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§ 1041.5 Ability-to-repay determination required.

(a) Definitions. For purposes of this section:

(1) Basic living expenses means expenditures, other than payments for major financial obligations, that a consumer makes for goods and services that are necessary to maintain the consumer's health, welfare, and ability to produce income, and the health and welfare of the members of the consumer's household who are financially dependent on the consumer.

Official Interpretation

5(a) Definitions

5(a)(1) Basic Living Expenses

1. General. Under §1041.5(b), a lender must make a reasonable determination that the consumer has the ability to repay a covered short-term loan or covered longer-term balloon-payment loan according to its terms. The consumer's ability to meet basic living expenses is part of the broader ability-to-repay determination under §1041.5(b). See comment 5(b)-1 for additional clarification. The lender's estimate of basic living expenses must be reasonable. The lender may make a reasonable estimate of basic living expenses without making an individualized determination. See comment 5(b)-2.i.C for additional clarification.

2. Expenditures included in basic living expenses. Section 1041.5(a)(1) defines basic living expenses as expenditures, other than payments for major financial obligations, that the consumer makes for goods and services necessary to maintain the consumer's health, welfare, and ability to produce income, and the health and welfare of the members of the consumer's household who are financially dependent on the consumer. Examples of basic living expenses include food, utilities not paid as part of rental housing expenses, transportation, out-of-pocket medical expenses, phone and Internet services, and childcare. Basic living expenses do not include expenditures for discretionary personal and household goods or services, such as newspaper subscriptions, or vacation activities. If the consumer is responsible for payment of household goods and services on behalf of the consumer's dependents, those expenditures are included in basic living expenses. As part of its reasonable ability-to-repay determination, the lender may reasonably consider whether another person (e.g., a spouse or adult family member living with the consumer) is regularly contributing toward the consumer's payment of basic living expenses (see comment 5(b)-2.i.C.2).

(2) Debt-to-income ratio means the ratio, expressed as a percentage, of the sum of the amounts that the lender projects will be payable by the consumer for major financial obligations during the relevant monthly period and the payments under the covered short-term loan or covered longer-term balloon-payment loan during the relevant monthly period, to the net income that the lender projects the consumer will receive during the relevant monthly period, all of which projected amounts are determined in accordance with paragraph (c) of this section.

Official Interpretation

5(a)(2) Debt-to-Income Ratio

1. General. Section 1041.5(a)(2) defines debt-to-income ratio as the ratio, expressed as a percentage, of the sum of the amounts that the lender projects will be payable by the consumer for major financial obligations during the relevant monthly period and the payments under the covered short-term loan or covered longer-term balloon-payment loan during the relevant monthly period, to the monthly net income that the lender projects the consumer will receive during the relevant monthly period, all of which projected amounts are determined in accordance with §1041.5(c). See §1041.5(b)(2)(i) and associated commentary for further clarification on the use of debt-to-income methodology to determine ability to repay. For covered longer-term balloon-payment loans, where the relevant monthly period may fall well into the future relative to the consummation of the loan, the lender must calculate the debt-to-income ratio using the projections made under §1041.5(c) and in so doing must make reasonable assumptions about the consumer's net income and major financial obligations during the relevant monthly period compared to the period covered by the verification evidence. For example, the lender cannot assume, absent a reasonable basis, that there will be a substantial increase in net income or decrease in major financial obligations between consummation and the relevant monthly period. For further clarification, see comment 5(c)(1)-1 regarding the consistency between the consumer's written statement and verification evidence and comment 5(c)(2)(ii)(A)-2 regarding what constitutes sufficient history of net income for purposes of verification evidence.

(3) Major financial obligations means a consumer's housing expense, required payments under debt obligations (including, without limitation, outstanding covered loans), child support obligations, and alimony obligations.

Official Interpretation

5(a)(3) Major Financial Obligations

1. General. Section 1041.5(a)(3) defines major financial obligations as a consumer's housing expense, required payments due under debt obligations (including, without limitation, outstanding covered loans), child support obligations, and alimony obligations. Housing expense includes the total periodic amount that the consumer pays for housing during the relevant monthly period, such as the amount the consumer pays to a landlord for rent or to a creditor for a mortgage (including principal, interest, and any escrowed amounts if required). Debt obligations for purposes of §1041.5(a)(3) do not include amounts due or past due for medical bills, utilities, and other items that are generally defined as basic living expenses under §1041.5(a)(1). The amount of a payment required under a debt obligation includes the amount the consumer must pay when due to avoid delinquency under the debt obligation in the absence of any affirmative act by the consumer to extend, delay, or restructure the repayment schedule. Thus, this would include periodic or lump-sum payments for automobile loans, student loans, and other covered and non-covered loans, and minimum monthly credit card payments due during the relevant monthly period. It also includes any delinquent amounts on such obligations that are due as of the relevant monthly period, except where an obligation on a covered short-term loan or a covered longer-term balloon-payment loan is no longer outstanding or where the obligation is listed as charged off on a national consumer report. For example, if the consumer has a periodic automobile loan payment from a prior period that is past due and the automobile finance company adds the past due payment to the next regularly scheduled periodic payment which falls during the relevant monthly period, then the past due periodic payment is a major financial obligation.

Motor vehicle leases. For purposes of this rule, motor vehicle leases shall be treated as a debt obligation.

(4) National consumer report means a consumer report, as defined in section 603(d) of the Fair Credit Reporting Act, 15 U.S.C. 1681a(d), obtained from a consumer reporting agency that compiles and maintains files on consumers on a nationwide basis, as defined in section 603(p) of the Fair Credit Reporting Act, 15 U.S.C. 1681a(p).

(5) Net income means the total amount that a consumer receives after the payer deducts amounts for taxes, other obligations, and voluntary contributions (but before deductions of any amounts for payments under a prospective covered short-term loan or covered longer-term balloon-payment loan or for any major financial obligation); provided that, the lender may include in the consumer's net income the amount of any income of another person to which the consumer has a reasonable expectation of access.

Official Interpretation

5(a)(5) Net Income

1. General. Section 1041.5(a)(5) defines a consumer's net income to mean the total amount that a consumer receives after the payer has deducted amounts for taxes withheld by the consumer, other obligations, and voluntary contributions (but before deductions of any amounts for payments under a prospective covered short-term loan or covered longer-term balloon-payment loan or for any major financial obligation); provided that, a lender may elect to include in the consumer's net income the amount of any income of another person to which a consumer has a reasonable expectation of access (see comment 5(a)(5)-3). Net income includes income that is regularly received by the consumer as take-home pay, whether the consumer is treated as an employee or independent contractor. Net income also includes income regularly received by the consumer from other sources, such as child support or alimony received by the consumer and any payments received by the consumer from retirement, social security, disability, or other government benefits, or annuity plans. Lenders may include in net income irregular or seasonal income, such as tips, bonuses, and overtime pay. Net income does not include one-time payments anticipated to be received in the future from non-standard sources, such as legal settlements, tax refunds, jury prizes, or remittances, unless there is verification evidence of the amount and expected timing of such income. If the consumer receives a traditional pay check but the verification evidence obtained under §1041.5(c)(2) shows payment of gross income or otherwise is unclear about whether deductions for the consumer's taxes, other obligations, or voluntary contributions have been made, or if the consumer is not paid via a traditional pay check, then the lender may draw reasonable conclusions from the information provided and is not required to inquire further about deductions for the consumer's taxes, other obligations, or voluntary contributions.

Other obligations and voluntary contributions. An example of other obligations is a consumer's portion of payments for premiums for employer-sponsored health insurance plans. An example of a voluntary contribution is a consumer's contribution to a defined contribution plan meeting the requirements of Internal Revenue Code section 401(a), 26 U.S.C. 401(a). The lender may inquire about and reasonably consider whether voluntary contributions will be discontinued prior to the relevant monthly period, in which case they would not be deducted from the amount of net income that is projected.

3. Reasonable expectation of access to another person's income. Under §1041.5(a)(5), a lender may elect to include in the consumer's net income the amount of any income of another person to which the consumer has a reasonable expectation of access. The income of any other person is considered net income to which the consumer has a reasonable expectation of access if the consumer has direct access to those funds on a regular basis through a transaction account in which the consumer is an accountholder or cardholder. If the lender elects to include any income of another person to which the consumer has a reasonable expectation of access, then as part of the lender's obligation to make a reasonable projection of the consumer's net income during the applicable period, the lender must obtain verification evidence demonstrating that the consumer has a reasonable expectation of access to the portion of the other person's income that the lender includes within its net income projection. See §1041.5(c)(2)(ii)(A) and associated commentary. The following examples illustrate when a consumer has reasonable expectation of access to the income of another person for purposes of §1041.5(a)(5):

1. The consumer's spouse has a salary or income that is deposited regularly into a joint account the spouse shares with the consumer. The consumer has a reasonable expectation of access to the spouse's income.

ii. The consumer shares a household with a sibling. The sibling's salary or other income is deposited into an account in which the consumer does not have access. However, the sibling regularly transfers a portion of that income from the sibling's deposit account into the consumer's deposit account. The consumer has a reasonable expectation of access to that portion of the sibling's income.

iii. The consumer's spouse has a salary or other income that is deposited into an account to which the consumer does not have access, and the spouse does not regularly transfer a portion of that income into the consumer's account. The consumer does not have a reasonable expectation of access to the spouse's income.

iv. The consumer does not have a joint bank account with his spouse, nor does the spouse make regular deposits into the consumer's individual deposit account. However, the spouse regularly pays for a portion of the consumer's basic living expenses. The consumer does not have a reasonable expectation of access to the spouse's income. However, regular contributions toward payment of the consumer's basic living expenses may be considered by the lender as a consumer-specific factor that is relevant if the lender makes an individualized estimate of basic living expenses (see comment 5(b)-2.i.C.2 for further clarification).

(6) Payment under the covered short-term loan or covered longer-term balloon-payment loan. (i) Means the combined dollar amount payable by the consumer at a particular time following consummation in connection with the covered short-term loan or covered longer-term balloon-payment loan, assuming that the consumer has made preceding required payments and in the absence of any affirmative act by the consumer to extend or restructure the repayment schedule or to suspend, cancel, or delay payment for any product, service, or membership provided in connection with the loan;

(ii) Includes all principal, interest, charges, and fees; and

Official Interpretation

5(a)(6) Payment Under the Covered Short-Term Loan or Covered Longer-Term Balloon-Payment Loan

Paragraphs 5(a)(6)(i) and (ii)

1. General. Section 1041.5(a)(6)(i) defines payment under a covered short-term loan or covered longer-term balloon-payment loan as the combined dollar amount payable by the consumer at a particular time following consummation in connection with the loan, assuming that the consumer has made preceding required payments and in the absence of any affirmative act by the consumer to extend or restructure the repayment schedule or to suspend, cancel, or delay payment for any product, service, or membership provided in connection with the covered short-term loan or covered longer-term balloon-payment loan. Section 1041.5(a)(6)(ii) clarifies that it includes all principal, interest, charges, and fees. A lender may not exclude a portion of the payment simply because a consumer could avoid or delay paying a portion of the payment, such as by requesting forbearance for that portion or by cancelling a service provided in exchange for that portion. For example:

i. Assume that in connection with a covered longer-term balloon-payment loan, a consumer would owe a periodic payment on a particular date of $100 to the lender, which consists of $15 in finance charges, $80 in principal, and a $5 service fee, and the consumer also owes $10 as a credit insurance premium to a separate insurance company. Assume further that under the terms of the loan or other agreements entered into in connection with the loan, the consumer has the right to cancel the credit insurance at any time and avoid paying the $10 credit insurance premium. The payment under the loan is $110.

ii. Assume that in connection with a covered short-term loan, a consumer would owe on a particular date $25 in finance charges to the lender. Under the terms of the loan, the consumer has the option of paying $50 in principal on that date, in which case the lender would charge $20 in finance charges instead. The payment under the loan is $25.

iii. Assume that in connection with a covered short-term loan, a consumer would owe on a particular date $25 in finance charges to the lender and $70 in principal. Under the terms of the loan, the consumer has the option of logging into her account on the lender's Web site and selecting an option to defer the due date of the $70 payment toward principal. The payment under the covered loan is $95.

(iii) For a line of credit is calculated assuming that:

(A) The consumer will utilize the full amount of credit under the covered short-term loan or covered longer-term balloon-payment loan as soon as the credit is available to the consumer; and

(B) The consumer will make only minimum required payments under the covered short-term loan or covered longer-term balloon-payment loan for as long as permitted under the loan agreement.

Official Interpretation

Paragraph 5(a)(6)(iii)

1. General. Section 1041.5(a)(6)(iii) provides assumptions that a lender must make in calculating the payment under §1041.5(a)(6) for a covered short-term loan or covered longer-term balloon-payment loan that is a line of credit (regardless of the extent to which available credit will be replenished as the consumer repays earlier advances). For a line of credit, the amount and timing of the consumer's actual payments after consummation may depend on the consumer's utilization of the credit or on amounts that the consumer has repaid prior to the payments in question. Section 1041.5(a)(6)(iii) requires the lender to calculate the total loan payment assuming that the consumer will utilize the full amount of credit under the loan as soon as the credit is available and that the consumer will make only minimum required payments for as long as permitted under the loan agreement. Lenders should use the same test with the same assumptions when they make a new ability-to-repay determination under §1041.5(b)(1)(ii) prior to an advance under the line of credit that is more than 90 days after the date of a prior ability-to-repay determination for the line of credit, in order to determine whether the consumer still has the ability to repay the current credit line.

(7) Relevant monthly period means the calendar month in which the highest sum of payments is due under the covered short-term or covered longer-term balloon-payment loan.

(8) Residual income means the sum of net income that the lender projects the consumer will receive during the relevant monthly period, minus the sum of the amounts that the lender projects will be payable by the consumer for major financial obligations during the relevant monthly period and payments under the covered short-term loan or covered longer-term balloon-payment loan during the relevant monthly period, all of which projected amounts are determined in accordance with paragraph (c) of this section.

Official Interpretation

5(a)(8) Residual Income

1. General. Under §1041.5(a)(8), residual income is defined as the sum of net income that the lender projects the consumer will receive during the relevant monthly period, minus the sum of amounts that the lender projects will be payable by the consumer for major financial obligations during the relevant monthly period and payments under the covered short-term loan or covered longer-term balloon-payment loan during the relevant monthly period, all of which projected amounts are determined in accordance with §1041.5(c). See §1041.5(b)(2)(ii) and associated commentary for further clarification on the use of residual income methodology to determine ability to repay. For covered longer-term balloon-payment loans, where the relevant monthly period may fall well into the future relative to the consummation of the loan, the lender must calculate the residual income using the projections made under §1041.5(c) and in so doing must make reasonable assumptions about the consumer's net income and major financial obligations during the relevant monthly period compared to the period covered by the verification evidence. For example, the lender cannot assume, absent a reasonable basis, that there will be a substantial increase in net income or decrease in major financial obligations between consummation and the relevant monthly period. For further clarification, see comment 5(c)(1)-1 regarding the consistency between the consumer's written statement and verification evidence and comment 5(c)(2)(ii)(A)-2 regarding what constitutes sufficient history of net income for purposes of verification evidence.

(b) Reasonable determination required. (1)(i) Except as provided in §1041.6, a lender must not make a covered short-term loan or covered longer-term balloon-payment loan or increase the credit available under a covered short-term loan or covered longer-term balloon-payment loan, unless the lender first makes a reasonable determination that the consumer will have the ability to repay the loan according to its terms.

(ii) For a covered short-term loan or covered longer-term balloon-payment loan that is a line of credit, a lender must not permit a consumer to obtain an advance under the line of credit more than 90 days after the date of a required determination under this paragraph (b), unless the lender first makes a new determination that the consumer will have the ability to repay the covered short-term loan or covered longer-term balloon-payment loan according to its terms.

(2) A lender's determination of a consumer's ability to repay a covered short-term loan or covered longer-term balloon-payment loan is reasonable only if either:

(i) Based on the calculation of the consumer's debt-to-income ratio for the relevant monthly period and the estimates of the consumer's basic living expenses for the relevant monthly period, the lender reasonably concludes that:

(A) For a covered short-term loan, the consumer can make payments for major financial obligations, make all payments under the loan, and meet basic living expenses during the shorter of the term of the loan or the period ending 45 days after consummation of the loan, and for 30 days after having made the highest payment under the loan; and

(B) For a covered longer-term balloon-payment loan, the consumer can make payments for major financial obligations, make all payments under the loan, and meet basic living expenses during the relevant monthly period, and for 30 days after having made the highest payment under the loan; or

(ii) Based on the calculation of the consumer's residual income for the relevant monthly period and the estimates of the consumer's basic living expenses for the relevant monthly period, the lender reasonably concludes that:

(A) For a covered short-term loan, the consumer can make payments for major financial obligations, make all payments under the loan, and meet basic living expenses during the shorter of the term of the loan or the period ending 45 days after consummation of the loan, and for 30 days after having made the highest payment under the loan; and

(B) For a covered longer-term balloon-payment loan, the consumer can make payments for major financial obligations, make all payments under the loan, and meet basic living expenses during the relevant monthly period, and for 30 days after having made the highest payment under the loan.

Official Interpretation

5(b) Reasonable Determination Required

1. Overview. Section 1041.5(b) prohibits a lender from making a covered short-term loan (other than a covered short-term loan described in §1041.6) or a covered longer-term balloon-payment loan or increasing the amount of credit available on such loan unless it first makes a reasonable determination that the consumer will have the ability to repay the loan according to its terms. For discussion of loan modifications, see comment 2(a)(5)-2. Section 1041.5(b) provides minimum standards that the lender's determination must meet to constitute a reasonable determination. Section 1041.5(b)(2) provides that a lender's ability-to-repay determination for a covered short-term loan or covered longer-term balloon-payment loan is reasonable only if the lender reasonably concludes that, based on the estimates of the consumer's basic living expenses for the relevant monthly period and the calculation of the consumer's residual income or the debt-to-income ratio for the relevant monthly period, as applicable, the consumer can pay for major financial obligations, make any payments under the loan, and meet basic living expenses during the periods specified in §1041.5(b)(2). For covered short-term loans, the periods are the shorter of the term of the loan or the period ending 45 days after consummation of the loan, and 30 days after having made the highest payment on the loan. For covered longer-term balloon-payment loans, the periods are the relevant monthly period, and 30 days after having made the highest payment on the loan. Thus, the rule requires lenders to make a debt-to-income ratio or residual income calculation and an estimate of basic living expenses for the relevant monthly period—the calendar month in which the highest payments are due on the covered short-term loan or covered longer-term balloon payment loan—and to use the results of the calculation and estimate to make reasonable inferences and draw a reasonable conclusion about whether the consumer can make loan payments, pay for major financial obligations, and meet basic living expenses during the periods specified in §1041.5(b)(2). This analysis is designed to determine whether the consumer has the ability to repay the loan according to its terms. See §1041.5(b)(2)(i) and (ii) and corresponding commentary.

2. Reasonable determination. To comply with the requirements of §1041.5(b), a lender's determination that a consumer will have the ability to repay a covered short-term loan or covered longer-term balloon-payment loan must be reasonable in all respects.

i. To be reasonable, a lender's determination of a consumer's ability to repay a covered short-term loan or covered longer-term balloon-payment loan must:

A. Include the reasonable conclusions required in §1041.5(b)(2), using either the debt-to-income ratio methodology under §1041.5(b)(2)(i) or the residual income methodology under §1041.5(b)(2)(ii) as applied to the relevant monthly period;

B. Be based on reasonable projections of a consumer's net income and major financial obligations during the relevant monthly period in accordance with §1041.5(c);

C. Be based on reasonable estimates of basic living expenses during the relevant monthly period. The following provides additional clarification on what constitutes reasonable estimates of basic living expenses:

1. Section 1041.5(a)(1) and (b) do not specify a particular method that a lender must use to determine a consumer's basic living expenses. A lender is not required to itemize the basic living expenses of each consumer, but may instead arrive at estimates for the amount needed to cover the costs of food, utilities not paid as part of rental housing expenses, transportation, out-of-pocket medical expenses, phone and Internet services, and childcare. A lender may reasonably estimate the dollar amount or percentage of net income the consumer will need to meet these basic living expenses based upon such sources as the lender's own experience in making covered short-term or longer-term balloon-payment loans to similarly-situated consumers, reasonably reliable information available from government surveys or other publications about the basic living expenses of similarly-situated consumers, or some combination thereof. For example, it would be reasonable for the lender to use data about relevant categories of expenses from the Consumer Expenditure Survey of the Bureau of Labor Statistics or the Internal Revenue Code's Collection Financial Standards, or a combination of the two data sources, to develop non-individualized estimates of food, utilities not paid as part of rental housing expenses, transportation, out-of-pocket medical expenses, phone and internet services, and childcare for consumers seeking covered short-term or longer-term balloon-payment loans. In using the data from those sources to estimate the amount spent on a particular category, the lender may make reasonable adjustments to arrive at an estimate of basic living expenses, for instance where a data source's information on a particular type of basic living expenses overlaps with a type of major financial obligation as defined in §1041.5(a)(3) or where a data source groups expenses into different categories than comment 5(a)(1)-2.

2. If the lender is conducting an individualized estimate by itemizing the consumer's costs of food, utilities not paid as part of rental housing expenses, transportation, out-of-pocket medical expenses, phone and Internet services, and childcare, the lender may reasonably consider other factors specific to the consumer that are not required to be projected under §1041.5(c). Such consumer-specific factors could include whether other persons are regularly contributing toward the consumer's payment of basic living expenses. The lender may consider such consumer-specific factors only when it is reasonable to do so. It is not reasonable for the lender to consider whether other persons are regularly contributing toward the consumer's payment of basic living expenses if the lender is separately including in its projection of net income any income of another person to which the consumer has a reasonable expectation of access; and

D. Be consistent with a lender's written policies and procedures required under §1041.12 and grounded in reasonable inferences and conclusions as to a consumer's ability to repay a covered short-term loan or covered longer-term balloon-payment loan according to its terms in light of information the lender is required to obtain or consider as part of its determination under §1041.5(b).

ii. A determination of ability to repay is not reasonable if it:

A. Relies on an implicit or explicit assumption that the consumer will obtain additional consumer credit to be able to make payments under the covered short-term loan or covered longer-term balloon-payment loan, to make payments under major financial obligations, or to meet basic living expenses;

B. Assumes that a consumer needs implausibly low amounts of funds to meet basic living expenses under the residual income methodology or an implausibly low percentage of net income to meet basic living expenses if a lender uses the debt-to-income methodology. For example, assume a consumer seeks a covered short-term loan. The lender uses a debt-to-income methodology to make an ability-to-repay determination. Based on the lender's projections of the consumer's net income and major financial obligations under §1041.5(c), the lender calculates that the consumer's debt-to-income ratio would be 90 percent, which means that only 10 percent of the consumer's net income will be remaining to pay for basic living expenses. It is not reasonable for the lender to conclude under §1041.5(b)(2) that a consumer with a 90 percent debt-to-income ratio would have the ability to repay the loan. See comment 5(b)(2)(i)-3 for additional examples of ability-to-repay determinations using the debt-to-income methodology; or

C. For covered longer-term balloon-payment loans, if the lender relies on an assumption that a consumer will accumulate savings while making one or more payments under a covered longer-term balloon-payment loan and that, because of such assumed savings, the consumer will be able to make a subsequent loan payment under the loan.

iii. Evidence that a lender's determinations of ability to repay are not reasonable may include, without limitation, the factors described under paragraphs (A) through (E) of comment 5(b)-2.iii. These factors may be evaluated across a lender's entire portfolio of covered short-term loans or covered longer-term balloon-payment loans or with respect to particular products, geographic regions, particular periods during which the loans were made, or other relevant categorizations. Other relevant categorizations would include, without limitation, loans made in reliance on consumer statements of income in the absence of verification evidence (see comment 5(c)(2)(ii)(A)-4). The factors described under paragraphs (A) through (E) of comment 5(b)-2.iii may be considered either individually or in combination with one another. These factors also are not absolute in their application; instead, they exist on a continuum and may apply to varying degrees. Each of these factors is viewed in the context of the facts and circumstances relevant to whether the lender's ability-to-repay determinations are reasonable. Relevant evidence may also include a comparison of the following factors on the part of the lender to that of other lenders making covered short-term loans or covered longer-term balloon-payment loans to similarly situated consumers; however, such evidence about comparative performance is not dispositive as to the evaluation of a lender's ability-to-repay determinations.

A. Default rates. This evidence includes defaults during and at the expiration of covered loan sequences as calculated on a per sequence or per consumer basis;

B. Re-borrowing rates. This evidence includes the frequency with which the lender makes consumers multiple covered short-term loans or covered longer-term balloon-payment loans within a loan sequence as defined in §1041.2(a)(14) (i.e., consecutive or concurrent loans taken out within 30 days of a prior loan being outstanding);

C. Patterns of lending across loan sequences. This evidence includes the frequency with which the lender makes multiple sequences of covered short-term loans or covered longer-term balloon-payment loans to consumers. This evidence also includes the frequency with which the lender makes consumers new covered short-term loans or covered longer-term balloon-payment loans immediately or soon after the expiration of a cooling-off period under §1041.5(d)(2) or the 30-day period that separates one loan sequence from another (see §1041.2(a)(14));

D. Evidence of delinquencies and collateral impacts. This evidence includes the proportion of consumers who incur late fees, failed presentments, delinquencies, and repossessions of motor vehicles for loans involving vehicle security; and

E. Patterns of non-covered lending. This evidence includes the frequency with which the lender makes non-covered loans shortly before or shortly after consumers repay a covered short-term loan or covered longer-term balloon-payment loan, and the non-covered loan bridges all or a substantial part of either the period between two loans that otherwise would be part of a loan sequence or of a cooling-off period. An example would be where the lender, its affiliate, or a service provider frequently makes 30-day non-recourse pawn loans to consumers shortly before or soon after repayment of covered short-term loans made by the lender, and where the lender then makes additional covered short-term loans to the same consumers soon after repayment of the pawn loans.

iv. Examples of evidence of the reasonableness of ability-to-repay determinations. The following examples illustrate how the factors described in comment 5(b)-2.iii may constitute evidence about whether lenders' determinations of ability to repay are reasonable under §1041.5(b):

A. A significant percentage of consumers who obtain covered short-term loans from a lender under §1041.5 re-borrow within 30 days of repaying their initial loan, re-borrow within 30 days of repaying their second loan, and re-borrow shortly after the end of the cooling-off period that follows the initial loan sequence of three loans. Based on the combination of these factors, this evidence suggests that the lender's ability-to-repay determinations are not reasonable.

B. A lender frequently makes at or near the maximum number of loans permitted under §1041.6 to consumers early within a 12-month period (i.e., the loans do not require ability-to-repay determinations) and then makes a large number of additional covered short-term loans to those same consumers under §1041.5 (i.e., the loans require ability-to-repay determinations) later within the 12-month period. Assume that the loans made under §1041.5 are part of multiple loan sequences of two or three loans each and the sequences begin soon after the expiration of applicable cooling-off periods or 30-day periods that separate one loan sequence from another. This evidence suggests that the lender's ability-to-repay determinations for the covered short-term loans made under §1041.5 are not reasonable. The fact that some of the loans in the observed pattern were made under §1041.6 and thus are conditionally exempted from the ability-to-repay requirements does not mitigate the potential unreasonableness of the ability-to-repay determinations for the covered short-term loans that were made under §1041.5.

C. A lender frequently makes at or near the maximum number of loans permitted under §1041.6 to consumers early within a 12-month period (i.e., the loans do not require ability-to-repay determinations) and then only occasionally makes additional covered short-term loans to those same consumers under §1041.5 (i.e., the loans require ability-to-repay determinations) later within the 12-month period. Very few of those additional loans are part of loans sequences longer than one loan. Absent other evidence that the ability-to-repay determination is unreasonable (see comment 5(b)-2.iii.A through E), this evidence suggests that the lender's ability-to-repay determinations for the loans made under §1041.5 are reasonable.

D. Within a lender's portfolio of covered short-term loans, a small percentage of loans result in default, consumers generally have short loan sequences (fewer than three loans), and the consumers who take out multiple loan sequences typically do not begin a new loan sequence until several months after the end of a prior loan sequence. There is no evidence of the lender or an affiliate making non-covered loans to consumers to bridge cooling-off periods or the periods between loan sequences. This evidence suggests that the lender's ability-to-repay determinations are reasonable.

3. Payments under the covered short-term loan or longer-term balloon-payment loan. Under the ability-to-repay requirements in §1041.5(b)(2)(i) and (ii), a lender must determine the amount of the payments due in connection with the covered short-term loan or covered longer-term balloon-payment loan during the relevant monthly period. See §1041.5(a)(6) for the definition of payment under a covered short-term loan or covered longer-term balloon-payment loan, including assumptions that the lender must make in calculating the amount of payments under a loan that is a line of credit.

Paragraph 5(b)(2)

1. General. For a covered short-term loan, §1041.5(b)(2) requires the lender to reasonably conclude that, based on the estimates of the consumer's basic living expenses for the relevant monthly period and the lender's calculation of the consumer's debt-to-income ratio or residual income for the relevant monthly period, as applicable, the consumer can pay major financial obligations, make any payments on the loan, and meet basic living expenses during the shorter of the term of the loan or the period ending 45 days after consummation of the loan, and for 30 days after having made the highest payment on the loan. See §1041.5(b)(2)(i)(A) (the debt-to-income methodology) and §1041.5(b)(2)(ii)(A) (the residual income methodology) and corresponding commentary. For a covered longer-term balloon-payment loan, §1041.5(b)(2) requires the lender to reasonably conclude that, based on the estimates of the consumer's basic living expenses for the relevant monthly period and the lender's calculation of the consumer's debt-to-income ratio or residual income, as applicable, the consumer can pay major financial obligations, make any payments on the loan, and meet basic living expenses during the relevant monthly period, and for 30 days after having made the highest payment on the loan. See §1041.5(b)(2)(i)(B) (the debt-to-income methodology) and §1041.5(b)(2)(ii)(B) (the residual income methodology) and corresponding commentary. If the loan has two or more payments that are equal to each other in amount and higher than all other payments, the date of the highest payment under the loan is considered the later in time of the two or more highest payments. Under §1041.5(b)(2), lenders must comply with either §1041.5(b)(2)(i) or (ii) depending on whether they utilize the residual income or debt-to-income ratio methodology.

Paragraph 5(b)(2)(i)

1. Relation of periods under §1041.5(b)(2)(i) to relevant monthly period. Section 1041.5(a)(2) defines debt-to-income ratio as the ratio, expressed as a percentage, of the sum of the amounts that the lender projects will be payable by the consumer for major financial obligations during the relevant monthly period and the payments under the covered short-term loan or covered longer-term balloon-payment loan during the relevant monthly period, to the net income that the lender projects the consumer will receive during the relevant monthly period, all of which projected amounts are determined in accordance with §1041.5(c). Comment 5(a)(2)-1 clarifies that the relevant monthly period is the calendar month during which the highest sum of payments on the loan is due. The relevant monthly period is not the same period as the periods set forth in §1041.5(b)(2)(i), which for covered short-term loans are the shorter of the loan term or 45 days following consummation, and 30 days following the date of the highest payment under the loan, and for covered longer-term balloon-payment loans are the relevant monthly period, and 30 days following the date of the highest payment under the loan. There may be overlap between the relevant monthly period and the periods set forth in §1041.5(b)(2)(i), but the degree of overlap will depend on the contractual duration of the loan and the consummation and contractual due dates. For example, assume a consumer takes a covered short-term loan of 30 days in duration that is consummated on June 15 and with a single payment due on July 14. The relevant monthly period is the calendar month in which the sum of the highest payments on the loan is due, which is the calendar month of July. This means that a portion of both the loan term (i.e., June 15 to June 30) and the 30-day period following the date of the highest payment on the loan (i.e., August 1 to August 13) are outside of the relevant monthly period.

2. Use of projections for relevant monthly period to comply with §1041.5(b)(2)(i). The lender is not required under §1041.5(b)(2)(i) to estimate the consumer's basic living expenses, make a projection under §1041.5(c) of the consumer's net income and major financial obligations, or calculate the consumer's debt-to-income ratio for any period other than the relevant monthly period. The lender may use the estimates of the consumer's basic living expenses for the relevant monthly period, the projections about the consumer's net income and major financial obligations during the relevant monthly period, and the calculation of the consumer's debt-to-income ratio as a baseline of information from which to make reasonable inferences and draw a reasonable conclusion about whether the consumer will pay major financial obligations, make the payments on the loan, and meet basic living expenses during the periods specified in §1041.5(b)(2)(i). To make reasonable inferences and draw a reasonable conclusion, the lender cannot, for example, assume that the consumer will defer payment of major financial obligations and basic living expenses until after the 30-day period that follows the date of the highest payment on the loan, or assume that obligations and expenses (other than payments on the covered loan itself) during the 30-day period will be less than during the relevant monthly period. Nor can the lender assume the consumer will be able to obtain additional credit during the loan term or during the 30-day period that follows the highest payment on the loan.

3. Examples. The following examples illustrate §1041.5(b)(2)(i):

i. Assume a lender considers making a covered short-term loan to a consumer on March 1. The prospective loan would be repayable in a single payment of $385 on March 17. The lender calculates that, based on its projections of the consumer's net income and major financial obligations during March (i.e., the relevant monthly period), the consumer will have a debt-to-income ratio of 55 percent. The lender complies with the requirement in §1041.5(b)(2) if, using that debt-to-income ratio, the lender reasonably concludes that the consumer can pay for major financial obligations, make the loan payment, and meet basic living expenses during the loan term and to pay for major financial obligations and meet basic living expenses for 30 days following the contractual due date (i.e., from March 18 to April 16). The lender would not make a reasonable conclusion if the lender were to assume, for example, that the consumer would defer payment of major financial obligations until after April 16 or that the consumer would obtain an additional extension of credit on April 1.

ii. Assume a lender considers making a covered longer-term balloon-payment loan to a consumer on March 1. The prospective loan would be repayable in six biweekly payments. The first five of which would be for $100, and the last of which would be for $275, due on May 20. The highest sum of these payments that would be due within a monthly period would be $375, during the month of May. The lender further calculates that, based on its projections of net income and major financial obligations during the relevant monthly period, the consumer will have a debt-to-income ratio of 50 percent. The lender complies with the requirement in §1041.5(b)(2)(i) if, applying that debt-to-income ratio, the lender reasonably concludes that the consumer can pay for major financial obligations, make the payments under the loan, and meet basic living expenses during the month in which the highest sum of payments on the loan are due (i.e., during the month of May) and for 30 days following the highest payment on the loan (i.e., from May 21 to June 19). The lender would not make a reasonable conclusion if the lender were to assume, for example, that the consumer would defer payment of major financial obligations until after June 19 or that the consumer would obtain an additional extension of credit on June 1.

Paragraph 5(b)(2)(ii)

1. Relation of periods under §1041.5(b)(2)(ii) to relevant monthly period. Section 1041.5(a)(8) defines residual income as the sum of net income that the lender projects the consumer will receive during the relevant monthly period, minus the sum of the amounts that the lender projects will be payable by the consumer for major financial obligations during the relevant monthly period and payments under the covered short-term loan or covered longer-term balloon-payment loan during the relevant monthly period, all of which projected amounts are determined in accordance with paragraph (c). The relevant monthly period is the calendar month in which the highest sum of payments on the loan is due. The relevant monthly period is not the same period as the periods set forth in §1041.5(b)(2)(ii), although there may be some overlap. See comment 5(b)(2)(i)-1 for further clarification and an analogous example.

2. Use of projections for relevant monthly period to comply with §1041.5(b)(2)(ii). The lender is not required under §1041.5(b)(2)(ii) to estimate the consumer's basic living expenses, make a projection under §1041.5(c) of the consumer's net income and major financial obligations, or calculate the consumer's residual income for any period other than the relevant monthly period. The lender may use the estimates of the consumer's basic living expenses for the relevant monthly period, projections about the consumer's net income and major financial obligations during the relevant monthly period and the calculation of the consumer's residual income as a baseline of information on which to make reasonable inferences and draw a reasonable conclusion about whether the consumer will pay major financial obligations, make the payments on the loan, and meet basic living expenses during the periods specified in §1041.5(b)(2)(ii). See comment 5(b)(2)(i)-2 for further clarification.

3. Examples. The following examples illustrate §1041.5(b)(2)(ii):

i. Assume a lender considers making a covered short-term loan to a consumer on March 1. The prospective loan would be repayable in a single payment of $385 on March 17. The lender calculates that, based on its projections of the consumer's net income and major financial obligations during March (i.e., the relevant monthly period), the consumer will have $1,000 in residual income for the month. The lender complies with the requirement in §1041.5(b)(2)(ii) if, based on the calculation of residual income, it reasonably concludes that the consumer will be able to pay major financial obligations, make the loan payment, and meet basic living expenses during the loan term and for 30 days following the contractual due date (i.e., from March 18 to April 16). The lender would not make a reasonable conclusion if the lender were to assume, for example, that the consumer would defer payment of major financial obligations until after April 16, that the consumer would obtain an additional extension of credit on April 1, or that the consumer's net income will increase in April relative to the relevant monthly period (i.e., March).

ii. Assume a lender considers making a covered longer-term balloon-payment loan to a consumer on March 1. The prospective loan would be repayable in six biweekly payments. The first five payments would be for $100, and the last payment would be for $275, on May 20. The highest sum of these payments that would be due within a monthly period would be $375, during the month of May. The lender further calculates that, based on its projections of net income and major financial obligations during the relevant monthly period (i.e., May), and accounting for the $375 amount, which is the highest sum of loan payments due within a monthly period, the consumer will have $1,200 in residual income. The lender complies with the requirement in §1041.5(b)(2)(ii) if, based on the calculation of residual income, it reasonably concludes that the consumer will be able to pay major financial obligations, make the loan payments, and meet basic living expenses during the relevant monthly period (i.e., May) and to pay for basic living expenses and major financial obligations for 30 days following the highest payment on the loan (i.e., from May 21 to June 19). The lender would not make a reasonable conclusion if the lender were to assume, for example, that the consumer would be able to defer payment of major financial obligations until after June 19 or that the consumer would obtain an additional extension of credit on June 1, or that the consumer's net income will increase in June relative to the relevant monthly period (i.e., May).

(c) Projecting consumer net income and payments for major financial obligations—(1) General. To make a reasonable determination required under paragraph (b) of this section, a lender must obtain the consumer's written statement in accordance with paragraph (c)(2)(i) of this section, obtain verification evidence to the extent required by paragraph (c)(2)(ii) of this section, assess information about rental housing expense as required by paragraph (c)(2)(iii) of this section, and use those sources of information to make a reasonable projection of the amount of a consumer's net income and payments for major financial obligations during the relevant monthly period. The lender must consider major financial obligations that are listed in a consumer's written statement described in paragraph (c)(2)(i)(B) of this section even if they cannot be verified by the sources listed in paragraph (c)(2)(ii)(B) of this section. To be reasonable, a projection of the amount of net income or payments for major financial obligations may be based on a consumer's written statement of amounts under paragraph (c)(2)(i) of this section only as specifically permitted by paragraph (c)(2)(ii) or (iii) or to the extent the stated amounts are consistent with the verification evidence that is obtained in accordance with paragraph (c)(2)(ii) of this section. In determining whether the stated amounts are consistent with the verification evidence, the lender may reasonably consider other reliable evidence the lender obtains from or about the consumer, including any explanations the lender obtains from the consumer.

Official Interpretation

Paragraph 5(c)(1)

1. General. Section 1041.5(c)(1) requires lenders to consider major financial obligations that are listed in a consumer's written statement described in §1041.5(c)(2)(i)(B) even if the obligations do not appear in the national credit report or other verification documentation that lenders are required to compile under §1041.5(c)(2)(ii)(B). To be reasonable, §1041.5(c)(1) provides that a projection of the amount of net income or payments for major financial obligations may be based on a consumer's written statement of amounts under §1041.5(c)(2)(i) only as specifically permitted by §1041.5(c)(2)(ii) or (iii) or to the extent the stated amounts are consistent with the verification evidence that is obtained in accordance with §1041.5(c)(2)(ii). Section 1041.5(c)(1) further provides that, in determining whether the stated amounts are consistent with the verification evidence, the lender may reasonably consider other reliable evidence the lender obtains from or about the consumer, including any explanations the lender obtains from the consumer. For example:

i. Assume that a consumer states that her net income is $900 every two weeks, pursuant to §1041.5(c)(2)(i)(A). The consumer pay stub the lender obtains as reasonably available verification evidence pursuant to §1041.5(c)(2)(ii)(A) shows that the consumer received $900 during the preceding pay period. The lender complies with §1041.5(c)(1) if it makes the determination required under §1041.5(b) based on a projection of $1,800 in net income for the relevant monthly period because the reasonably available verification evidence supports a projection of $900 in net income every two weeks.

ii. Assume that a consumer states that net income is $1,000 every two weeks, pursuant to §1041.5(c)(2)(i)(A). The lender obtains a copy of the consumer's recent deposit account transaction records as verification evidence pursuant to §1041.5(c)(2)(ii)(A). The account transaction records show biweekly take-home pay of $800 during the preceding two-week period. The lender does not comply with §1041.5(c)(1) if it makes the determination required under §1041.5(b) based on a net income projection of a $2,000 for the relevant monthly period because this projection is not consistent with the reasonably available verification evidence (which, rather, is consistent with a total of $1,600 net income for the relevant monthly period). The lender may request additional deposit account transaction records for prior recent pay cycles and may reasonably project $2,000 in net income for the relevant monthly period if such additional evidence is consistent with the consumer's statement.

iii. Assume that a consumer states that net income is $1,000 every two weeks, pursuant to §1041.5(c)(2)(i)(A). The lender obtains a copy of the consumer's recent deposit account transaction records as verification evidence pursuant to §1041.5(c)(2)(ii)(A). The account transaction records show biweekly take-home pay of $800 during the preceding two-week period. Assume also, however, that the consumer states that the consumer supplements his regular payroll income with cash income from a second job, for which verification evidence is not reasonably available because the consumer is paid in cash and does not deposit the cash into the consumer's bank account, and that the consumer earns between $100 and $300 every two weeks from this job. In this instance, the lender complies with §1041.5(c)(1) if it makes the determination required under §1041.5(b) based on a net income projection of $2,000 for the relevant monthly period. The lender's projection includes both the payroll income from the first job for which verification evidence is reasonably available and the cash income from the second job for which verification evidence is not reasonably available (see comment 5(c)(2)(ii)(A)-3). In such circumstances, the lender may reasonably consider the additional income reflected in the consumer's written statement pursuant to §1041.5(c)(2)(ii)(A)(1).

iv. Assume that a consumer states that her net income is $1,000 every two weeks, pursuant to §1041.5(c)(2)(i)(A). The lender obtains electronic records of the consumer's deposit account transactions as verification evidence pursuant to §1041.5(c)(2)(ii)(A) showing a biweekly direct deposit $800 during the preceding two-week period and a biweekly direct deposit of $1,000 during the prior two-week period. The consumer explains that the most recent income was lower than her usual income of $1,000 because she missed two days of work due to illness. The lender complies with §1041.5(c)(1) if it makes the determination required under §1041.5(b) based on a projection of $2,000 for the relevant monthly period because it reasonably considers the consumer's explanation in determining whether the stated amount is consistent with the verification evidence.

v. Assume that a consumer states that her net income is $2,000 every two weeks, pursuant to §1041.5(c)(2)(i)(A). The lender obtains electronic records of the consumer's deposit account transactions as verification evidence pursuant to §1041.5(c)(2)(ii)(A) showing no income transactions in the preceding month but showing consistent biweekly direct deposits of $2,000 from ABC Manufacturing prior to that month. The consumer explains that she was temporarily laid off for one month while ABC Manufacturing retooled the plant where she works but that she recently resumed work there. The lender complies with §1041.5(c)(1) if it makes the determination required under §1041.5(b) based on a projection of $4,000 for the relevant monthly period because it reasonably considers the consumer's explanation in determining whether the stated amount is consistent with the verification evidence.

vi. Assume that a consumer states that she owes a child support payment of $200 each month, pursuant to §1041.5(c)(2)(i)(B). The national consumer report that the lender obtains as verification evidence pursuant to §1041.5(c)(2)(ii)(C) does not include any child support payment. The lender must consider the child support obligation listed in the written statement. The lender complies with §1041.5(c)(1) if it reasonably relies on the amount in the consumer's written statement pursuant to §1041.5(c)(2)(ii)(C) to make the determination required under §1041.5(b) based on a projection of a $200 child support payment each month.

vii. Assume that a consumer does not list a student loan in her written statement pursuant to §1041.5(c)(2)(i)(B), but the national consumer report that the lender obtains as verification evidence pursuant to §1041.5(c)(2)(ii)(B) lists such a loan with a payment due during the relevant monthly period. The lender does not comply with §1041.5(c)(1) if it makes the determination required under §1041.5(b) without including the student loan payment based on the consumer's failure to list the loan in the written statement or on the consumer's explanation that the loan has recently been paid off. The lender may obtain and reasonably consider other reliable evidence, such as records from the consumer or an updated national consumer report, and may exclude the student loan payment if such additional evidence is consistent with the consumer's statement or explanation.

viii. Assume that a consumer states that he owes a child support payment of $200 each month, pursuant to §1041.5(c)(2)(i)(B). The national consumer report that the lender obtains as verification evidence pursuant to §1041.5(c)(2)(ii)(C) includes the child support payment. The consumer states, further, that his child support payment is deducted out of his paycheck prior to his receipt of take-home pay. The lender obtains a recent pay stub of the consumer as verification evidence which shows a $200 deduction but does not identify the payee or include any other information regarding the nature of the deduction. The lender complies with §1041.5(c)(1) if it makes the determination required under §1041.5(b) based on a projection of major financial obligations that does not include the $200 child support payment each month, because it relies on the consumer's statement that the child support payment is deducted from his paycheck prior to receipt of take-home pay and nothing in the verification evidence is inconsistent with the statement.

2. Consumer-specific factors regarding payment of major financial obligations. Under §1041.5(c)(1), in projecting major financial obligations the lender may consider consumer-specific factors, such as whether other persons are regularly contributing toward the consumer's payment of major financial obligations. The lender may consider such consumer-specific factors only when it is reasonable to do so. It is not reasonable for the lender to consider whether other persons are regularly contributing toward the consumer's payment of major financial obligations if the lender is separately including in its projection of net income any income of another person to which the consumer has a reasonable expectation of access (see comment 5(a)(5)-3).

(2) Evidence of net income and payments for major financial obligations—(i) Consumer statements. A lender must obtain a consumer's written statement of:

(A) The amount of the consumer's net income, which may include the amount of any income of another person to which the consumer has a reasonable expectation of access; and

(B) The amount of payments required for the consumer's major financial obligations.

(ii) Verification evidence. A lender must obtain verification evidence for the amounts of the consumer's net income and payments for major financial obligations other than rental housing expense, as follows:

(A) For the consumer's net income:

(1) The lender must obtain a reliable record (or records) of an income payment (or payments) directly to the consumer covering sufficient history to support the lender's projection under paragraph (c)(1) of this section if a reliable record (or records) is reasonably available. If a lender determines that a reliable record (or records) of some or all of the consumer's net income is not reasonably available, then, the lender may reasonably rely on the consumer's written statement described in paragraph (c)(2)(i)(A) of this section for that portion of the consumer's net income.

(2) If the lender elects to include in the consumer's net income for the relevant monthly period any income of another person to which the consumer has a reasonable expectation of access, the lender must obtain verification evidence to support the lender's projection under paragraph (c)(1) of this section.

(B) For the consumer's required payments under debt obligations, the lender must obtain a national consumer report, the records of the lender and its affiliates, and a consumer report obtained 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 available. If the reports and records do not include a debt obligation listed in the consumer's written statement described in paragraph (c)(2)(i)(B) of this section, the lender may reasonably rely on the written statement in determining the amount of the required payment.

(C) For a consumer's required payments under child support obligations or alimony obligations, the lender must obtain a national consumer report. If the report does not include a child support or alimony obligation listed in the consumer's written statement described in paragraph (c)(2)(i)(B) of this section, the lender may reasonably rely on the written statement in determining the amount of the required payment.

(D) Notwithstanding paragraphs (c)(2)(ii)(B) and (C) of this section, the lender is not required to obtain a national consumer report as verification evidence for the consumer's debt obligations, alimony obligations, and child support obligations if during the preceding 90 days:

(1) The lender or an affiliate obtained a national consumer report for the consumer, retained the report under §1041.12(b)(1)(ii), and checked it again in connection with the new loan; and

(2) The consumer did not complete a loan sequence of three loans made under this section and trigger the prohibition under paragraph (d)(2) of this section since the previous report was obtained.

(iii) Rental housing expense. For a consumer's housing expense other than a payment for a debt obligation that appears on a national consumer report obtained pursuant to paragraph (c)(2)(ii)(B) of this section, the lender may reasonably rely on the consumer's written statement described in paragraph (c)(2)(i)(B) of this section.

Official Interpretation

Paragraph 5(c)(2)(i)

1. Statements from the consumer. Section 1041.5(c)(2)(i) requires a lender to obtain a consumer's written statement of the amounts of the consumer's net income and payments for the consumer's major financial obligations currently and for the relevant monthly period. Section 1041.5(c)(2)(i) also provides that the written statement from the consumer may include a statement from the consumer about the amount of any income of another person to which the consumer has a reasonable expectation of access. A consumer's written statement includes a statement the consumer writes on a paper application or enters into an electronic record, or an oral consumer statement that the lender records and retains or memorializes in writing or electronically and retains.

Paragraph 5(c)(2)(ii)

1. Verification requirement. Section 1041.5(c)(2)(ii) establishes requirements for a lender to obtain verification evidence for the amounts of a consumer's net income and required payments for major financial obligations other than rental housing expense.

Paragraph 5(c)(2)(ii)(A)

1. Income. Section 1041.5(c)(2)(ii)(A) requires a lender to obtain a reliable record (or records) of an income payment (or payments) directly to the consumer covering sufficient history to support the lender's projection under §1041.5(c)(1) if a reliable record (or records) of income payment (or payments) is reasonably available. Section 1041.5(c)(2)(ii)(A) also provides that if the lender elects to include as the consumer's net income for the relevant monthly period the income of another person to which the consumer has a reasonable expectation of access, the lender must obtain verification evidence of that income in the form of a reliable record (or records) demonstrating that the consumer has regular access to that income. Such verification evidence could consist of bank account statements indicating that the consumer has access to a joint bank account in which the other person's income is deposited, or that the other person regularly deposits income into the consumer's bank account (see comment 5(a)(5)-3 for further clarification). For purposes of verifying net income, a reliable transaction record includes a facially genuine original, photocopy, or image of a document produced by or on behalf of the payer of income, or an electronic or paper compilation of data included in such a document, stating the amount and date of the income paid to the consumer. A reliable transaction record also includes a facially genuine original, photocopy, or image of an electronic or paper record of depository account transactions, prepaid account transactions (including transactions on a general purpose reloadable prepaid card account, a payroll card account, or a government benefits card account) or money services business check-cashing transactions showing the amount and date of a consumer's receipt of income.

2. Sufficient history. Under §1041.5(c)(2)(ii)(A), the lender must obtain a reliable record or records of the consumer's net income covering sufficient history to support the lender's projection under §1041.5(c). For a covered short-term loan, sufficient history typically would consist of one biweekly pay cycle or one monthly pay cycle, depending on how frequently the consumer is paid. However, if there is inconsistency between the consumer's written statement regarding net income and the verification evidence which must be reconciled by the lender (see comment 5(c)(1)-1), then depending on the circumstances more than one pay cycle may be needed to constitute sufficient history. For a covered longer-term balloon-payment loan, sufficient history would generally consist of two biweekly pay cycles or two monthly pay cycles, depending on how frequently the consumer is paid. However, depending on the length of the loan, and the need to resolve inconsistency between the consumer's written statement regarding net income and the verification evidence, more than two pay cycles may be needed to constitute sufficient history.

3. Reasonably available. The lender's obligation to obtain a reliable record (or records) of income payment (or payments) covering sufficient history to support the lender's projection under §1041.5(c)(1) applies if and to the extent a reliable record (or records) is reasonably available. A reliable record of the consumer's net income is reasonably available if, for example, the consumer's source of income is from her employment and she possesses or can access a copy of the consumer's recent pay stub. The consumer's recent transaction account deposit history is a reliable record (or records) that is reasonably available if the consumer has such an account. With regard to such bank account deposit history, the lender could obtain it directly from the consumer or, at its discretion, with the consumer's permission via an account aggregator service that obtains and categorizes consumer deposit account and other account transaction data. In situations in which income is neither documented through pay stubs nor transaction account records, the reasonably available standard requires the lender to act in good faith and exercise due diligence as appropriate for the circumstances to determine whether another reliable record (or records) is reasonably available.

4. Reasonable reliance on consumer's statement if reliable record not reasonably available. Under §1041.5(c)(2)(ii)(A), if a lender determines that a reliable record (or records) of some or all of the consumer's net income is not reasonably available, the lender may reasonably rely on the consumer's written statement described in §1041.5(c)(2)(i)(A) for that portion of the consumer's net income. Section 1041.5(c)(2)(ii)(A) does not permit a lender to rely on a consumer's written statement that the consumer has a reasonable expectation of access to the income of another person (see comment 5(c)(2)(ii)(A)-1). A lender reasonably relies on the consumer's written statement if such action is consistent with a lender's written policies and procedures required under §1041.12 and there is no indication that the consumer's stated amount of net income on a particular loan is implausibly high or that the lender is engaged in a pattern of systematically overestimating consumers' income. Evidence of the lender's systematic overestimation of consumers' income could include evidence that the subset of the lender's portfolio consisting of the loans where the lender relies on the consumers' statements to project income in the absence of verification evidence perform worse, on a non-trivial level, than other covered loans made by the lender with respect to the factors noted in comment 5(b)-2.iii indicating poor loan performance (e.g., high rates of default, frequent re-borrowings). If the lender periodically reviews the performance of covered short-term loans or covered longer-term balloon-payment loans where the lender has relied on consumers' written statements of income and uses the results of those reviews to make necessary adjustments to its policies and procedures and future lending decisions, such actions indicate that the lender is reasonably relying on consumers' statements. Such necessary adjustments could include, for example, the lender changing its underwriting criteria for covered short-term loans to provide that the lender may not rely on the consumer's statement of net income in absence of reasonably available verification evidence unless the consumer's debt-to-income ratio is lower, on a non-trivial level, than that of similarly situated applicants who provide verification evidence of net income. A lender is not required to consider income that cannot be verified other than through the consumer's written statement. For an illustration of a lender's reliance on a consumer's written statement as to a portion of her income for which verification evidence is not reasonably available, see comment 5(c)(1)-1.iii.

Paragraph 5(c)(2)(ii)(B)

1. Payments under debt obligations. To verify a consumer's required payments under debt obligations, §1041.5(c)(2)(ii)(B) requires a lender to obtain a national consumer report, the records of the lender and its affiliates, and a consumer report obtained 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 available. A lender satisfies its obligation under §1041.5(d)(1) 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 available, when it complies with the requirement in §1041.5(c)(2)(ii)(B) to obtain this same consumer report. See comment 5(a)(3)-1 regarding the definition of required payments.

2. Deduction of debt obligations prior to consumer's receipt of take-home pay. If verification evidence shows that a debt obligation is deducted prior to the consumer's receipt of take-home pay, the lender does not include the debt obligation in the projection of major financial obligations under §1041.5(c).

3. Inconsistent information. If the consumer reports and lender and affiliate records do not include a debt obligation listed in the consumer's written statement described in §1041.5(c)(2)(ii)(B), the lender must consider the debt obligation listed in the consumer's written statement to make a reasonable projection of the amount of payments for debt obligations. The lender may reasonably rely on the written statement in determining the amount of the required payment for the debt obligation. If the reports and records include a debt obligation that is not listed in the consumer's written statement, the lender must consider the debt obligation listed in the report or record unless it obtains additional verification evidence confirming that the obligation has been paid off or otherwise released. A lender is not responsible for information about a major financial obligation that is not owed to the lender, its affiliates, or its service providers if such obligation is not listed in a consumer's written statement, a national consumer report, or 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).

Paragraph 5(c)(2)(ii)(C)

1. Payments under child support or alimony obligations. Section 1041.5(c)(2)(ii)(B) requires a lender to obtain a national consumer report to verify a consumer's required payments under child support obligations or alimony obligations under §1041.5(c)(2)(ii)(C). A lender may use the same national consumer report to satisfy the verification requirements under both §1041.5(c)(2)(ii)(B) and (C). See comment 5(c)(2)(ii)(B)-1 for clarification on the interplay between this obligation and §1041.5(d)(1). If the report does not include a child support or alimony obligation listed in the consumer's written statement described in §1041.5(c)(2)(i)(B), the lender must consider the obligation listed in the consumer's written statement to make a reasonable projection of the amount of payments for the child support or alimony obligation. The lender may reasonably rely on the written statement in determining the amount of the required payment for the obligation.

2. Deduction of child support or alimony obligations prior to consumer's receipt of take-home pay. If verification evidence shows that a child support or alimony obligation is deducted prior to the consumer's receipt of take-home pay, the lender does not include the child support or alimony obligation in the projection of major financial obligations under §1041.5(c). For an illustration, see comment 5(c)(1)-1.viii.

Paragraph 5(c)(2)(ii)(D)

1. Exception to obligation to obtain consumer report. Section 1041.5(c)(2)(ii)(D) provides that notwithstanding §1041.5(c)(2)(ii)(B) and (C), a lender is not required to obtain a national consumer report to verify debt obligations and child support and alimony obligations if during the preceding 90 days: The lender or its affiliate has obtained a national consumer report for the consumer, retained the report under §1041.12(b)(1)(ii) and checked it again in connection with the new loan; and the consumer did not complete a loan sequence of three loans under §1041.5 and trigger the 30-day cooling-off period under §1041.5(d)(2) since the previous report was obtained. To illustrate how the two conditions relate to each other, assume a consumer obtains a sequence of three covered short-term loans under §1041.5, with each loan being 15 days in duration, the first loan consummating on June 1, and the final loan no longer being outstanding as of July 15. The lender obtained a consumer report on May 30 as part of its ability-to-repay determination for the first loan in the sequence. Under §1041.5(c)(2)(ii)(D), the lender is not required to obtain a consumer report for the second and third loan in the sequence. Because the consumer took a three-loan sequence, the consumer is subject to a 30-day cooling-off period which expires on August 15 pursuant to §1041.5(d)(2). If the consumer returns to the lender for another covered short-term loan under §1041.5 on August 15, the lender must obtain a consumer report under §1041.5(c)(2)(ii)(B) and (C) to verify debt obligations and child support and alimony obligations even though fewer than 90 days has elapsed since the lender previously obtained a consumer report for the consumer because the consumer completed a three-loan sequence and triggered the 30-day cooling-off period since the previous report was obtained.

2. Conflicts between consumer's written statement and national consumer report. A lender is not required to obtain a new national consumer report if the conditions under §1041.5(c)(2)(ii)(D) are met; however, there may be circumstances in which a lender would voluntarily obtain a new national consumer report to resolve potential conflicts between a consumer's written statement and a national consumer report obtained in the previous 90 days. See comments 5(c)(1)-1.vii and 5(c)(2)(ii)(B)-3.

Paragraph 5(c)(2)(iii)

1. Rental housing expense. Section 1041.5(c)(2)(iii) provides that for the consumer's housing expense other than a payment for a debt obligation that appears on a national consumer report obtained pursuant to §1041.5(c)(2)(ii)(B) (i.e., with respect to lease or other rental housing payments), the lender may reasonably rely on the consumer's statement described in §1041.5(c)(2)(i)(B). A lender reasonably relies on the consumer's written statement if such actions are consistent with a lender's written policies and procedures required under §1041.12, and there is no evidence that the stated amount for rental housing expense on a particular loan is implausibly low or that there is a pattern of the lender underestimating consumers' rental housing expense.

2. Mortgage obligations. For a housing expense under a debt obligation (i.e., a mortgage), a lender generally must verify the obligation by obtaining a national consumer report that includes the housing expense under a debt obligation pursuant to §1041.5(c)(2)(ii)(B). Under §1041.5(c)(2)(ii)(D), however, a lender is not required to obtain a national consumer report if, during the preceding 90 days: the lender or its affiliate has obtained a national consumer report for the consumer and retained the report under §1041.12(b)(1)(ii) and checked it again in connection with the new loan; and the consumer did not complete a loan sequence of three loans under §1041.5 and trigger the 30-day cooling-off period under §1041.5(d)(2) since the previous report was obtained (see comment 5(c)(2)(ii)(D)-1).

(d) Additional limitations on lending—covered short-term loans and covered longer-term balloon-payment loans—(1) Borrowing history review. Prior to making a covered short-term loan or covered longer-term balloon-payment loan under this section, in order to determine whether any of the prohibitions in this paragraph (d) are applicable, a lender must obtain and review information about the consumer's borrowing history from the records of the lender and its affiliates, and from a consumer report obtained from an information system that has been registered for 180 days or more pursuant to §1041.11(c)(2) or is registered with the Bureau pursuant to §1041.11(d)(2), if available.

Official Interpretation

Paragraph 5(d)

1. General. Section 1041.5(d) specifies certain circumstances in which making a new covered short-term loan or a covered longer-term balloon-payment loan under §1041.5 during or after a sequence of covered short-term loans, covered longer-term balloon-payment loans, or a combination of covered short-term loans and covered longer-term balloon-payment loans is prohibited during a mandatory cooling-off period. The prohibitions apply to making a covered short-term loan or covered longer-term balloon-payment loan under §1041.5.

2. Application to rollovers. The prohibitions in §1041.5(d) apply to new covered short-term loans or covered longer-term balloon-payment loans under §1041.5, as well as to loans that are a rollover of a prior loan (or what is termed a “renewal” in some States). 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 that a lender is permitted under State law to roll over a loan, the rollover would be treated as applicable as a new covered short-term loan or covered longer-term balloon-payment loan that, depending on when it occurs in the sequence, would be subject to the prohibitions in §1041.5(d). For example, assume that a lender is permitted under applicable State law to roll over a covered short-term loan and the lender makes a covered short-term loan with $500 in principal and a 14-day contractual duration. Assume that the consumer returns to the lender on day 14 (the repayment date of the first loan), the lender reasonably determines that the consumer has the ability to repay a new loan, and the consumer is offered the opportunity to roll over the first loan for an additional 14 days for a $75 fee. The rollover would be the second loan in a loan sequence, as defined under §1041.2(a)(14), because fewer than 30 days would have elapsed between consummation of the new covered short-term loan (the rollover) and the consumer having had a covered short-term loan made under §1041.5 outstanding. Assume that the consumer returns on day 28 (the repayment date of the first rollover, i.e., the second loan in the sequence) and the lender again reasonably determines that the consumer has the ability to repay a new loan and offers to roll over the loan again for an additional 14 days for a $75 fee. The second rollover would be the third loan in a loan sequence. If the consumer were to return on day 42 (the repayment date of the second rollover, which is the third loan in the sequence) and attempt to roll over the loan again, that rollover would be considered the fourth loan in the loan sequence. Therefore, that rollover would be prohibited and the consumer could not obtain another covered short-term loan or covered longer-term balloon-payment loan until the expiration of the 30-day cooling-off period, which begins after the consumer repays the second rollover (i.e., the third loan in the sequence).

5(d)(1) Borrowing History Review

1. Relationship to §1041.5(c)(2)(ii)(B) and (C). A lender satisfies its obligation under §1041.5(d)(1) 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 available, when it complies with the requirement in §1041.5(c)(2)(ii)(B) and (C) to obtain this same consumer report.

2. Availability of information systems that have been registered for 180 days or more pursuant to §1041.11(c)(2) or are registered pursuant to §1041.11(d)(2). If no information systems that have been registered for 180 days or more pursuant to §1041.11(c)(2) or are registered pursuant to §1041.11(d)(2) are available at the time that the lender is required to obtain the information about the consumer's borrowing history, the lender is nonetheless required to obtain information about the consumer's borrowing history from the records of the lender and its affiliates and to obtain the consumer's statement about the amount and timing of payments of major financial obligations as required under §1041.5(c)(2)(i)(B) (which would include information on current debt obligations including any outstanding covered loans). A lender may be unable 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 that is registered pursuant to §1041.11(d)(2) if, for example, all registered information systems are temporarily unavailable.

(2) Prohibition on loan sequences of more than three covered short-term loans or covered longer-term balloon-payment loans made under this section. A lender must not make a covered short-term loan or covered longer-term balloon-payment loan under this section during the period in which the consumer has a covered short-term loan or covered longer-term balloon-payment loan made under this section outstanding and for 30 days thereafter if the new covered short-term loan or covered longer-term balloon-payment loan would be the fourth loan in a sequence of covered short-term loans, covered longer-term balloon-payment loans, or a combination of covered short-term loans and covered longer-term balloon-payment loans made under this section.

Official Interpretation

5(d)(2) Prohibition on Loan Sequences of More Than Three Covered Short-Term Loans or Covered Longer-Term Balloon-Payment Loans Made Under §1041.5.

1. Prohibition. Section 1041.5(d)(2) prohibits a lender from making a fourth covered short-term loan or covered longer-term balloon-payment loan under §1041.5 in a loan sequence of covered short-term loans, covered longer-term balloon-payment loans, or a combination of covered short-term loans and covered longer-term balloon-payment loans made under §1041.5. See §1041.2(a)(14) for the definition of a loan sequence.

2. Examples. The following examples illustrate application of the prohibition under §1041.5(d)(2):

i. Assume that a lender makes a covered short-term loan to a consumer under the requirements of §1041.5 on February 1 with a contractual due date of February 15, the consumer repays the loan on February 15, and the consumer returns to the lender on March 1 for another loan. Assume that the second loan is a covered short-term loan with a contractual due date of March 15. The second loan would be part of the same loan sequence as the first loan because 30 or fewer days have elapsed since repayment of the first loan. Assume that the lender makes the second loan, the consumer repays the loan on March 15, and the consumer returns to the lender on April 1 for another loan. Assume that the third loan is a covered short-term loan with a contractual due date of April 15. The third loan would be part of the same loan sequence as the first and second loans because 30 or fewer days have elapsed since repayment of the second loan. Assume that the lender makes the third loan and the consumer repays the loan on April 15. Assume that all loans are reported to a registered information system. The consumer would not be eligible for another covered short-term loan or covered longer-term balloon-payment loan under §1041.5(d) from any lender until a 30-day cooling-off period following April 15 has elapsed, that is, starting on May 16. The consumer also would not be eligible for another covered short-term loan under §1041.6 during the same 30-day cooling-off period. See §1041.6(c)(1) and accompanying commentary.

ii. Assume that a lender makes a covered short-term loan to a consumer under the requirements of §1041.5 on February 1 with a contractual due date of February 15, the consumer repays the loan on February 15, and the consumer returns to the lender on March 1 for another loan. Assume that the second loan is a covered longer-term balloon-payment loan that has biweekly installment payments followed by a final balloon payment on the contractual due date of May 1. The second loan would be part of the same loan sequence as the first loan because 30 or fewer days have elapsed since repayment of the first loan. Assume that the lender makes the second loan, the consumer repays the loan in full as of May 1, and the consumer returns to the lender on May 15 for another loan. Assume that the third loan is a covered short-term loan with a contractual due date of May 30. The third loan would be part of the same loan sequence as the first and second loans because 30 or fewer days have elapsed since repayment of the second loan. Assume that the lender makes the third loan and the consumer repays the loan on May 30. Assume that all loans are reported to a registered information system. The consumer would not be eligible to receive another covered short-term loan or covered longer-term balloon-payment loan under §1041.5(d) from any lender until a 30-day cooling-off period following May 30 has elapsed, that is until after June 29. The consumer also would not be eligible for another covered short-term loan under §1041.6 during the same 30-day cooling-off period. See §1041.6(c)(1) and accompanying commentary.

(3) Prohibition on making a covered short-term loan or covered longer-term balloon-payment loan under this section following a covered short-term loan made under §1041.6. A lender must not make a covered short-term loan or covered longer-term balloon-payment loan under this section during the period in which the consumer has a covered short-term loan made under §1041.6 outstanding and for 30 days thereafter.

(e) Prohibition against evasion. A lender must not take any action with the intent of evading the requirements of this section.

Official Interpretation

5(e) Prohibition Against Evasion

1. General. Section 1041.5(e) provides that a lender must not take any action with the intent of evading the requirements of §1041.5. In determining whether a lender has taken action with the intent of evading the requirements of §1041.5, the form, characterization, label, structure, or written documentation of the lender's action shall not be dispositive. Rather, the actual substance of the lender's action as well as other relevant facts and circumstances will determine whether the lender's action was taken with the intent of evading the requirements of §1041.5. If the lender's action is taken solely for legitimate business purposes, it is not taken with the intent of evading the requirements of §1041.5. By contrast, if a consideration of all relevant facts and circumstances reveals a purpose that is not a legitimate business purpose, the lender's action may have been taken with the intent of evading the requirements of §1041.5. A lender action that is taken with the intent of evading the requirements of this part may be knowing or reckless. Fraud, deceit, or other unlawful or illegitimate activity may be one fact or circumstance that is relevant to the determination of whether a lender's action was taken with the intent of evading the requirements of §1041.5, but fraud, deceit, or other unlawful or illegitimate activity is not a prerequisite to such a finding.

2. Illustrative example—lender action that may have been taken with the intent of evading the requirements of the rule. The following example illustrates a lender action that, depending on the relevant facts and circumstances, may have been taken with the intent of evading the requirements of §1041.5 and thus may have violated §1041.5(e):

i. A storefront payday lender makes covered short-term loans to consumers with a contractual duration of 14 days and a lump-sum repayment structure. The lender's policies and procedures provide for a standard loan contract including a “recurring late fee” as a lender remedy that is automatically triggered in the event of the consumer's delinquency (i.e., if the consumer does not pay the entire lump-sum amount on the contractual due date, with no grace period), and in the loan contract the consumer grants the lender authorization to initiate a recurring ACH in the event such remedy is triggered. Assume that the recurring late fee is to be paid biweekly while the loan remains outstanding and is substantially equal to or greater than the fee that the lender charges on transactions that are considered rollovers under applicable State law. The practice of imposing a recurring late fee by contract differs from the lender's prior practice of contacting the consumer on or about the contractual due date requesting that the consumer visit the store to discuss payment options including rollovers. Assume that as a matter of practice, if a consumer does not repay the first loan in a sequence when it is due, the lender charges recurring late fees for 60 days unless the consumer repays the outstanding balance. Such a period is roughly equivalent to two 14-day loan cycles or two rollovers following the initial loan in the sequence, plus a 30-day cooling-off period. See §1041.5(d)(2) and related commentary. Depending on the relevant facts and circumstances, this action may have been taken with the intent of evading the requirements of §1041.5. By charging the recurring late fee for 60 days after the initial loan was due, the lender avoided its obligation under §1041.5(b) to make an ability-to-repay determination for the second and third loans in the sequence and to comply with the mandatory cooling-off period in §1041.5(d)(2) after the third loan was no longer outstanding.

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