Strange bedfellows call on CFPB to enact broader participation rule for personal loans | Ballard Spahr LLP

The Center for Responsible Lending (CRL) and the Consumer Bankers Association (CBA) have filed a joint petition with the CFPB that urges the Bureau to engage in developing rules to define the biggest players in the personal loan market. In February 2022, the CFPB implemented a new procedure for members of the public to submit petitions for rulemaking (including changes to or repeals of existing rules). The petition has been registered by the CFPB. Under the new CFPB procedure, registered requests will receive a final response from the CFPB. (ABC already sent a letter in October 2021 to incoming Director Chopra in which he urged the CFPB to adopt a broader participation rule for fintech consumer lenders.)

In their petition, CRL and CBA describe the consumer credit market as consisting of five segments: mortgages (including home equity loans and HELOCs), credit cards, auto loans, students and "other personal loans". They describe the category of "other personal loans" as encompassing three types of loans which may be secured (other than by real estate interest) or unsecured: short-term installment loans (generally lasting from three months to year), longer-term loans and revolving lines of credit. Secured loans in this category include loans intended to finance the purchase of durable goods (such as a household appliance or mobile home) and loans backed by security over an existing asset of the borrower (such as a vehicle).

CRL and CBA note that in 2015, the Bureau announced in its regulatory agenda that it planned to develop a proposed rule to define large non-bank participants in the personal loan market, including installment loans. consumer and vehicle title loans, and reported in its Spring 2017 Regulatory Agenda report that it was working on such a rule. However, as they also note, the Bureau under former acting director Mulvaney reclassified rulemaking as inactive in its spring 2018 regulatory agenda and has not spoken on the matter since.

Reasons set out in the petition why the Bureau should resume rulemaking for larger participants include:

• A rapidly growing personal installment loan market, particularly as a result of changes in state law that effectively ban payday loans;
• A significant portion of consumers who use other personal loans, particularly consumers who obtain such loans from non-bank institutions, tend to be economically vulnerable consumers who cannot obtain credit through credit cards or HELOCs. , have exhausted their available credit or have incurred such debt that they need to refinance a credit card or HELOC;
• Substantial growth in fintech targeting the subprime market and offering loans that consumers are struggling to repay;
• The current regulatory regime creates an uneven playing field with CFPB-supervised banks and a significant risk that consumer protection issues affecting vulnerable consumers will go undetected; and
• Risk-based supervision, because of the need for firm-specific findings, is not an adequate substitute for a higher participation rule in a market with a substantial number of significant participants.

In their petition, CRL and CBA recommend that the personal loan market be defined as follows:

Creation or management of closed or open lines of credit payable in installments and provided to consumers for personal, family, or household purposes other than loans secured by real estate, loans for post-secondary education as defined in 12 CFR 1090.106 (a), or automobile purchase or refinance loans as defined in 12 CFR 1090.108(a).

Regarding their recommendation that the Bureau cover both closed installment loans and open lines of credit, CRL and CBA state that "there is an ongoing debate as to whether [buy-now-pay-later (BNPL)] the loans are fixed principal loans or variable principal lines of credit" and state that "[g]Consolidating closed and open loans in the definition of a single market for personal loans will avoid potential inconsistencies with regard to the supervision of the Office and avoid potential uncertainties with regard to the coverage of BNPL loans.

Regarding their recommendation that the market be defined to cover both the origination and servicing of personal loans, CRL and CBA point to bank/fintech partnerships. Calling "questionable" the assertion that the bank in such partnerships is the true lender, they argue that it is clear that the non-bank partner is a covered person providing a consumer financial product or service in its role as loan manager. According to CRL and CBA, market definition to cover services and origination "will ensure that these non-custodial fintechs, if large enough to meet the higher participation threshold, are subject to Bureau oversight at least with respect to its service activities, including its billing activities, collection and provision of data to consumer reporting agencies. "

In August 2022, eight national professional groups filed a request with the CFPB which urged the Bureau to engage in developing rules to define the largest participants in the data aggregation services market.

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