E. SCOTT PRUITT ATTORNEY GENERAL

June 16, 2015

Director Richard Cordray U.S. Consumer Financial Protection Bureau 1700 G Street NW Washington, DC 20552

Re: Proposed Rules Under Consideration for Payday, Vehicle Title, and Installment Loans

Dear Director Cordray,

I write concerning the regulations the Consumer Financial Protection Bureau (the "Bureau") is considering as announced on March 26, 2015. Before continuing the process of rulemaking, the Bureau has solicited the input of the Small Business Review Panel and a wide range of stakeholders.1 As the sovereign that traditionally has empowered both consumers and businesses through even-handed regulation and enforcement of lending laws within Oklahoma, the State of Oklahoma has a unique interest in the content and implementation of these proposed rules. The Office of the Attorney General ("OAG") offers its views on the proposed rules being considered and the impacts it will have on community lenders in Oklahoma and the consumers they serve.

The State of Oklahoma shares the Bureau's concerns about payday and title lending that may have detrimental consequences to Oklahoma consumers. Oklahoma, like many states, has adopted the Uniform Consumer Credit Code, which extensively regulates consumer lending, and Oklahoma separately and specifically regulates payday lending as part of the Deferred Deposit

• 2 • Lending Act. The Oklahoma Department of Consumer Credit also has promulgated numerous regulations protecting consumers serviced by payday and other lending.3 And in recent years,

1 http://www.consumerfinance.gov/newsroom/cfpb-considers-proposal-to-end-payday-debt-traps/. 2 See generally 14a O.S. §§ 1 et seq.; 59 O.S. §§ 3101-3119. 3 See generally OKLA. ADMIN. CODE tit. 160, Chps. 25, 45, & 70.

313 N.E. 2IST STREET • OKLAHOMA CITY, OK 73105 • (405) 521-3921 • FAX: (405) 521-6246

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Oklahoma has pursued payday lenders that have engaged in abusive practices that harm, rather than help, Oklahoma consumers.4

The Bureau has carefully researched and monitored the issues surrounding payday lending. The Bureau spent years documenting issues relating to payday loans, holding field hearings,5 publishing whitepapers,6 conducting extensive data gathering and research,7 gathering

• 8 • • 9 consumer complaints, and bringing enforcement actions. Such investigation is necessary before imposing any new regulations, especially in a field like consumer credit, which is already heavily regulated by both Federal and State law, and which may have severe detrimental effects on the livelihoods of both consumers and small business owners if overly regulated. Denying a consumer access to credit is a serious matter.

The Bureau's proposal, however, is not limited to payday loans. Rather, it seeks to regulate broad categories of short- and medium-term loans, such as installment loans, that are quite dissimilar from payday loans and have not been the subject of extensive investigation by the Bureau. These loans are sometimes made by community banks and credit unions that are already extensively regulated as depository institutions and extend short-term credit as a service to their customers. Regulating installment loans in the same rulemaking and in a similar fashion as payday loans without conducting adequate research is unwarranted and unsafe. Unlike with payday lending, the Bureau has done little, if any, industry research on installment lending, has not issued any reports, and has not yet undertaken to supervise installment lenders as it has with payday lenders. The Bureau admits that the range of products for these longer-term loans "is more diverse than the range that would be covered as 'short-term loans,'" that there is "less clarity about the impacts of the proposals under consideration on small entities," that "[t]he reaction of lenders is ... uncertain," and that "[t]he Bureau lacks sufficient data at this time to model" the effects of the proposals being considered with respect to installment loans.10

Moreover, there is significant reason to believe that payday loans and installment loans provided by community banks are quite different, and that installment loans present far fewer risks to consumers than payday loans. For example, the mean APR on payday and title loans is about 350%, which is exponentially higher than the mean APR on installment loans, which is less than 60%. Similarly, the Bureau has found that the median Payment-to-income (PTI) ratio

4 See, e.g., Oklahoma v. SOL, Inc., d/b/a Speedy Cash, No. 13-0163 (Admin. Consumer Credit Jul. 26, 2013), available at http://www.ok.gov/okdocc/documents/13-0163%20Consent%200rder.pdf. 5 http://www.consumerfinance.gov/newsroom/consumer-financial-protection-bureau-examines-payday-lending/. 6 http://files.consumerfinance.gOv/f/201304_cfpb_payday-dap-whitepaper.pdf. 7 http://files.consumerfinance.gOv/f/201403_cfpb_report_payday-lending.pdf. 8 http://www.consumerfinance.gov/newsroom/cfpb-begins-accepting-payday-loan-complaints/. 9 http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-ace-cash-express-for-pushing-payday-borrowers-into-cycle-of-debt/. 10 Small Business Advisory Review Panel for Potential Rulemakings for Payday, Vehicle Title, and Similar Loans: Outline of Proposals Under Consideration and Alternatives Considered, pp. 46-50 (Mar. 26, 2015) [hereinafter "Outline"].

for short-term loans (e.g., payday loans) is 22%, leaving the consumer with a remaining monthly income of only $1,500, whereas the PTI for covered longer-term loans is estimated at just 10%, leaving the consumer with over $2,600 in monthly income after loan payments.11 In addition, unlike payday lenders, community banks and other installment lenders generally underwrite loans, engage with credit bureaus, test ability to repay, do not require as a condition to a loan post-dated checks or ACH access, require only low, regular, and equal installment payments rather than single large balloon payments in short time frames, and are examined and licensed by the States. Overall, it is widely recognized that installment loans are far safer for consumers and provide much-needed access to credit.13 Regulating the two practices similarly, without being certain about the risks installment loans present to consumers, would thus seem unwarranted.

The need for thorough investigation before regulation in this context is especially high because of the limited, but serious, scope of the Consumer Financial Protection Act. The Bureau is intending to promulgate this regulation under its rulemaking authority to identify as unlawful "unfair, deceptive, or abusive acts or practices."14 Thus, no installment loans should be prohibited by the Bureau or otherwise subject to the regulation being considered unless the Bureau is certain that those loans are inherently unfair, deceptive, or abusive. But many installment loans that would be prohibited by the Bureau's proposed regulations are both safe and affordable. While the Bureau may have the certainty necessary to make such categorical determinations with respect to some payday loans after thorough investigation of the topic, the Bureau's limited insight and lack of research into traditional installment lending counsels strongly against making the sweeping determination that covered loans are always unfair and abusive.

A more careful regulatory approach is also required by the Bureau's recognition that these short-term lending markets are already "regulated by a variety of state laws" that, for

11 Outline, pp. 41-42, 49. 12 See Schneider & Koide, How Should We Serve the Short-Term Credit Needs of Low-Income Consumers?, Center for Financial Services 12-13 (2010) ("Like traditional bank lenders, installment lenders operate out of physical stores, and they assess the borrower's creditworthiness before deciding whether to make a loan and at what price. Installment lenders usually examine the borrower's credit report and score, although that information is not the sole factor in the lending decision. Other considerations include the borrower's job tenure, employment history, monthly income and expenses, and ability and willingness to repay the loan... . Once the installment loan is made, repayment history is reported to the major credit bureaus and becomes part of the borrower's credit record. Thus, installment loans, unlike many other small-dollar, short-term credit products, enable consumers to build or repair their credit scores."). 13 Mark Muecke, Payday Lenders Burden Working Families and the U.S. Armed Forces, Consumers Union (July 2003), http://consumersunion.org/pdf/payday-703.pdf ("Texas' thriving signature loan industry provides a clearly safer and more affordable alternative to high-risk, high-cost payday loans."); Schneider & Koide, supra, at 13 ("Because consumers must deliberately decide to apply for installment loans, some planning and intentionality is required of borrowers. The fact that installment loans are offered at a fixed rate and are paid back in equal payments may help to ensure that the loan remains an affordable part of a consumer's budget."). 14 12 U.S.C. § 5531(b).

example, "impose[] usury limits," "regulate loan structures," "restrict reborrowing in certain circumstances," and "set[] a maximum ratio for the amount of debt on such loans to gross monthly income."15 Principles of federalism favor the Bureau attempting as its initial approach to work with States to improve State laws where needed and, only when that has proved unfeasible, actively consult with States when developing federal regulation in this area of traditional State power. Not only does this approach respect our Constitutional structure, it also avoids the potential for needlessly duplicative regulation. Although the Bureau has expressed its intention that its regulations "coexist" with State laws, with lenders and consumers being forced to adhere to only the stricter of the two, this assumes that all regulation is one-dimensional, on a linear continuum from lenient to strict.16 In reality, States and the Bureau will often regulate consumer lending through different mechanisms in pursuit of the same goal, requiring lenders and consumers to comply with both, needlessly duplicative regulations. For example, States may choose to effectively regulate affordability through flexible rate caps, but the Bureau may prefer ability-to-repay determinations; either approach may be effective on its own, but when lenders and consumers must comply with both, the regulations may effectively prohibit all loans, even affordable ones. Not suiprisingly, other States have, in bipartisan efforts, urged the Bureau to carefully reconsider its regulations so as not to upset the careful balances States have struck in regulating lending in a manner that makes consumer credit both safe and accessible.17

The Bureau estimates that its proposed regulations could eliminate more than 80% of longer-term covered loans.18 Representatives from community lenders across Oklahoma have informed OAG that the proposed rules will force lenders to discontinue making covered loans, effectively eliminating access to short- and medium-term credit below $4000. But in a time of increased income and consumption volatility, access to these types of loans is as important as ever, with the typical household needing ready access to around $1,800 to weather the fluctuations that have become common in this economy.19 Eliminating these loans does not eliminate consumer need for them, leaving consumers with few options, each of them worse than the next. Consumers would be forced to either take out larger-than-needed loans requiring them to pay unnecessary finance charges, turn to black market loan sharks whose abusiveness is widely-recognized, or forgo obtaining credit altogether, sending them into fiscal insolvency or ensuring that they remain there. Millions of consumers in Oklahoma that at one point or another may need this credit may be forced into insolvency, increasing divorce rates, crime, foreclosures, car repossessions, and domestic violence because of the financial strain.

15 Outline, p. 4. 16 Outline, p. 4. 17 See, e.g., Letter from U.S. House of Representatives from Florida to Richard Cordray (April 28, 2015), available at http://alceehastings.house.gov/uploadedfiles/fl_delegation_to_cfpb_re_payday_lending_regs_final.pdf. 18 Outline, p. 50. 19 See J.P.Morgan Chase & Co. Institute, Weathering Volatility: Big Data on the Financial Ups and Downs of U.S. Individuals (May 2015), http://www.jpmorganchase.com/corporate/institute/document/54918-jpmc-institute-report-2015-aw5.pdf.

For example, if a janitor who commutes to work needs $1000 to replace his car or face unemployment, his community bank or credit union can provide a loan to be repaid at an affordable $200/month rate over the course of six months for that repair. Similarly, installment lenders provide access to credit to mothers needing to pay for pediatric services not covered by insurance or small construction subcontractors needing cash flow to pay for workers and materials before a job is completed. Installment loans have been shown to decrease the likelihood that borrowers go hungry, reduce the chance that they remain or enter into poverty, increase the likelihood of keeping their jobs, help them to overcome emergencies, and enabled them to build up a credit history—all the while remaining profitable to lenders.20

Aside from community banks and credit unions, certain non-depository lenders provide access to installment loans as well, but regulating these lenders alongside payday lenders may cause them significant harm. In the State's experience, these non-depository community installment lenders make significant efforts to distinguish themselves from payday lenders and as a whole are far more responsible in their business. By categorically labelling the services of these lenders as "abusive" and "unfair" just as the worst of practices by payday lenders, and by regulating them under the same rulemaking, installment lenders may suffer enormous reputational harm which, at the minimum, will cause them to cease providing covered loans and may cause many community lenders to exit the business altogether. The harsh impacts of eliminating this source of credit will be most acutely felt in rural, underserved, and minority communities of Oklahoma, exacerbating the cycle of destitution.

Specific aspects of the Bureau's proposal have caused concern among Oklahoma consumers and lenders as well:

Income Restrictions: The Bureau is considering requiring lenders to make ability-to-repay determinations before making a loan and be subject to an enforcement action and prosecution if the Bureau later believes those determinations were not "reasonable" or adequately verified.21

Community banks and other installment lenders generally already make ability-to-repay determinations before issuing a loan by assessing credit reports, employment status and history, monthly income and expenses, and other factors indicating ability and willingness to repay, often developing proprietary underwriting systems and algorithms to provide flexibility in making those determinations to low-income and underserved communities.22 However, overlaying vague federal oversight to these necessarily sensitive determinations would likely prevent these loans from ever occurring in the first place.

Oklahoma has implemented carefully balanced regulation to ensure that Oklahoma consumers both are protected and have access to credit. The proposed ability-to-repay

20 THE ECONOMIST, In Praise of Usury (Aug. 2, 2007), available at http://www.economist.com/node/9587533. 21 Outline, pp. 22-24; see also id. at 11-14. 22 See Schneider & Koide, supra, at 12-13.

determination requirement, which will make enforcement turn on the Bureau's belief of "reasonableness," will cause such regulatory uncertainty as to make otherwise viable loans too risky to pursue profitably. In these circumstances, consumers will be deprived of credit not because they present too great of a risk of default or cannot repay, but because the government presents too great a risk of prosecuting lenders. The lack of access to credit will bring all the potentially disastrous consequences to the consumer described above.

Moreover, community banks only make loans to their clients because they sincerely believe the client can repay the loan. Thus, when a loan is made both the consumer and the lender have made determinations that the consumer will be able to repay the loan. Adding a third barrier to credit wielding the powerful arm of the state is unnecessary and harmful, because standards will be vague and the government's "reasonableness" determinations are often tinged with subjectivity. For example, if a consumer believes that her family needs $150/month for food expenses (including fast food) and her bank agrees, but the Bureau believes that, in order for that family to eat healthy, it should be spending $250/month on food and that extra $100 of expense would prevent the consumer from being able to repay an installment loan for vehicle repair, the loan could not be made.

Similarly, the Bureau's proposal that most or all aspects of the ability-to-repay determination be verified may needlessly inhibit access to credit. Such strict requirements are costly to both the consumer and the lender, and verification of every aspect of a consumer's financial life may take far too much time and visits to the lender to feasibly implement within the short periods during which a loan is needed to satisfy consumer exigencies. Moreover, because some aspects of a consumer's financial profile may be difficult to verify with unquestionable sources, especially irregular and variable income and expenses, lenders may choose to forgo making covered loans altogether rather than risk prosecution.

Nor are the proposed alternative bright-line affordability requirements feasible.23 A NCUA-type loan with a 28% interest rate cap not only exceeds the Bureau's authority to set rate caps, but also would make virtually all installment loans less than $4000 unaffordable to lenders. Similarly, requiring a 5% PTI ratio would effectively eliminate consumer access to short- and medium-term installment loans. Under the Bureau's own analysis, this requirement would prevent more than 80% of installment loans, and more than 90% of installment loans with terms shorter than 6 months.24 Put another way, the median borrower has an annual take home pay of around $22,500 a year ($1080/month), so a 5% PTI ratio would allow such consumers to access only $54 of credit.25 Oklahoma consumers who need short term installment loans to repair a

23 See Outline, pp. 26-28. 24 Outline, p.50. 25 See Rick Hackett, Predictive Value of Payment-to-Paycheck Ratios in Small-Dollar Lending (Feb. 17, 2015), https://www.nonprimel01.com/blog/predictive_value_ptpratios_small-dollar_lending/.

vehicle or replace a broken refrigerator deserve access to more than the $54 of credit the Bureau is considering to allow.

Interest Rate Cap: The Bureau is proposing to regulate certain longer-term loans when the "all-in" APR is greater than 36 percent.26 But this interest rate cut-off is problematic in at least three respects. First, the 36% all-in cut-off appears to be arbitrary and not narrowly tailored to target only inherently harmful loans based on any sound research or methodology. Very few, if any, short- or medium-term loans can be made below a 36% all-in APR. Especially in view of the fact that the mean traditional (not all-in) APR of installment loans is around 59%, the Bureau should carefully reconsider the interest rate cut-off for any future regulations that would prohibit certain installment loans.

Second, the Bureau should use a traditional Truth in Lending Act (TILA) APR cut-off instead of an "all-in" cutoff that is yet to be adequately defined. The TILA APR is already calculated by and familiar to small lenders and would be far less burdensome to use in attempting to comply with new Bureau regulations. Unlike a new, experimental "all-in" APR, the TILA APR is already incorporated into lending platforms and data systems. This is especially true because of the added complexities of an attempted "all-in" APR. For example, if a lender offers credit insurance with a 20-day cancellation period, the TILA APR remains constant whether or not the consumer chooses to cancel the insurance, whereas an "all-in" APR would fluctuate (and consequently, the applicability of proposed regulations would change) depending on the consumer's insurance decision even after the loan has been taken out. As a co-equal sovereign active in regulating consumer credit issues, Oklahoma believes that using an undefined "all-in" APR poses an unnecessary regulatory burden.

Third, Oklahoma is concerned that the proposed regulations being considered amount to an unlawful de facto rate cap imposed by the Bureau. Under its animating statute, the Bureau may not "establish a usury limit applicable to an extension of credit offered or made by a

97 covered person to a consumer." Because the proposed rules would virtually eliminate consumer access to certain loans with an "all-in" APR greater than 36%, it functions as a de facto usury limit that, in a manner expressly forbidden by Congress, infringes on the traditional State prerogative to set such limits. At the very least, the Bureau should conduct research into determining whether the considered regulations will function as a de facto rate cap before promulgating regulations that might be contrary to Congressional intent and to core Constitutional federalism principles.

Account Access Restrictions: The Bureau is considering adopting a regulation that would require lenders to provide a written notice to a consumer at least three business days prior to an

26 Outline, p. 19. 2712 U.S.C. § 5517(e).

attempt to engage in a pre-authorized collection in the consumer's account.28 OAG believes this notice requirement, as proposed, is inadvisable because it reduces consumer flexibility in making payments through direct access. Instead, lenders should be able to access a consumer's account for authorized or pre-authorized payments so long as the lender discloses that account access is optional and authorization can be easily withdrawn. Three-day advanced notice should only be required if pre-authorization provides blanket access to the account and the consumer has not already specified the authorized date (inclusive of the next business day) and amount of payment.

The Bureau is concerned that consumers may authorize lenders to collect future payments but "may not know when presentments will be made, in what amount, and for what reason."29

But these same concerns would be addressed by a more narrowly tailored notice requirement than the one proposed by the Bureau. For example, the Bureau would require a three-day notice prior to cashing a post-dated signature check, but it is unreasonable to believe that when a consumer writes a post-dated check, he does not know the date, amount, and reason for which his account is being charged. Rather, any pre-authorization by a consumer to charge the consumer's account on a specified day for a specified amount need no further notice. Indeed, because the current proposals do not set a maximum time for advanced notice, it might be the case that under these proposals, a check post-dated three months in advance, or other similar authorization, would meet the minimum three-day notice requirement.

It is important to remember that notice requirements are not costless. Not only do they present a greater regulatory burden on businesses, the more notices a consumer must receive as a result of more and more state and federal regulations, the less meaningful every individual notice becomes. The Bureau should seek to avoid regulatory and notice fatigue by requiring disclosures only when their absence would severely impair consumer choice.

The notice requirements considered may impose additional costs as well. The notice requirement would appear to prevent consumers from making same-day direct account access payments. For example, if a consumer calls or visits a lender on the day a payment is due and requests that the lender take a one-time Automated Clearing House (ACH) payment on that same day, under the notice requirements being considered, the lender would be forced to refuse. The consumer would then be charged a late fee and the federally-imposed delinquency would be reported to credit bureaus. Moreover, by using ACH access as a trigger for a host of regulatory obligations, the Bureau would effectively prohibit a large quantity of loans solely because of the method of payment. However, for certain consumers, like truck drivers, the ability to automatically and remotely pay installments through ACH access is necessary; the Bureau's proposals would eliminate access to credit for these consumers. OAG opposes such harmful rules that would hurt, not help, Oklahoma consumers.

28 Outline, pp. 28-30. 29 Outline, p. 29.

Refinancing and Renewal Restrictions: The regulations under consideration would require consumers to demonstrate with evidence a favorable change in circumstances before they could retain a covered loan refinancing or alternate payment agreement.30 Such a restriction may have severe detrimental effects on Oklahoma consumers.

Refinancing and alternative payment arrangements benefit both consumers and lenders if such modifications enable consumers to perform on their loans even if they have not experienced an improved financial situation. Forbidding lenders from engaging in loan modifications, workouts, or deferrals in these situations, where consumers are struggling to make payments despite meeting initial underwriting and ability-to-repay criteria, may force the consumer into default, collection, credit spiral, and even court proceedings. Community banks often work hard to ensure that they are repaid to the extent possible and that their customers are able to avoid collection actions. These flexible arrangements are especially important and effective in small communities, where personal relationships have greater importance than in large cities, which demand a numbers-only approach.31 The Bureau should not be in the practice of forbidding such mutually beneficial arrangements.

For example, if a consumer has been making timely payments on an installment loan but then experiences a temporary financial hardship that would prevent her from making the next payment, her community bank may agree to allow the her to defer, decrease, or skip that payment. The Bureau's current proposal would forbid that modification and force the consumer into default. Similarly, the Bureau's proposal would prohibit a renewal of an existing installment loan even where the installment plan has progressed successfully and the principal has been substantially paid down, earning the consumer additional credit and available cash. Unlike the undesirable snowballing of recurring and cumulative loans and fees associated with payday rollovers, installment loan renewals are consistent with a consumer's ability to repay and provide the consumer with additional access to credit without the undue pressure of a post-dated check or other financial obligation.

The Bureau also proposes to mandate a 60-day period before a consumer can take out a subsequent loan after the consumer has fully paid a previous loan. In general, when businesses and consumers successfully transact and both are satisfied, the State of Oklahoma does not attempt to prevent them from engaging in repeat business, whether it is buying a cup of coffee or paying for childcare. The Bureau should similarly avoid limiting consumer access to credit simply because consumers are desiring, taking out, and paying off installment loans too successfully. For example, if a lawn care provider needing to replace his truck's transmission in

30 Outline, pp. 24-25. 31 See Schneider & Koide, supra, at 13 ("Installment loan companies typically locate stores in the communities in which they operate. Lenders report that this interaction helps to assess the borrower's financial situation and keeps them abreast of any potential challenges the borrower may have in repaying the loan. Lenders consider their direct interaction with consumers and physical presence in the community as critical to controlling default rates.").

January takes out a six month installment loan and ably repays the loan by July, the Bureau's proposed regulations may cause him to lose his business if his mower breaks down the following month and he both does not have the funds to repair it and cannot get a second covered installment loan because federal law prohibits it. OAG opposes rules that would lead to such perverse results.

Oklahoma looks forward to working with the Bureau to ensure that Oklahoma consumers have access to safe, affordable credit. The current proposals under consideration to regulate certain payday lending practices may be well-considered, but the Bureau has not had sufficient investigation and experience into installment lending to justify increased regulation of those loans and, in any event, such lending is sufficiently distinguished from payday and title lending that their concurrent regulation is unwarranted. Moreover, regulation in this traditional field of State sovereignty implicates important considerations under our federal system. In deference and comity to State prerogatives, the Bureau should seek first to work with States to implement federal regulatory priorities through flexible implementation on the State level before engaging in nationwide one-size-fits-all regulation. Even if the Bureau believes that national uniformity is necessary in some instances, it should actively seek State input to ensure regulation is carefully crafted to integrate with State regulatory regimes.

Sincerely,

E. Scott Pruitt Attorney General