The Center for Responsible Lending (CRL) and the Consumer Bankers Association (CBA) have submitted a joint petition to the CFPB asking the Governing Board to participate in rulemaking to define larger participants in the personal lending market. In February 2022, the CFPB introduced a new process for members of the public to petition rulemaking (including changing or repealing existing rules). the petition was put on record from the CFPB. Under the CFPB’s new procedure, petitions submitted will receive a final response from the CFPB. (The CBA previously sent a letter to then-new director Chopra in October 2021, urging the CFPB to introduce a larger participant rule for fintech consumer lenders.)
In their petition, the CRL and CBA describe the consumer credit market 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 including three types of loans, which can be secured (other than real estate interests) or unsecured: short-term installment loans (typically with maturities of three months to one year), longer-term Loans and Revolving Credit Lines. Secured loans in this category include loans to finance the purchase of durable goods (e.g. appliances or mobile homes) and loans secured by a security interest in the borrower’s existing property (e.g. a vehicle).
The CRL and CBA note that the Bureau announced in its 2015 regulatory agenda that it expects to develop a proposed rule to define major non-bank participants in the personal loan market, including consumer installment loans and auto title loans, and reported on it in its Spring Regulatory Agenda 2017 that they are working on developing such a rule. However, as they also note, the Bureau under former Acting Director Mulvaney classified rulemaking as inactive in its Spring 2018 regulatory agenda and has not commented on the issue since.
Reasons set out in the petition why the Bureau should resume rulemaking more broadly include:
- A rapidly growing personal installment loan market, also due to changes in state laws effectively banning payday loans;
- A significant portion of consumers who take out other personal loans, particularly consumers who receive such loans from non-banks, tend to be economically vulnerable consumers who either cannot obtain credit through a credit card or HELOC, have exhausted their available credit, or incurred so much debt have that they need a credit card or HELOC refinance;
- Significant growth in fintechs targeting the subprime market and offering loans that consumers find difficult to repay;
- The current regulatory regime creates an unlevel playing field for banks regulated by the CFPB and a significant risk that consumer protection issues affecting vulnerable consumers will go undetected; and
- Risk-based supervision is not an adequate substitute for a large participant rule in a market with a significant number of large participants due to the need for company-specific insights.
In their petition, the CRL and CBA recommend defining the personal loan market as follows:
Originating or servicing closed or perpetual lines of credit, payable in more than one installment, granted to consumers for personal, family, or household purposes, except for loans secured by real estate, post-secondary education loans as defined in 12 CFR 1090.106 (a ) or auto purchase or refinance loans as defined in 12 CFR 1090.108(a).
Referring to their recommendation that the Governing Board cover both closed installment loans and perpetual lines of credit, the CRL and CBA state that “there is an ongoing debate as to whether [buy-now-pay-later (BNPL)] Loans are closed loans or perpetual lines of credit” and claim that “[g]Consolidating closed and open loans into the definition of a single retail lending market will avoid potential inconsistencies in terms of bureau oversight and potential uncertainties over coverage of BNPL loans.”
Regarding their recommendation to define the market to cover both origination and servicing of personal loans, the CRL and CBA point to partnerships between banks and fintechs. They call the claim that the bank is the true lender in such partnerships “controversial,” arguing that it is clear that the non-bank partner is an insured person who, in its role as a credit servicer, sells a financial product or provides a service to consumers. According to the CRL and CBA, defining the market to cover servicing and origination “will ensure that if these non-custodial fintechs are large enough to meet the larger participant threshold, they will be subject to Bureau oversight, at least in relation to on its servicing activities, including its activities in billing, collection and provision of data to consumer reporting points.”
In August 2022, eight national trade groups submitted a petition to the CFPB asking the Governing Board to participate in rulemaking to define larger participants in the data aggregation services market.