Comment for 1041.6 - Conditional Exemption for Certain Covered Short-Term Loans
6(a) Conditional Exemption for Certain Covered Short-Term Loans
1. General. Under § 1041.6(a), a lender that complies with § 1041.6(b) through (e) can make a covered short-term loan without complying with the otherwise applicable requirements under § 1041.5. A lender who complies with § 1041.6 in making a covered short-term loan has not committed the unfair and abusive practice under § 1041.4 and is not subject to § 1041.5. However, nothing in § 1041.6 provides lenders with an exemption to the requirements of other applicable laws, including subpart C of this part and State laws.
2. Obtaining consumer borrowing history information. Under § 1041.6(a), the lender must determine prior to making a covered short-term loan under § 1041.6 that requirements under § 1041.6(b) and (c) are satisfied. In particular, § 1041.6(a) requires the lender to obtain information about the consumer's borrowing history from the records of the lender and the records of the lender's affiliates. (This information about borrowing history with the lender and its affiliates is also important to help a lender avoid violations of § 1041.6(d)). Furthermore, § 1041.6(a) requires the lender to obtain a consumer report from an information system that has been registered for 180 days or more pursuant to § 1041.11(c)(2) or is registered pursuant to § 1041.11(d)(2). If no information systems have been registered for 180 days or more pursuant to § 1041.11(c)(2) or are registered pursuant to § 1041.11(d)(2) and available as of the time the lender is required to obtain the report, the lender cannot comply with the requirements in § 1041.6(b) and (c). A lender may be unable to obtain such a consumer report if, for example:
i. No information systems have been registered for 180 days or more pursuant to § 1041.11(c)(2) or are registered pursuant to § 1041.11(d)(2); or
ii. If information systems have been registered for 180 days or more pursuant to § 1041.11(c)(2) or are registered pursuant to § 1041.11(d)(2) but all such registered information systems are temporarily unavailable. Under these circumstances, a lender cannot make a covered short-term loan under § 1041.6.
3. Consumer reports. A lender is not responsible for inaccurate or incomplete information contained in a consumer report from an information system that has been registered for 180 days or more pursuant to § 1041.11(c)(2) or is registered pursuant to § 1041.11(d)(2).
6(b) Loan Term Requirements
Paragraph 6(b)(1)
1. Loan sequence. Section 1041.2(a)(14) defines a loan sequence. For further clarification and examples regarding the definition of loan sequence, see § 1041.2(a)(14).
2. Principal amount limitations - general. For a covered short-term loan made under § 1041.6, different principal amount limitations apply under § 1041.6(b)(1) depending on whether the loan is the first, second, or third loan in a loan sequence. The principal amount limitations apply regardless of whether any or all of the loans are made by the same lender, an affiliate, or unaffiliated lenders. Under § 1041.6(b)(1)(i), for the first loan in a loan sequence, the principal amount must be no greater than $500. Under § 1041.6(b)(1)(ii), for the second loan in a loan sequence, the principal amount must be no greater than two-thirds of the principal amount of the first loan in the loan sequence. Under § 1041.6(b)(1)(iii), for the third loan in a loan sequence, the principal amount must be no greater than one-third of the principal amount of the first loan in the loan sequence.
3. Application to rollovers. The principal amount limitations under § 1041.6 apply to rollovers of the first or second loan in a loan sequence as well as new loans that are counted as part of the same loan sequence. Rollovers are defined as a matter of State law but typically involve deferral of repayment of the principal amount of a short-term loan for a period of time in exchange for a fee. In the event the lender is permitted under State law to make rollovers, the lender may, in a manner otherwise consistent with applicable State law and § 1041.6, roll over a covered short-term loan made under § 1041.6, but the rollover would be treated as the next loan in the loan sequence, as applicable, and would therefore be subject to the principal amount limitations set forth in § 1041.6(b)(1) as well as other limitations in § 1041.6. For example, assume that a lender is permitted under applicable State law to make a rollover. If the consumer obtains a first loan in a loan sequence under § 1041.6 with a principal amount of $300, under § 1041.6(b)(1)(ii), the lender may allow the consumer to roll over that loan so long as the consumer repays at least $100, so that the principal of the loan that is rolled over would be no greater than $200. Similarly, under § 1041.6(b)(1)(iii), the lender may allow the consumer to roll over the second loan in the loan sequence as permitted by State law, so long as the consumer repays at least an additional $100, so that the principal of the loan that is rolled over would be no greater than $100.
4. Example. Assume that a consumer who otherwise satisfies the requirements of § 1041.6 seeks a covered short-term loan and that the lender chooses to make the loan without meeting all the specified underwriting criteria required in § 1041.5. Under § 1041.6(b)(1)(i), the principal amount of the loan must not exceed $500. Assume that the consumer obtains a covered short-term loan under § 1041.6 with a principal amount of $450, the loan is contractually due in 14 days, and the consumer repays the loan on the contractual due date. Assume that the consumer returns to the lender 10 days after the repayment of the first loan to take out a second covered short-term loan under § 1041.6. Under § 1041.6(b)(1)(ii), the principal amount of the second loan may not exceed $300. Assume, further, that the consumer is then made a covered short-term loan under § 1041.6 with a principal amount of $300, the loan is contractually due in 14 days, and the consumer repays the loan on the contractual due date. If the consumer returns to the lender 25 days after the repayment of the second loan to take out a third covered short-term loan under § 1041.6, under § 1041.6(b)(1)(iii), the principal amount of the third loan may not exceed $150. These same limitations would apply if the consumer went to a different, unaffiliated lender for the second or third loan. If, however, the consumer does not return to the lender seeking a new loan under § 1041.6 until 32 days after the date on which the second loan in the loan sequence was repaid, the subsequent loan would not be part of the prior loan sequence and instead would be the first loan in a new loan sequence. Therefore, if otherwise permissible under § 1041.6, that loan would be subject to the $500 principal amount limitation under § 1041.6(b)(1)(i).
Paragraph 6(b)(2)
1. Equal payments and amortization for loans with multiple payments. Section 1041.6(b)(2) provides that for a loan with multiple payments, the loan must amortize completely during the term of the loan and the payment schedule must allocate a consumer's payments to the outstanding principal and interest and fees as they accrue only by applying a fixed periodic rate of interest to the outstanding balance of the unpaid loan principal during every repayment period for the term of the loan. For example, if the loan has a contractual duration of 30 days with two scheduled biweekly payments, under § 1041.6(b)(2) the lender cannot require the consumer to pay interest only for the first scheduled biweekly payment and the full principal balance at the second scheduled biweekly payment. Rather, the two scheduled payments must be equal in amount and amortize over the course of the loan term in the manner required under § 1041.6(b)(2).
Paragraph 6(b)(3)
1. Inapplicability of conditional exemption to a loan with vehicle security. Section 1041.6(b)(3) prohibits a lender from making a covered-short-term loan under § 1041.6 with vehicle security. If the lender or its service provider take vehicle security in connection with a covered short-term loan, the loan must be originated in compliance with all of the requirements under § 1041.5, including the ability-to-repay determination.
Paragraph 6(b)(4)
1. Inapplicability of conditional exemption to an open-end loan. Section 1041.6(b)(4) prohibits a lender from making a covered short-term loan under § 1041.6 structured as an open-end loan under § 1041.2(a)(16). If a covered short-term loan is structured as an open-end loan, the loan must be originated in compliance with all of the requirements under § 1041.5.
6(c) Borrowing History Requirements
Paragraph 6(c)(1)
1. Preceding loans. Section 1041.6(c)(1) provides that prior to making a covered short-term loan under § 1041.6, the lender must determine that more than 30 days has elapsed since the consumer had an outstanding loan that was either a covered short-term loan (as defined in § 1041.2(a)(10)) made under § 1041.5 or a covered longer-term balloon-payment loan (as defined in § 1041.2(a)(7)) made under § 1041.5. This requirement applies regardless of whether this prior loan was made by the same lender, an affiliate, or an unaffiliated lender. For example, assume that a lender makes a covered short-term loan to a consumer under § 1041.5, that the loan has a contractual duration of 14 days, and that the consumer repays the loan on the contractual due date. If the consumer returns for a second loan 20 days after repaying the loan, the lender cannot make a covered short-term loan under § 1041.6.
Paragraph 6(c)(2)
1. Loan sequence limitation. Section 1041.6(c)(2) provides that a lender cannot make a covered short-term loan under § 1041.6 if the loan would result in the consumer having a loan sequence of more than three covered short-term loans under § 1041.6 made by any lender. This requirement applies regardless of whether any or all of the loans in the loan sequence are made by the same lender, an affiliate, or unaffiliated lenders. See comments 6(b)(1)-1 and -2 for further clarification on the definition of loan sequence, as well as § 1041.2(a)(14) and accompanying commentary. For example, assume that a consumer obtains a covered short-term loan under the requirements of § 1041.6 on February 1 that has a contractual due date of February 15, that the consumer repays the loan on February 15, and that the consumer returns to the lender on March 1 for another loan under § 1041.6. The second loan under § 1041.6 would be part of the same loan sequence because 30 or fewer days have elapsed since repayment of the first loan. Assume that the lender makes the second loan with a contractual due date of March 15, that the consumer repays the loan on March 15, and that the consumer returns to the lender on April 1 for another loan under § 1041.6. The third loan under § 1041.6 would be part of the same loan sequence as the first and second loans because fewer than 30 days have elapsed since repayment of the second loan. Assume that the lender makes the third loan, which has a contractual due date of April 15 and that the consumer repays the loan on April 15. The consumer would not be permitted to receive another covered short-term loan under § 1041.6 until the 30-day period following April 15 has elapsed, that is until after May 15, assuming the other requirements under § 1041.6 are satisfied. The consumer would also be prohibited from obtaining other forms of credit from the same lender or its affiliate for 30 days under § 1041.6(d); see comment 6(d)-1. Loans that are rollovers count toward the sequence limitation under § 1041.6(c)(2). For further clarification on how the requirements of § 1041.6 apply to rollovers, see comment 6(b)(1)-3.
Paragraph 6(c)(3)
1. Consecutive 12-month period. Section 1041.6(c)(3) requires that a covered short-term loan made under § 1041.6 not result in the consumer having more than six covered short-term loans outstanding during a consecutive 12-month period or having covered short-term loans outstanding for an aggregate period of more than 90 days during a consecutive 12-month period. The consecutive 12-month period begins on the date that is 12 months prior to the proposed contractual due date of the new covered short-term loan to be made under § 1041.6 and ends on the proposed contractual due date. The lender must review the consumer's borrowing history on covered short-term loans for the 12 months preceding the consummation date of the new covered short-term loan less the period of proposed contractual indebtedness on that loan. For example, for a new covered short-term loan to be made under § 1041.6 with a proposed contractual term of 14 days, the lender must review the consumer's borrowing history during the 351 days preceding the consummation date of the new loan. The lender also must consider the making of the new loan and the days of proposed contractual indebtedness on that loan to determine whether the requirement under § 1041.6(c)(3) regarding the total number of covered short-term loans and total time of indebtedness on covered short-term loans during a consecutive 12-month period is satisfied.
Paragraph 6(c)(3)(i)
1. Total number of covered short-term loans. Section 1041.6(c)(3)(i) provides that a lender cannot make a covered-short term loan under § 1041.6 if the loan would result in the consumer having more than six covered short-term loans outstanding in any consecutive 12-month period. The requirement counts covered short-term loans made under either § 1041.5 or § 1041.6 toward the limit. This requirement applies regardless of whether any or all of the loans subject to the limitations are made by the same lender, an affiliate, or an unaffiliated lender. Under § 1041.6(c)(3)(i), the lender must use the consumer's borrowing history to determine whether the loan would result in the consumer having more than six covered short-term loans outstanding during a consecutive 12-month period. A lender may make a loan that would comply with the requirement under § 1041.6(c)(3)(i) even if the six-loan limit would prohibit the consumer from taking out one or two subsequent loans in the sequence.
2. Example. Assume that a lender seeks to make a covered short-term loan to a consumer under § 1041.6 with a contractual duration of 14 days. Assume, further, that the lender determines that during the past 30 days the consumer has not had an outstanding covered short-term loan and that during the 351 days preceding the consummation date of the new loan the consumer had outstanding a total of five covered short-term loans. The new loan would be the sixth covered short-term loan that was outstanding during a consecutive 12-month period. Therefore, the loan would comply with the requirement regarding the aggregate number of covered short-term loans under § 1041.6. Because the consumer has not had an outstanding covered short-term loan in the preceding 30 days, this loan would be the first loan in a new loan sequence. Assume that a week after repaying this first loan the consumer seeks another covered short-term loan under § 1041.6, also with a contractual duration of 14 days. Under § 1041.6(c)(3)(i), this second loan in the loan sequence cannot be made if it would result in the consumer taking out more than six covered short-term loans in the 351 days preceding the proposed consummation date of this loan.
Paragraph 6(c)(3)(ii)
1. Aggregate period of indebtedness. Section 1041.6(c)(3)(ii) provides that a lender cannot make a covered short-term loan under § 1041.6 if the loan would result in the consumer having covered short-term loans outstanding for an aggregate period of more than 90 days in any consecutive 12-month period. In addition to the proposed contractual duration of the new loan, the aggregate period in which all covered short-term loans made to the consumer during the consecutive 12-month period under either § 1041.5 or § 1041.6 were outstanding is counted toward the limit. This requirement applies regardless of whether any or all of the covered short-term loans are made by the same lender, an affiliate, or an unaffiliated lender. Under § 1041.6(c)(3)(ii), the lender must use the information it has obtained about the consumer's borrowing history to determine whether the loan would result in the consumer having covered short-term loans outstanding for an aggregate period of more than 90 days during a consecutive 12-month period. A lender may make a loan that would comply with the requirement under § 1041.6(c)(3)(ii) even if the 90-day limit would prohibit the consumer from taking out one or two subsequent loans in the sequence.
2. Example. Assume that Lender A seeks to make a covered short-term loan under § 1041.6 with a contractual duration of 14 days. Assume, further, that Lender A determines that during the past 30 days the consumer did not have an outstanding covered short-term loan and that during the 351 days preceding the consummation date of the new loan the consumer had outstanding three covered short-term loans made by Lender A and a fourth covered short-term loan made by Lender B. Assume that each of the three loans made by Lender A had a contractual duration of 14 days and that the loan made by Lender B had a contractual duration of 30 days, for an aggregate total of 72 days of contractual indebtedness. Assume, further, that the consumer repaid each loan on its contractual due date. The new loan, if made, would result in the consumer having covered short-term loans outstanding for an aggregate period of 86 days during the consecutive 12-month period. Therefore, the loan would comply with the requirement regarding aggregate time of indebtedness. Because the consumer has not had an outstanding covered short-term loan in the preceding 30 days, this loan would be the first loan in a new loan sequence. Assume that a week after repaying this first loan the consumer seeks another covered short-term loan under § 1041.6, also with a contractual duration of 14 days. Under § 1041.6(c)(3)(ii), this second loan in the loan sequence cannot be made if it would result in the consumer being in debt on covered short-term loans for more than 90 days in the 351 days preceding the proposed consummation date of this loan.
6(d) Restrictions on Making Certain Covered Loans and Non-Covered Loans Following a Covered Short-Term Loan Made Under the Conditional Exemption
1. General. If a lender makes a covered short-term loan under § 1041.6 to a consumer, § 1041.6(d) prohibits the lender or its affiliate from making a covered short-term loan under § 1041.5, a covered longer-term balloon payment loan under § 1041.5, a covered longer-term loan, or a non-covered loan to the consumer while the covered short-term loan made under § 1041.6 is outstanding and for 30 days thereafter. During this period, a lender or its affiliate could make a subsequent covered short-term loan in accordance with the requirements in § 1041.6.
2. Example. Assume that a lender makes both covered short-term loans under § 1041.6 and non-covered installment loans. Assume, further, that the lender makes on April 1 a covered short-term loan under § 1041.6 to a consumer who has not obtained a covered short-term loan under § 1041.6 in the previous 30 days. Assume that the consumer repays this loan on April 15 and that the consumer returns to the lender on April 30 to seek a non-covered installment loan. Because 30 days have not elapsed since the consumer repaid the loan made under § 1041.6, neither the lender nor its affiliate can make a non-covered installment loan to the consumer on April 30. May 16 is the earliest the lender or its affiliate could make a non-covered installment loan to the consumer. The prohibition in § 1041.6(d) applies to covered short-term loans and covered longer-term balloon payment loans made under § 1041.5 and covered longer-term loans but not to covered short-term loans made under § 1041.6. Section 1041.6(d) would, therefore, not prohibit the consumer from obtaining an additional covered short-term loan under § 1041.6 from the same lender or its affiliate on April 30, provided that such loan complies with the principal amount reduction and other requirements of § 1041.6. The prohibition in § 1041.6(d) on making subsequent non-covered loans applies only to a lender and its affiliates. Section 1041.6(d) would, therefore, not prohibit the consumer from obtaining on April 30 a non-covered installment loan from a lender not affiliated with the lender that made the covered short-term loan on April 1.
6(e) Disclosures
1. General. Section 1041.6(e) sets forth two main disclosure requirements related to a loan made under the requirements in § 1041.6. The first, set forth in § 1041.6(e)(2)(i), is a notice of the restriction on the principal amount on the loan and restrictions on the number of future loans and the principal amounts of such loans, which is required to be provided to a consumer when the consumer seeks the first loan in a sequence of covered short-term loans made under § 1041.6. The second, set forth in § 1041.6(e)(2)(ii), is a notice of the restriction on the principal amount on the loan and the prohibition on another similar loan for at least 30 days after the loan is repaid, which is required to be provided to a consumer when the consumer seeks the third loan in a sequence of covered short-term loans made under § 1041.6.
6(e)(1) General Form of Disclosures
6(e)(1)(i) Clear and Conspicuous
1. Clear and conspicuous standard. Disclosures are clear and conspicuous for purposes of § 1041.6(e) if they are readily understandable by the consumer and their location and type size are readily noticeable to the consumer.
6(e)(1)(ii) In Writing or Electronic Delivery
1. General. Section 1041.6(e)(1)(ii) requires that disclosures required by § 1041.6 be provided to the consumer in writing or through electronic delivery.
2. E-Sign Act requirements. The notices required by § 1041.6(e)(2)(i) and (ii) may be provided to the consumer in electronic form without regard to the Electronic Signatures in Global and National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.).
6(e)(1)(iii) Retainable
1. General. Electronic disclosures are retainable for purposes of § 1041.6(e) if they are in a format that is capable of being printed, saved, or emailed by the consumer.
6(e)(1)(iv) Segregation Requirements for Notices
1. Segregated additional content. Although segregated additional content that is not required by this section may not appear above, below, or around the required content, this additional content may be delivered through a separate form, such as a separate piece of paper or Web page.
6(e)(1)(vi) Model Forms
1. Safe harbor provided by use of model forms. Although the use of the model forms and clauses is not required, lenders using them will be deemed to be in compliance with the disclosure requirement with respect to such model forms consistent with section 1032(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5481, et seq.)
6(e)(2) Notice Requirements
6(e)(2)(i) First Loan Notice
1. As applicable standard. Due to the requirements in § 1041.6(c)(3), a consumer may not be eligible to complete a three-loan sequence of covered short-term loans under § 1041.6 because additional loans within 30 days of the expected pay-off date for the first loan would violate one or more provisions of § 1041.6(c)(3). Such a consumer may be permitted to obtain only one or two loans in a sequence of covered short-term loans under § 1041.6, as applicable. Under these circumstances, § 1041.6(e)(2)(i) would require the lender to modify the notice in § 1041.6(e)(2)(i) to reflect these limitations on subsequent loans. For example, if a consumer can receive only a sequence of two covered short-term loans under § 1041.6 because of the requirements in § 1041.6(c)(3), the lender would have to modify the notice to list the maximum principal amount on loans 1 and 2 and to indicate that loan 3 would not be permitted.
6(e)(3) Timing
1. General. Section 1041.6(e)(3) requires a lender to provide the notices required in § 1041.6(e)(2)(i) and (ii) to the consumer before the applicable covered short-term loan under § 1041.6 is consummated. For example, a lender can provide the notice after a consumer has completed a loan application but before the consumer has signed the loan agreement. A lender would not have to provide the notices to a consumer who inquires about a covered short-term loan under § 1041.6 but does not fill out an application to obtain this type of loan.
2. Electronic notices. If a lender delivers a notice required by this section electronically in accordance with § 1041.6(e)(1)(ii), § 1041.6(e)(3) requires a lender to provide the electronic notice to the consumer before a covered short-term loan under § 1041.6 is consummated. Specifically, § 1041.6(e)(3) requires a lender to present the retainable notice to the consumer before the consumer is contractually obligated on the loan. To comply with § 1041.6(e)(3), a lender could, for example, display a screen on a web browser with the notices required in § 1041.6(e)(2)(i) and (ii), provided the screen can be emailed, printed, or saved, before the covered short-term loan under § 1041.6 has been consummated.