proposed rule includes requirements that could enhance consumer protections if narrowly tailored to predatory lenders, the benefits of the rule are outweighed by the fact that credit unions could be forced out of this market as a result of the unnecessary burdens placed on their consumer friendly products. When asked how member credit unions would respond to the implementation of additional requirements and restrictions on small dollar loans, 70% of respondents indicated that their credit union would have to reevaluate participation in their small dollar, payday loan substitute loans program. Therefore, the Association urges the CFPB to use the full extent of its authority under the Dodd- Frank Wall Street Reform and Consumer Protection Act to limit new regulatory requirements for all credit unions. As the harm this proposal is intended to address does not occur within credit union lending, the Association is of the position that the proposed rule is a prime opportunity for the CFPB to expressly exempt credit unions from this rule using its exemption authority pursuant to Section 1022(b)(3)(a) of Dodd-Frank. At a minimum, this proposal does not routinely distinguish credit unions from some of the very large and predatory financial institutions and lenders, and may unintentionally burden community based financial institutions and limit the choice and availability of consumer credit. Credit unions provide safe and sound products and services for their members. Their focus on local lending and community development and the close-knit relationship they develop with those they serve is essential to preserve. As the CFPB considers consumer protection regulations, the Association urges you to account for the burden associated with compliance, particularly for smaller entities such as credit unions. Credit unions want members to have all the information they need to make the right financial decisions for themselves and their families, and to ensure that bad actors are prevented from taking advantage of consumers. The furtherance of this mission requires the CFPB not only to promulgate strong consumer protections, but also to evaluate their effect on a complex financial marketplace made up of both very large financial institutions and much smaller entities. Credit unions are subject to a multitude of regulations at every level and are under acute pressure to remain in compliance with all applicable laws and regulations, while still providing valuable services and benefits to their members. The current level of regulation limits credit unions ability to serve their members. Regulatory compliance invites costs, in the form of staff time, data processing systems, administrative costs, and training. Within our member states, recent estimates of costs attributed to regulatory burden are $12.4 million in Delaware, $155.2 million in Massachusetts, $26.5 million in New Hampshire, and $23.2 million in Rhode Island. The funds that are allocated to regulatory compliance are diverted from the member service side, resulting in a reduction of the services offered to members. Including them in this proposed rule
Page 5 creates yet another compliance hurdle in an area where credit unions currently display safe and sound lending practices. Rules that might seem appropriate for the largest and for-profit financial institutions, who have very different relationships with their customers, are not appropriate for different and much smaller neighborhood financial service providers such as credit unions. This is particularly true for credit unions that have been designated as low income. Such credit unions serve low to moderate income communities, with individuals who live paycheck to paycheck. These individuals depend on short term, small dollar loans from their local credit union to help them manage their finances until they receive their next paycheck. Credit unions view such loans as helping the member needs in their communities. When Congress passed the Dodd-Frank Act, it specifically recognized the need to tailor regulations to fit the diversity of the financial marketplace. Section 1022(b)(3)(a) gives the CFPB the authority to adapt regulations by allowing it to exempt any class of entity from its rulemakings. The Association urges the CFPB to consider the benefits credit unions provide to their members and ensure that regulations do not have the unintended consequences of limiting services or increasing costs for credit union members. III. Any Final Rule Should Exempt the NCUA PALs Program The Association echoes the recent request delivered by its federal regulator and insurer, the National Credit Union Administration, and urges the CFPB to completely exempt the NCUA s payday alternative loans ( PALs ) program from any final regulation. Chairman Metsger of the NCUA has asked the CFPB to include a blanket exemption for PALs from its final payday lending rule. In the request, the NCUA stated that as the prudential regulator for federal credit unions, it already ensures that members receive the type of protections the CFPB is seeking to address. The Association is of the position that the CFPB should defer to the NCUA regarding the PALs product. Although the NCUA supports the goals of the proposed rule, the NCUA cautioned that additional rules from sister agencies will unnecessarily increase compliance burdens. It was noted by the NCUA that the CFPB itself determined that no evidence has been found to exist that credit unions making loans under the PALs program participate in widespread questionable payment practices. The PALs program is a model for consumer protection. As part of its proposal, the CFPB proposes a partial exemption for PALs. It is an important step forward for consumers that the CFPB recognizes some of the authority it has to exempt consumer friendly aspects of the financial services marketplace. The proposal states that the partial exemption is based on the need to ensure that all consumers have access to markets for consumer financial products and services in markets that operate transparently and efficiently to facilitate access and innovation.
Page 6 It also notes that the partial exemption is designed to facilitate access to credit by permitting lenders an alternative option for making covered longer-term loans, subject to important structural, cost, and borrowing history limitations. The Association shares the CFPB s concern that there needs to be a safe alternative source of small dollar credit for the millions of people in need of it, and is in agreement with the analysis about the consumer friendly nature of loans offered through the PALs program. Unfortunately, the exemption proposed for the PALS program is not an effective way to incentivize small dollar lending by financial institutions, and instead is a step in the opposite direction that will make it harder for credit unions to participate in the PALS program. The proposal makes arbitrary changes and adds new requirements to an already consumer friendly lending model. The Association requests that the CFPB use the same exemption authority it outlined in the proposal to ensure that those subject to the parameters of the NCUA PALs program found in the Federal Credit Union Act are exempt entirely from this rule. IV. The Rule Sweeps in Other Essential Safe Products An additional problem with this proposal is that it sweeps in other lending products that are completely different than payday loans. The proposed rule adds arbitrary compliance requirements to several consumer friendly options for small dollar loans and sweeps in several other credit union products that are quite dissimilar from payday loans, such as auto refinance loans, multi-feature open-end lending plans, unsecured loans and share-secured loans. Auto refinance loans are a popular product offered by credit unions at better rates. None of these products fit the intended purpose of this rule. In the Association s survey, multiple credit unions responded that they would no longer be able to offer another popular product, as it would fall under the covered loans of this proposal if it is to go forward as written. The product is a credit builder loan product. This loan is secured for small dollar amounts for members to help build credit, in the case of those members who have little or no credit history, or to repair and reestablish their credit, in the case of those members who have had credit difficulties in the past. Working with members to correct credit mishaps and to build financial stability is part of the core mission of credit unions. The Association strongly suggests that any final rule should in no way alter this goal. V. Conclusion The Association suggests that this proposal is the solution to a problem that does not involve credit unions. Predatory, harmful payday loans do exist in the marketplace and mal-intentioned practices must be addressed. However, the proposal presents a dilemma that relates to nonmember owned, typically larger institutions, and does not consider the effects it will have on institutions such as credit unions whose founding principle is to provide thrift and credit on safe and affordable terms.
Page 7 The Association expresses its appreciation to the CFPB for seeking stakeholder input into its proposed rule on small dollar loans. The Association hopes that the CFPB carefully reviews these and other stakeholder comments, and continues to consider the impact its often wideranging rules have on all financial institutions. Thank you for your consideration of these views. The Association appreciates the opportunity to provide input and I remain available to address any questions or concerns at 732.865.4641 that you or your staff may have at your convenience. Sincerely, Paul C. Gentile President/CEO PCG/mabc/kb