By C. Ketil. University of Scranton.

Small entities making loans using the Portfolio approach would be required to conduct underwriting payday loan about com, but would have the flexibility to determine what underwriting to undertake consistent with the provisions in proposed § 1041 lenders for payday loan. They would not be required to gather information or verification evidence on borrowers’ income or major financial obligations nor determine that the borrower has the ability to repay the loan while paying major financial 1105 obligations and paying basic living expenses payday loan advance. They would also not be required to obtain a consumer report from a registered information system. Moreover, they would have the option of furnishing information concerning the loan either to each registered information system or to a national consumer reporting agency. They would also not be required to provide the payment notice, the costs and benefits of which are described below. Costs to Small Entities Small entities with very low portfolio default rates would still incur some costs to use the Portfolio approach. They would be required to break out covered longer-term loans from the rest of their personal lending activity and calculate the covered portfolio default rate. Because of the risk of having to refund borrowers’ origination fees, lenders would be likely to seek to maintain a portfolio default rate lower than 5 percent so as to limit the risk that an unexpected increase in the portfolio default rate, such as from changing local or national economic conditions, does not push the portfolio default rate above 5 percent. The Portfolio approach would also limit the number of loans that a small entity could make because prior to making a Portfolio approach loan, a lender must determine from its records and the records of its affiliates that the loan would not result in the consumer being indebted on more than two outstanding Portfolio approach loans from the lender or its affiliates within a period of 180 days. Among other requirements, the loan would need to be structured with a term of 46 days to six months, with substantially equal and amortizing payments due at regular intervals and no prepayment penalty. They would also not be required to obtain a consumer report from a registered information system. Moreover, they would have the option of furnishing information concerning the loan either to each registered information system or to a national consumer reporting agency. Provisions Relating to Payment Practices and Related Notices The proposed rule would limit how payments on a covered loan are initiated from a borrower’s checking, savings, or prepaid account and impose two notice requirements relating to those payments. This should make unsuccessful payment withdrawal attempts less frequent, and lessen the impacts of 1107 the limitation on payment withdrawal attempts and the requirement to notify consumers when a lender would no longer be permitted to attempt to withdraw payments from a borrower’s account. Limitation on Payment Withdrawal Attempts The proposed rule would prevent lenders from attempting to withdraw payment from a consumer’s deposit or prepaid account if two consecutive prior payment attempts made through any channel are returned for nonsufficient funds. The lender could resume initiating payment if the lender obtained from the consumer a new authorization to collect payment from the consumer’s account. Cost to Small Entities The impact of this restriction depends on how often the lender attempts to collect from a consumers’ account after more than two consecutive failed transactions and how often they are successful in doing so. Based on industry outreach, the Bureau understands that some small entities already have a practice of not continuing to attempt to collect using these means after one or two failed attempts. The Bureau notes that under the proposed restriction, lenders still could seek payment from their borrowers, including by obtaining a new and specific authorization to collect payment from a borrower’s account or by engaging in other lawful collection practices, and so the preceding estimate represents a high-end estimate of the impact of the restriction on the payments that would not be collected by these particular lenders if the proposed restriction were in place. These other forms of lawful collection practices, however, may be more costly for lenders than attempting to collect directly from a borrower’s account. The Bureau believes that this would most often be done in conjunction with general collections efforts and would impose little additional cost on lenders. To the extent that lenders assess returned item fees when an attempt to collect a payment fails and lenders are subsequently able to collect on those fees, this proposal may reduce lenders’ revenue from those fees. Small entities would also need the capability of identifying when two consecutive payment requests have failed. The Bureau believes that the systems small entities use to identify when a payment is due, when a payment has succeeded or failed, and whether to request another payment would have the capacity to identify when two consecutive payments have failed, and therefore this requirement would not impose a significant new cost. There would be separate notices prior to regular scheduled payments and prior to unusual payments. Costs to Small Entities The costs to small entities of providing these notices would depend heavily on whether they are able to provide the notice via email or text messages or would have to send notices through paper mail. Lenders enter data directly into the disclosure system or the system automatically collects data from the lenders’ loan origination system. For disclosures provided via mail, email, or text message, the disclosure system often forwards to a vendor, in electronic form, the information necessary to prepare the disclosures, and the vendor then prepares and delivers the disclosures. Lenders would incur a one-time burden to upgrade their disclosure systems to comply with new disclosure requirements. Lenders would need to update their disclosure systems to compile necessary loan information to send to the vendors that would produce and deliver the disclosures relating to 1110 payments. The Bureau believes small depositories and non-depositories rely on licensed disclosure system software. Depending on the nature of the software license agreement, the Bureau estimates that the cost to upgrade this software would be $10,000 for lenders licensing the software at the entity-level and $100 per seat for lenders licensing the software using a seat- license contract. For lenders using seat license software, the Bureau estimates that each location for small lenders has on average three seats licensed. Given the price differential between the entity-level licenses and the seat-license contracts, the Bureau believes that only small entities with a significant number of stores would rely on the entity-level licenses.

The median monthly payment is only slightly higher than for 994 vehicle title installment loans at $304 1000 loan not payday, suggesting borrowers would need a similar household income to be able to demonstrate an ability to repay both types of loans payday loan to a debit. Given the substantially higher average incomes of payday installment borrowers definition for payday loan, as seen in Table 6, it appears that a majority would be able to demonstrate an ability to repay a typical payday installment loan. Table 6 shows that borrowers taking out loans online have higher incomes, on average, 995 than payday installment borrowers overall. An individual borrower may need $3,000 in monthly income for household income to be sufficient to make such a payment. More than two-thirds of the online installment borrowers in the Bureau’s data have individual incomes at least that high. Taken together, these results suggest that borrowers who currently take out payday installment loans are more likely to demonstrate an ability to repay the loans than are borrowers who take out vehicle title loans, or any short-term loans, and this result is stronger for borrowers taking out loans online. If these borrowers have unusually high expenses, relative to their incomes, they would be less likely than the data here suggest to be able to demonstrate an ability to repay a loan. Given the borrowers’ need for liquidity, however, it is more likely that they have greater expenses relative to their income compared with households generally. This may be particularly true around the time that borrowers take out a loan, as this may be a time of unusually high expenses or low income. The presumptions would not apply in circumstances in which the new loans would substantially reduce the cost of credit or payment size, and could be rebutted by evidence of an improvement in the consumer’s financial capacity in the last 30 days. However, it believes that these proposals would have more modest impacts on the volume of covered longer-term loans overall than the basic ability- to-repay requirements, though they could be more substantial as applied specifically to longer- term balloon payment loans in which there is evidence of substantial reborrowing activity. Overall, the reduction in loan volume from the proposed rules would benefit lenders to the extent that it would substantially reduce their costs associated with default, including credit losses and the costs of collections. Cash-flow analyses similar to the residual income analysis that would be required under the proposed rule are common for some types of storefront installment lenders, indicating that they find this approach effective at reducing credit losses. Calculations of debt-to-income ratios are likewise common among lenders in a variety of other consumer credit markets, such as mortgages and credit cards. And, recent entrants making loans that would be covered longer-term loan use various sources of income and expense data to conduct similar analyses. While the Bureau does not have information on the default rates of borrowers who would or would not demonstrate an ability to repay a loan, the Bureau has published an analysis of the 1017 src="http://www. This suggests that a more refined evaluation that included information on borrower’s payments on other major financial obligations and living expenses would provide information about the risk of a borrower defaulting on the loan. That report found that the relationship was substantially mitigated or eliminated if loans for which the borrower never made a payment (“first-payment defaults”) were excluded from the analysis. Another analysis by the research group affiliated with a specialty consumer reporting agency found that a 1002 residual income model was “proven predictive of loan performance. The magnitude of this cost would vary across lenders; it would appear, based on the analysis presented above, to be greatest for vehicle title installment lenders, who currently make loans to borrowers with substantially lower income than lenders making payday installment loans. The Bureau does not expect the same level of consolidation of lenders making covered longer-term loans as it does for payday and single-payment vehicle title lenders. Lenders making vehicle title installment loans may face challenges in determining that applicants have the ability to repay a loan that are similar to those faced by payday lenders, based on the discussions presented above. These lenders would not, however, face revenue impacts from limitations on rolling over loans, or permitting reborrowing, in the same way lenders making covered short-term loans would. And, given that installment products have a wider range of possible loan structures, it may be more feasible for these lenders to adjust the terms of the loans such that they are able to determine that applicants have the ability to repay a the loan. This could possibly be achieved through some combination of reducing the size of the loan, lowering the cost of the loan, or extending the term of the loan. The latter approach could, however, require the lender to build in a larger cushion to account for the increased risk of income volatility. Extending the term of a loan may increase lender revenue, holding constant repayment. Lenders would, however, receive less revenue per loan if they reduced the loan size or the price of a loan. And, extending the term of a loan or offering only smaller loan may make the loan less attractive to a borrower and therefore make a borrower less willing to take the loan. Extending the term of a loan may reduce the risk of default because of the lower payment, but there may be an off-setting effect of a greater risk that a borrower would experience a negative shock to income or expenses during the term of the loan, resulting in default. That risk may be mitigated to the extent the lender adjusts the cushion used in assessing the consumer’s ability to repay. Possible Lender Response – Lowering the Total Cost of Credit to Avoid Coverage Longer-term loans are not covered loans if the total cost of credit of the loan is below 36 percent. Many of the products that would be covered by the proposed rule have a total cost of credit that far exceed 36 percent, and lenders making these loans would presumably not cut the price of the loans so dramatically, or make other changes to the structure of the loan that would affect the total cost of credit, to make them non-covered loans. Some lenders, however, make loans that are only slightly above the 36 percent coverage threshold. For example, a community bank might make a loan with a low interest rate but a relatively high origination fee (compared to the amount of the loan) and a short repayment term. Lenders making these loans may choose to reduce the origination fee, or set a minimum loan size or minimum term, to bring the total cost of credit below 36 percent.

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Assuming that multiple registered information systems existed cash payday loan in, it might be necessary to incur this cost multiple times apply loan payday, if data are not shared across systems payday loan instant approval no credit check. As discussed 1004 above, the Bureau would encourage the development of common data standards for registered information systems when possible to reduce the costs of providing data to multiple systems. As noted above, many lenders already use automated systems when originating loans. These lenders would likely modify those systems or purchase upgrades to those systems to automate many of the tasks that would be required by the proposal. Lenders originating covered longer-term loans would be required to obtain information and verification evidence on the amount and timing of an applicant’s income for all such loans. The Bureau understands that the underwriting practices of lenders that originate loans that would be covered longer-term loans vary substantially. The Bureau believes that many lenders that 1005 make covered longer-term loans, such as payday installment lenders, already obtain some information and verification evidence about consumers’ incomes, but that others, such as some vehicle title lenders or some lenders operating online, do not do so for some or all of the loans they originate. And, some lenders, such as storefront consumer finance installment lenders who make some covered longer term loans and some newer entrants, have underwriting practices that may satisfy, or satisfy with minor changes such as obtaining housing cost estimates, the requirements of the proposed rule. Other lenders, however, do not collect information or verification evidence on applicants’ major financial obligations or determine consumers’ ability to repay a loan in the manner contemplated by the proposal. Lenders would be required to obtain a consumer report from a national consumer reporting agency to verify applicants’ required payments under debt obligations. This would be in addition to the cost of obtaining a consumer report from a registered information system. Verification evidence for housing costs may be included on an applicant’s consumer report, if the applicant has a mortgage; otherwise, such evidence could consist of documentation of rent or an estimate of a consumer’s housing expense based on the housing expenses of similarly situated consumers with households in their area. The Bureau believes that most lenders would purchase reports from specialty consumer reporting agencies that would contain both debt information from a national consumer reporting agency and housing expense estimates. Based on industry outreach, the Bureau believes these reports would cost approximately $2. As with the ordering of reports from registered information systems, the Bureau believes that many lenders would modify their automated loan origination system, or purchase an upgrade to the system to enable the system to automatically order a specialty 1006 consumer report during the lending process. For lenders that order reports manually, the Bureau estimates that it would take approximately two minutes for a lender to request a report. Lenders that do not currently collect income or verification evidence for income would need to do so. For lenders that use a manual process, for consumers who have straightforward documentation for income and provide documentation for housing expenses, rather than relying on housing cost estimates, the Bureau estimates that gathering and reviewing information and verification evidence for income and major financial obligations would take roughly three to five minutes per application. Some consumers may visit a lender’s storefront without the required documentation and may have income for which verification evidence cannot be obtained electronically, raising lenders’ costs and potentially leading to some consumers failing to complete the loan application process, reducing lender revenue. Lenders making loans online may face particular challenges obtaining verification evidence, especially for income. It may be feasible for online lenders to obtain scanned or photographed documents. And services that use other sources of information, such as checking account or payroll records, may mitigate the need for lenders to obtain verification evidence directly from consumers. Making Ability-to-repay determination Once information and verification evidence on income and major financial obligations has been obtained, the lender would need to make a reasonable determination whether the consumer has the ability to repay the contemplated loan. In addition to considering the information collected about income and major financial obligations, lenders would need to estimate an amount that borrowers generally need for basic living expenses. They may do this in 1007 a number of ways, including, for example, collecting information directly from applicants, using available estimates published by third parties, or providing for a “cushion” calculated as a percentage of income. The time it takes to complete this review would depend on the method used by the lender. Making the determination would be essentially instantaneous for lenders using automated systems; the Bureau estimates that this would take roughly 10 additional minutes for lenders that use a manual process to make these calculations. Dollar costs would include a report from a registered information system costing $0. Documenting Improved Financial Capacity Lenders would not be able to make a covered longer-term loan during the term of and for 30 days following a prior covered short-term loan or covered longer term balloon-payment loan unless the borrower’s financial capacity has sufficiently improved or payments on the new loan would be substantially smaller than payments on the prior loan. This situation is unlikely to occur frequently, as a covered longer-term loan would normally have payments that are substantially smaller than the payment for a covered short-term loan or the balloon payment of a 1008 covered longer-term balloon-payment loan. It could arise, however, if the new loan were for a substantially larger amount than the prior loan, or if the new loan had only a slightly longer term than the prior loan (for example, a 46-day three-payment loan following a 45-day three-payment loan). A similar limitation would apply in cases in which a consumer has indicated difficulty in repaying other types of covered or non-covered loans to the same lender or its affiliates. Unless the payments on the new loan would be substantially smaller than payment on the prior loan or the new loan would substantially lower the cost of credit, the consumer would be presumed not to be able to afford the new loan unless the lender concluded that the borrower’s financial capacity had improved sufficiently in the preceding 30 days. The improvement in financial capacity would need to be documented using the same general kinds of verification evidence that lenders would be need to collect as part of the underlying assessment of the consumer’s ability to repay. Comparing the borrower’s projected financial capacity for the new loan with the consumer’s financial capacity since obtaining the prior loan (or during the prior 30 days for an unaffordable outstanding loan) would impose very little cost, as long as the same lender had made the prior loan. If the lender did not make the prior loan, or if the borrower’s financial capacity would be better for the new loan because of an unanticipated dip in income since obtaining the prior loan (or during the prior 30 days), the lender would need to collect additional documentation to overcome the presumption of unaffordability. Many of these requirements would not appear qualitatively different from many practices that most lenders already engage in, such as gathering information and documents from borrowers and ordering various types of consumer reports.

Action is for credit than mainstream financial institutions and necessary from both provincial and municipal levels are more prevalent in lower income neighbourhoods payday loan easy to get. Payday lenders and other fringe There are 15 return Payday loan customers are financial institutions counteract poverty- customers or rollover loans predominately those who are reduction efforts not repaying a payday loan. Payday lenders employed full time but live at or for every new payday below a living wage— charge interest rates that loan customer txt for payday loan, which further the working poor. The Cost of Providing Payday Loans in Canada: A Report Prepared for the Canadian Association of Community Financial Service Providers. Mainstream Municipal Provincial Federal Non-profit Financial Government Government Government Sector Institutions » Passing land use » Repeal the » Do not allow » Provide financial » Provide financial bylaws limiting Alberta Payday provinces to literacy and products that the number of Loans Regulation override the empowerment offer short-term, payday lending and revert to the interest rate supports to low dollar credit businesses within federal criminal maximum of 60% encourage at reasonable a community or code interest rate annually outlined savings, asset interest rates. Employers, who principal amount of the loan), generally have emerged and may have previously provided maximum term for loans (62 expanded as the cost of living salary advances to financially days), a penalty for non-payment for lower and middle income strapped employees, largely (2. This combined payroll outsourcing and direct borrowing limit (not to exceed with “traditional banks... To make ends meet Approximately the working poor who live in in expensive cities like less affluent neighbourhoods. Calgary, the poorest two million The working poor by definition workers spend 122% Canadians make use of payday are likely to be working full-time, of their annual income. Despite often working means perpetuates the more than 40 hours per week the cycle of poverty. Fifty- including: pawn broking, cash due to mainstream financial eight percent of low wage workers for gold or cars, cheque cashing, institutions being less accessible. For the oversight compared to the The reasons why payday loan purposes of this brief our focus will traditional banking sector. In The payday loan industry in Loans Regulation under the Alberta when 252 payday loan Canada emerged in the early Fair Trading Act. Supporting Albertans to Save: An Asset Building Approach to Poverty Reduction concept paper. The avenue for customers to increase pay for necessities; 11% to avoid Ernst & Young report goes on their indebtedness to payday bouncing cheques; 9% to help to outline that for every first-time lenders. Government of Canada troubling is that 55% of people to present at a payday loan data determined that 52% of taking out payday loans did so location with information about people who used cheque cashing to cover routine or necessary or payday lenders also used the their work related earnings and a expenses. If a based on a proportion of their with 22% using the service at least person is unable to pay for basics 12 next paycheque and payment is monthly. The plus the principal loan amount, payday loan users said they chose customer is expected to return and have enough money to cover a payday loan over other financial to the store and repay the loan next month as well? Not only the loan, customers are often lenders that they exist for a can customers go to any number encouraged to take out another customer’s one-off emergency, of stores in their community but loan as soon as the following both the Ernst &Young study they can now qualify for a payday 14 day. Kobzar, Olena (2012) Networking in the Margins: The Regulation of Payday Lending in Canada, Centre for Criminology and Sociolegal Studies, University of Toronto, 48. The Cost of Providing Payday Loans in Canada: A Report Prepared for the Canadian Association of Community Financial Service Providers. Kobzar, Olena (2012) Networking in the Margins: The Regulation of Payday Lending in Canada, Centre for Criminology and Sociolegal Studies, University of Toronto, 124. In Calgary, this is according to a leading payday was followed by an exodus of becoming increasingly the case loan provider in Canada, a commercial banks from the area. Applications are completed online the number of fringe banking and can be deposited directly businesses increased from 6 to into bank accounts or picked 19. To combat the rise of fringe 34, who live in western provinces, In Alberta as in most provinces, financial providers, a community have incomes of less than $30,000 provincial regulations allow for initiative called Community annually, and have completed higher annual rates of interest than Financial Counselling Services some post-secondary education. This is 10 times more than what the federally regulated annual rate of interest was created. Every successful business withdrawal of mainstream financial It is clear that consumers, model targets its key consumer institutions and the rise of the cash particularly low income demographics to ensure repeat store and other fringe lenders consumers, need options. If the business; fringe financial comes out of Winnipeg’s north only local alternatives available businesses are no different. Is there an alternative to fringe banking: One community’s response to the financial services void, 5. This rely on repeat business is not Currently all orders of government strategy will likely include financial substantiated by their data. With in Canada legislate and regulate empowerment, which may include far more repeat customers than various aspects of the fringe the area of fringe lending. Section 347 whether those who use payday of the Canadian Criminal Code The City of Calgary approved a loans repeatedly are doing so identifies that charging more than poverty reduction strategy and in order to repay previous loans 60% annual interest is punishable one of its recommendations is to taken out for necessities further by a fine and jail time. In her 2012 doctoral thesis Olena override the 60% federal interest Kobzar challenges us to consider rate. On one side are those lenders in economically Section 347 of the Canadian Criminal who argue that payday loans depressed parts of Calgary as result, for many people, in a Code identifies that charging well as demographic information more than 60% annual interest is downward cycle of poverty and about customers suggests that debt that can be difficult, if not punishable by a fine and jail time.

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