Diaz, Bethany From: Sent: To: Subject: Attachments: Samantha Dravis Monday, June 13, 2016 6:26 AM Samantha Dravis CFPB Rule Proposal Summaries Legal Arguments to CFPB Rule Proposal on Short.docx; Regulatory Update 6.8.16.docx All, Attached are some documents summarizing some of the arguments surrounding the CFPB's short term lending rule. These are also posted in the briefing room for your convenience so you can access them anytime there. Best, Samantha Legal Arguments to CFPB Rule Pt·oposal on Short-Term Lending 1. CFPB Failed to Adequately Consider Preemption Issues a. Though more than half of the states allow payday lending, with each state having consumer protections, the CFPB rule is so restrictive that vitiually all state laws and regulations will be wholly preempted, thereby depriving consumers of a form of credit that these states have determined is valuable to consumers. b. CFPB has ignored the impact of the proposed rule on the state regimes, as well as failing to engage in meaningful consultation with state officials about the rule's preemptive effect. 2. CFPB Failed to Consider Successful Approaches Adopted by States, Other Less Restrictive Altematives a. The CFPB failed to adequately consider less restrictive, more cost-effective and reasonable alternatives that would protect consumers while preserving access to needed credit. b. There is extensive regulation on the state level that the CFPB disregarded in its approach, including disclosure requirements, limiting rollovers, extended payment plan, cooling off periods of reasonable length. c. To the extent the CFPB believes consumers do not adequately understand financial risks of loans, it should require additional disclosure documents. Yet, the CFPB did not adequately consider additional disclosure documents as an approach, even though the CFPB does assume that disclosure works for other consumer financial products. 3. Proposed Rule is Unconstitutional a. The CFPB may not exercise regulatory authority because it is insulated from both presidential control and Congressional oversight, thereby violating the Constih1tion's Separation of Powers. b. The UDAAP ("unfair, deceptive or abusive acts or practices") delegation of authority is improperly broad and exceeds Constitutional limits. 4. Proposed Rule Exceeds the CFPB's Statutory Authority a. Despite the Dodd Frank Act clearly prohibiting a usury limit, the Rule effectively applies an impermissible interest rate cap both by adopting a 36% trigger for installment loans and by imposing significant restrictions on short-term loans based on concerns about the high costs. b. The Dodd Frank Act did not provide the CPFB with the authority to impose on shoJi-term lenders an ability to repay requirement as it expressly did for mortgage lenders by amending the Truth in Lending Act. 5. CFPB Failed to Comply with Federal Law (Regulatory Flexibility Act and SBREFA) a. The CFPB failed to properly consider alternatives that would minimize significant economic impacts on small entities. b. The serious concerns expressed by the small entity representatives during the SBREFA panel process last year were largely ignored, with the CFPB moving forward on a rule that would serve to drastically decrease industry revenues by the CFPB's own estimation. c. If effective, these requirements would force numerous employee layoffs, close down small businesses, and provide fewer credit options to state residents. Short-Term Credit Federal Regulation Update June 8, 2016 On June 2, the Consumer Financial Protection Bureau (CFPB) released its proposed rules to limit consumers' ability to access payday loans, title loans, deposit advance products and some installment loans. As proposed, the rules would override existing state regulations, consumer protections and invent new products unlike any credit options available in today's regulated marketplace. The release of these rules was preceded by several actions from the Administration that seek to cripple the short-term lending industry. Through a covert government program known as "Operation Choke Point" federal regulators have successfully disrupted the banking relationships of properly licensed short-term lenders operating in full compliance with the law. This ideological campaign has made its way into the private sector, as Google announced that it will ban payday loan advertisements from its site just weeks before the release of the CFPB's short-term lending rules. Together, these efforts suggest the federal government plans to further intrude upon regulatory matters traditionally left to the states. Additionally, the Administration is waging a campaign against non-bank short-term lending based solely on ideological opposition. CFPB Short-Term Lending Regulations Outline of Proposed Rule: On March 26, 2015, the Consumer Financial Protection Bureau (CFPB) released an outline of proposed rules, proposing a payment-to-income test for prospective borrowers and limits on loan renewals. Small Business Review: Following the release of the outline of proposed rules, the CFPB conducted a Small Business Review Panel process, as required by statute. In that review-information about which was obtained only through Freedom of Information Act requests-the CFPB predicted that its payday lending proposal would result in 59-84% revenue declines for lenders. The Panel wrote in a 526-page report that it "recommends that the Bureau seek additional information on potential impacts and consider certain alternatives that might reduce the burden on small entities." The CFPB's simulation was largely confirmed by credit reporting agency Clarity Services, which found that under the March 2015 outline the "payday storefront business would lose well more than 70% of its volume and, we think, likely would cease to exist." Notice of Proposed Rule: On June 2, 2016 the CFPB released its proposed rules, a 1,333 page document. The rules would override existing regulations in the 35 states that currently regulate short-term lending. The proposal would restrict the amount of loans based on a complex, multi-step "full payment test," which would require lenders to assess a potential borrower's income, financial obligations (via credit report) and living expenses. Full-Payment Test: • Assess a potential borrower's ability to repay by verifying their income, financial obligations (via credit report) and living expenses. • • Institute a 30-day lockout period before allowing a second or third loan, unless the lender can document that the borrower's financial circumstances have improved enough to repay a new loan without re-borrowing. Prohibit more than three loans in a row, regardless of financial circumstances, without a 30day lockout period. Principal Payoff Option: Lenders may offer loans without a "Full-Payment Test" if: • Loan is capped at $500; • Borrower does not use auto title as collateral or loan is structured as open-end credit; and • Borrower does not have outstanding short-term or balloon-payment loans and has not been in debt on short-term loans more than 90 days in a rolling 12-month period. • Principal must be paid off by either: o Single payment; or o Two extensions, but only if the borrower pays off at least one-third of the principal with each extension. Next Steps: In the coming days, the proposed rule will be published in the Federal Register. Once it is published, the rule will be open for public comment. Comments on the proposal are due by Sept. 14, 2016. Operation Choke Point Contemporaneous with development of the CFPB's proposed rules, the Department of Justice, FDIC and Comptroller of the Currency engaged in a coordinated effort known as "Operation Choke Point" to disrupt short-term lenders through the payment processors and banks with which they work. While presented as an effort to address illegal lending, the program has curtailed the banking relationships of properly licensed lenders operating in full compliance with the law, Operation Choke Point used a variety of tactics to pressure banks and third-party payment processors to terminate short­ term lenders' depository accounts and block them from using the automated clearing house system (ACH) to process loan repayments. Most notably via: • Federal banking examiners suggested that conducting business with short-term lenders­ without differentiating between legal and illegal operations- is an inappropriate practice. • A FDIC "hit list" singled out short-term lenders and other legal industries as warranting greater scrutiny by banks processing their transactions. After continued pressure from Congress and a lawsuit, the FDIC withdrew the list, citing "misunderstandings." Actions surrounding Operation Choke Point: • June 5, 2014: The Community Financial Services Association of America (CFSA) and Advance America filed a lawsuit- against the FDIC, the Federal Reserve, the ace, and the Comptroller of the Currency, Thomas J. Curry- seeking to end Operation Choke Point, after exhausting every other option with regulators and Congress. On September 26, 2015, a federal judge ruled that the CFSA may move forward with its lawsuit, which is now proceeding to the discovery phase. • • January 2015: The FDIC issued guidance amounting to an admission of the agency's involvement, and a report from the FDIC Inspector General further reinforced the agency's involvement, finding that in certain communications with banks, FDIC personnel "used moral suasion" to discourage banks from working with payday lenders. February 5, 2016: The House of Representatives attempted to combat this persistent government overreach, passing the Financial Institution Customer Protection Act, sponsored by Rep. Blaine Luetkemeyer (M0-3). If enacted, the legislation would prevent federal regulators from ordering financial institutions to terminate lawful banking relationships as part of Operation Choke Point. Google's New Policy on Payday Loan Advertising The ideological campaign against non-bank short-term lending is making its way into the private sector. Google recently announced that it will ban payday loan advertisements from its site starting July 13. Under the new policy, ads will be prohibited if the loans have a repayment term shorter than 60 days or an annual percentage rate (APR) of 36 percent or higher. This policy change presents an apparent conflict of interest for Google: the company's investment fund has invested more than $18 million in the consumer lending startup LendUp, which markets itself as a direct competitor of regulated short-term lenders. The Washington Post reported that the decision was not a result of changes in the market, but was likely due to pressure from activist groups who are critical of the short-term lending industry. Additionally, the Washington Times reported on the intimate relationship between Google and The White House, which may have led to Google's new restrictive advertising policy.