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 rulemaking to define larger participants in the market for personal loans. In February 2022, the CFPB established a new procedure for members of the public to submit petitions for rulemaking (including amendments to or repeals of existing rules). The petition has been docketed by the CFPB. Under the CFPB’s new procedure, docketed petitions will receive a final response from the CFPB. (CBA previously sent a letter in October 2021 to then incoming Director Chopra in which it urged the CFPB to adopt a larger participant rule for fintech consumer lenders.)
In their petition, CRL and CBA describe the market for consumer credit as consisting of five segments: mortgages (including home equity loans and HELOCs), credit cards, auto loans, student loans, and “other personal loans.” They describe the “other personal loans” category as encompassing three types of loans that can be secured (other than by an interest in real estate) or unsecured: short-term installment loans (typically with three-month to one-year terms), longer-term loans, and revolving lines of credit. The secured loans in this category include loans to finance the purchase of durable goods (such as an appliance or mobile home) and loans backed by a security interest in existing property of the borrower (such as a vehicle).
CRL and CBA note that in 2015, the Bureau had announced in its regulatory agenda that it expected to develop a proposed rule to define nonbank larger participants in the market for personal loans, including consumer installment loans and vehicle title loans, and reported in its Spring 2017 regulatory agenda that it was working to develop such a rule. However, as they also note, the Bureau under former Acting Director Mulvaney reclassified the rulemaking as inactive in its Spring 2018 regulatory agenda and has not since spoken on the subject.
The reasons set forth in the petition for why the Bureau should resume the larger participant rulemaking include:
- A rapidly growing personal installment loan market, including as a result of changes in state law that effectively prohibit payday lending;
- A sizable portion of consumers who use other personal loans, particularly consumers obtaining such loans from nonbanks, tend to be economically vulnerable consumers who either cannot obtain credit through a credit card or HELOC, have exhausted their available credit or have acquired so much debt that they need to refinance a credit card or HELOC;
- Substantial growth in fintechs targeting the subprime market and offering loans consumers are struggling to repay;
- The current regulatory regime creates an unlevel playing field with banks supervised by the CFPB and a significant risk that consumer protection issues affecting vulnerable consumers will go undetected; and
- Risk-based supervision, because of the need for company-specific findings, is not an adequate substitute for a larger participant rule in a market with a substantial number of large participants.
In their petition, CRL and CBA recommend that the market for personal loans be defined as follows:
Originating or servicing closed-end or open-end lines of credit payable in more than one installment and extended to consumers for personal, family, or household purposes other than loans secured by real estate, post-secondary education loans as defined in 12 C.F.R. 1090.106(a), or automobile purchase or refinance loans as defined in 12 C.F.R. 1090.108(a).
With regard to their recommendation that the Bureau cover both closed-end installment loans and open-end lines of credit, CRL and CBA state that “there is an ongoing debate as whether [buy-now-pay-later (BNPL)] loans are closed-end loans or open-end lines of credit” and assert that ‘[g]rouping closed-end and open-end loans into the definition of a single personal loan market will avoid potential inconsistency with respect to Bureau supervision and avoid potential uncertainty as to the coverage of BNPL loans.”
With regard to their recommendation that the market be defined to cover both originating and servicing personal loans, CRL and CBA point to bank/fintech partnerships. Calling the assertion that the bank in such partnerships is the true lender “debatable,” they argue that it is clear that the nonbank partner is a covered person delivering a consumer financial product or service in its role as loan servicer. According to CRL and CBA, defining the market to cover servicing and origination “will assure that these non-depository fintechs, if large enough to meet the larger participant threshold, are subject to the Bureau’s supervision at least with respect to its servicing activities, including its activities in billing, collecting, and furnishing data to consumer reporting agencies.”
In August 2022, eight national trade groups filed a petition with the CFPB that urged the Bureau to engage in rulemaking to define larger participants in the market for data aggregation services.