The WBA filed the following comment letter on behalf of the industry. Below is the text of the comment letter which WBA members are welcome to use for their own letters.


October 4, 2016

VIA EMAIL

Ms. Monica Jackson, Office of the Executive Secretary
Consumer Financial Protection Bureau
1700 G Street NW.,
Washington, DC 20552
www.regulations.gov
Docket No. CFPB-2016- 0025

RE:     Payday, Vehicle Title, and Certain High-Cost Installment Loans: Docket No. CFPB-2016- 0025

Dear Ms. Jackson,

The Wisconsin Bankers Association (WBA) is the largest financial trade association in Wisconsin, representing approximately 270 state and nationally chartered banks, savings and loan associations, and savings banks. All of our members are insured depository institutions. WBA appreciates the opportunity to comment on the Bureau of Consumer Financial Protection's (CFPB's) proposed rule on payday, vehicle title, and certain high-cost installment loans.

WBA recognizes that the CFPB's intent is to provide consumer protections by regulating payday, vehicle title, and certain high-cost installment loans, but fears that the proposed rule's complex and burdensome underwriting and record retention requirements will result in unintended consequences, more specifically discussed below, that will cause many of our member institutions to exit the market entirely and cease to provide covered loans. We believe those financial institutions that do continue to make short-term loans under the proposed rule will face increased costs due to such factors as software and systems upgrades and training of personnel. These costs will, in turn, increase the cost of credit to consumers.

Unintended Consequences

Our members make short-term loans as an aspect of service to their community. Short-term loans covered by the proposed rule are not products created and offered by our member institutions as a means of profit; they are primarily provided for their customers to deal with financial emergencies. They are offered to customers with poor credit or limited means, who live on social security or disability, and others who truly need this funding. For example, financial institutions provide covered loans for customers with sudden car and home repairs and unexpected medical bills. Our member institutions firmly believe that this service is part of being a responsible and engaged member of the communities in which they operate and serve.

Under the proposed rule, financial institutions will be required to follow very rigid requirements to document, verify, and project the borrower's income, majority of financial obligations, housing costs, and basic living expenses prior to making the loan. WBA is concerned that this, combined with significant compliance risk, will require a complete overhaul of our members' processes and render short-term loans costly and impractical. We believe that imposition of such a significant regulatory burden upon insured depository institutions, which are all regularly examined, is unnecessary when they already follow self-imposed underwriting standards. These underwriting standards have been tested and reports from our members indicate low-to-nonexistent charge-off rates. Furthermore, these products have been tested by customers who understand the loan structure and are able to repay them consistently. WBA believes that the underwriting standards currently set by insured depository institutions are more than adequate, as evidenced by the extremely low charge-off rates for covered loans they already provide.

The CFPB estimates that the required ability-to-repay determination will take essentially no time for a fully automated electronic system and between 15 and 20 minutes for a fully manual system. WBA is concerned that while the CFPB's assessment may be accurate for larger institutions, it overlooks the burdens smaller community institutions will face. For example, it is not uncommon to find a community bank with a staff of five. If such a financial institution is required to follow the standards set forth under the proposed rule, WBA is concerned that the result will be a significant increase in costs that will increase the cost of credit to consumers. Even more likely, we fear that these financial institutions will simply stop offering short-term loans entirely because the burden of compliance will be too great for a smaller staff to absorb into an already complex and challenging compliance environment.

Many of our member institutions serve small communities where they are one of the few, and sometimes only, nearby options available for consumers in need of short-term loans. WBA fears that the proposed rule's unintended consequences will mean consumers living in those communities might be unable to obtain short-term loans altogether, or without significant inconvenience or additional cost. If the institution exits the market, we are very concerned that consumers in these small communities could be forced to seek credit from alternative lenders that are not regularly examined and perhaps less focused on consumer protection. The result of this situation will not only be inconvenient and more costly to consumers, but could also be harmful to consumers.

In addition, WBA understands that consumers of short-term loans come to our member institutions expecting to receive funds immediately, particularly in the case of an emergency. A customer is unlikely to bring the documentation required by the proposed rule during an emergency. Thus, if a financial institution offers covered loans at all, the customer would be sent home to retrieve documentation, further burdening and inconveniencing them and potentially delaying the process by which they are able to obtain funds that they need to avert or remedy an emergency.

While WBA appreciates the CFPB's efforts to create an exemption for accommodation loans, we do not find it to be a useful means to continue to make short-term loans covered by the proposed rule. Imposing a weighted annual default rate of 5% or less for short-term loans made under this exemption renders them inviable due to the potential costs resulting from the prohibition against set-off and potential refund of all origination fees. Furthermore, we do not believe that customers who repay a loan on schedule should be ineligible for a new loan. The proposed rule's restrictions on re-borrowing will harm customers who have demonstrated that these types of loans work for them.

WBA believes that in order for short-term loans to remain a viable option for our members while still meeting the CFPB's goal of consumer protection through regulation, the proposed rule will need to exempt insured depository institutions from the coverage of the proposed rule. Alternatively, we will request a de minimis threshold providing an exemption from the rule, for example, for insured depository institutions that make fewer than 100 covered loans per year. Such a threshold will make it possible for smaller community banks such as those discussed above to continue making covered loans as a service to their communities, using their already well established, tried and tested underwriting standards, and without causing unintended consequences that will be adverse to consumers. If the CFPB is unwilling to implement one of these alternatives, WBA requests that, at a minimum, the CFPB provide a more streamlined, less burdensome underwriting process for insured depository institutions.

Conclusion

WBA believes that the CFPB's proposed rule will force many of our member institutions to discontinue making short-term loans, or cause undue costs and burden that will then be passed on to their customers. Our members provide short-term loans as a service to their communities. Being insured depository institutions subject to regular examinations, and following underwriting standards set by their own policies and procedures which have resulted in very few defaults, we do not believe that such harsh restrictions on short-term lending are necessary for our members. Thus, as outlined above, we request that the CFPB include an exemption for insured depository institutions. To do otherwise will result in a curtailment in credit to consumers when they need it most.