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  • OCC Rescinds Guidance on Deposit Advance Products, Cites Overlap With CFPB Payday Rule

    Agency Rule-Making & Guidance

    On October 5, the OCC rescinded its 2013 Guidance on Supervisory Concerns and Expectations Regarding Deposit Advance Products and accompanying Bulletin 2013-40, effective immediately. The rescission, announced so as to avoid “potentially inconsistent regulatory direction,” comes as a reaction to the CFPB’s final rule announced October 5 concerning payday loans, vehicle title loans, deposit advance products, and longer-term balloon loans. (See previous InfoBytes coverage here.) Acting Comptroller of the Currency, Keith A. Noreika, acknowledged that the changing regulatory and marketplace landscape has made it difficult for banks to serve the demand for short-term, small-dollar credit, and while the OCC may issue new guidance at a later date, it will continue to ensure that banks that choose to offer these types of products are compliant with the “basic principles of prudent underwriting and risk management as well as fair and inclusive treatment of customers.”

    Agency Rule-Making & Guidance OCC CFPB Payday Lending Consumer Finance

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  • CFPB Issues Final Rule Regarding Payday, Title, Deposit Advance, and Other Installment Loans

    Agency Rule-Making & Guidance

    On October 5, the CFPB published its final rule (Rule) addressing payday loans, vehicle title loans, deposit advance products, and longer-term balloon loans (collectively, “covered loans”). The CFPB previously announced the proposed rule in June 2016 (covered by a Buckley Sandler Special Alert). The final rule makes it an abusive and unfair practice for lenders to make a covered short-term loan or covered longer-term balloon loan without determining upfront that the borrower has the ability to repay (known as the “full-payment test”). The full-payment test varies depending on the covered loan, but in essence, requires the lender to reasonably determine that the borrower can meet basic living expenses and major financial obligations and still afford their highest monthly payment(s). The Rule puts a limitation of three on the number of loans that can be made in quick succession (within 30 days of each other).

    Lenders may avoid the requirement of a “full-payment test” with covered loans by offering small-dollar, short-term loans that allow the borrower to pay down the principal more gradually or are determined to pose less financial risk to the borrower. In addition, loans that meet the parameters of “payday alternative loans” authorized by the National Credit Union Administration are excluded, as are no-cost advances and wage advance programs that meet certain conditions, though the Rule does impose restrictions on using these exceptions based on the borrower’s loan history.

    In addition to requirements surrounding the borrower’s ability to repay, the CFPB also finalized rules regarding payment withdrawals and reporting requirements. The Rule prevents lenders from attempting to withdraw a payment from a borrower’s account after two consecutive withdrawal attempts have failed, unless the borrower has given specific authorization to do so. This restriction applies to covered loans as well as longer-term loans with account access and an APR above 36 percent. The Rule requires lenders to use Bureau-registered credit reporting systems to report and obtain information about loans made under the full-payment test or the principal payoff option.

    The provision regarding the registration information systems takes effect 60 days after publication in the Federal Register. The rest of the Rule takes effect 21 months after publication in the Federal Register.

    Buckley Sandler will follow up with a more detailed summary of the CFPB’s final rule.

    Agency Rule-Making & Guidance CFPB Payday Lending Consumer Finance NCUA Federal Register

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  • NYDFS Announces Settlement to Provide Restitution and Loan Forgiveness to Consumers Affected by Payday Lending Practices

    Consumer Finance

    On September 25, New York Department of Financial Services (NYDFS) Superintendent Maria T. Vullo announced the Department had entered into a consent order with a payday loan debt collector and payday loan servicer (together, “defendants”) for allegedly collecting on illegal payday loans made to New York consumers between 2011 to 2014. Payday lending, according to NYDFS’ press release, is illegal in the state, and debt collectors who “collect or attempt to collect outstanding payments from New Yorkers on payday loans violate debt collection laws.” The consent order notes that in 2013, NYDFS circulated a guidance letter to all debt collectors operating in the state to remind them that usurious loans made by non-bank lenders with interest rates exceeding the statutory maximum—and the attempts to collect debts on these types of loans—are “void and unenforceable and violate state and federal law.” However, one of the defendants continued to collect on payday loans for more than a year. The alleged actions, NYDFS asserted, are violations of the Fair Debt Collection Procedures Act, New York Debt Collection Procedures Law, and New York General Business Law.

    Pursuant to the consent order, which includes a notice letter to be sent to affected consumers, the debt collector defendant must comply with the following: (i) cease all collection on payday loans in New York; (ii) release and discharge more than $11.8 million in outstanding applicable payday loan debts; (iii) move to vacate any judgments obtained on payday loan accounts; and (iv) “[r]elease any pending garnishments, levies, liens, restraining notices, or attachments relating to any judgments on New Yorkers’ payday loan accounts.” The loan servicer defendant must close any pending accounts in the state and cease communications with consumers regarding their accounts.

    Consumer Finance State Issues NYDFS Enforcement Settlement Payday Lending Debt Collection FDCPA

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  • District Court Grants $30 Million Settlement in Payday Lending Securities Class Action Suit

    Courts

    On September 20, a federal judge in the U.S. District Court for the Eastern District of Pennsylvania issued a memorandum signing off on a settlement between a payday lender and a class of institutional investors, resolving allegations that the lender violated securities laws when it made “materially false and misleading statements” about its financial health and the nature of its U.K. lending practices. According to the plaintiffs, the lender’s misstatements artificially inflated the common stock during the class period (January 28, 2011 through February 3, 2014), so that when the lending practices were revealed, the stock prices declined. Further, the lender allegedly (i) “routinely lent to borrowers without conducting any affordability checks”; (ii) “permitted borrowers to roll over loans that [they] could not afford to repay, enriching [the lender] with fees”; and (iii) presented “loan loss reserves [that] were understated as a result of its poor lending practices, its failure to adequately monitor the quality of its loans, and its failure to properly account for loans that were rolled over.” In 2016, the court granted class certification and the parties reached a settlement after extensive discussions. The final settlement approved in the memorandum creates a settlement fund of $30 million, of which $7.5 million will go towards attorneys’ fees and costs. The court signed a judgment approving the class action settlement the same day.

    Courts Payday Lending Securities Settlement Litigation International

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  • CFPB Issues Consent Order to Online Lead Aggregator, Settles Separate 2016 Lead Aggregator Action

    Consumer Finance

    On September 6, the CFPB ordered an online loan lead aggregator to pay $100,000 for its alleged involvement in selling leads to small-dollar lenders and installment loan purchasers who then extended loans that were void in whole or in part under the borrower’s state laws. The consent order alleges that the California-based company knew the state of residence for each lead sold, yet “regularly sold [l]eads for consumers located in states where the resulting loan was void or the lender had no legal right to collect the principal, interest, or fees from the consumer based on state-licensing requirements or interest-rate limits.” The order also claims that, because the company knows the identity of each purchaser prior to the sale of the loan, it should also know (i) whether the purchaser is likely to comply with the state laws, or (ii) whether the leads it sells will result in loans exceeding state usury interest rate limits or fail to be in compliance with the consumer’s state laws. Pursuant to the consent order, in addition to the $100,000 civil money penalty, the company must (i) “undertake reasonable efforts to ensure” leads do not result in loans that are void under the laws of the consumer’s state; (ii) obtain, among other things, copies of licenses required by each state for its end users “where the absence of such a license would render a loan void in whole or in part under the laws of that state”; (iii) implement procedures for reviewing loans that result from its leads to ensure compliance with privacy and other laws; (iv) establish a policy to prohibit lenders from making loans that are likely to result in loans that are void under the consumer’s state-licensing requirements or interest-rate limits and “refrain from conveying” leads for such loans; and (v) submit registration for the Bureau’s Company Portal.

    On the same day, the CFPB also entered into a $250,000 settlement with the company’s president and primary owner for his alleged actions cited in a 2016 complaint involving his role as the operator of a different online lead aggregator. (See previous InfoBytes summary here.) In addition to the civil money penalty, the president has agreed to (i) make efforts to guarantee that all loans offered to consumers are valid in the states where they live; (ii) ensure that there is no misleading, inaccurate, or false information contained in the consumer-facing content of all lead generators from which leads are accepted; and (iii) require all lead generators to “prominently disclose to consumers an accurate description” of how leads will be received, conveyed, and processed. The president has neither admitted nor denied the CFPB’s allegations.

    Consumer Finance CFPB Payday Lending Data Collection / Aggregation Enforcement Settlement

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  • DOJ Formally Ends Operation Chokepoint; Judicial and Financial Services Committee Leaders and Acting Comptroller of the Currency Respond

    Federal Issues

    On August 16, the DOJ sent a letter to House Judiciary Committee Chairman Bob Goodlatte (R-Va.) formally announcing the DOJ’s commitment to end its initiative known as Operation Chokepoint, which was designed to target fraud by investigating U.S. banks and the business they do with companies believed to be a higher risk for fraud and money laundering. Assistant Attorney General Stephen Boyd wrote: “All of the [DOJ]’s bank investigations conducted as part of Operation Chokepoint are now over, the initiative is no longer in effect, and it will not be undertaken again.” Boyd further reiterated that “the [DOJ] will not discourage the provision of financial services to lawful industries, including businesses engaged in short-term lending and firearms-related activities.” However, criminal activity discovered as a result from responses to subpoenas may continue to be pursued by the DOJ. Additionally, the FDIC also rescinded a list identifying “purportedly ‘high-risk’ merchants” and the DOJ noted that it “strongly agrees with that withdrawal.”

    On August 18, Rep. Goodlatte’s office, along with other judicial and financial services committee leaders, issued praise for the DOJ’s decision: “Targeted industries, such as firearms dealers, were presumed guilty by the Obama Justice Department until proven innocent, and many businesses are still facing the repercussions of this misguided program.”

    Separately, on August 21, Acting Comptroller of the Currency Keith A. Noreika sent a letter to House Financial Services Committee Chairman Jeb Hensarling (R-Tex.) repudiating Operation Chokepoint and claiming “the [OCC] rejects the targeting of any business operating within state and federal law as well as any intimidation of regulated financial institutions into banking or denying banking services to particular businesses.” Noreika further stated that the OCC “expects the banks it supervises to maintain banking relationships with any lawful businesses or customers they choose, so long as they effectively manage any risks related to the resulting transactions and comply with applicable laws and regulations.”

    The DOJ’s announcement comes after years of attempts by Congressional Republicans to end the initiative as well as lawsuits filed by payday lenders over claims that regulator interpretations of “reputational risk” violated their rights to due process. (See previous InfoBytes coverage here.)

    Federal Issues DOJ Operation Choke Point Payday Lending OCC House Financial Services Committee

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  • Virginia AG Announces Settlement with Small Dollar Lender Over Excessive Fees

    State Issues

    On August 1, Virginia Attorney General Mark Herring announced​ a settlement with a Virginia pawnbroker to resolve allegations that the company violated the Virginia Consumer Protection Act (VCPA) by offering consumers small dollar loans in exchange for personal property—held as security for the loans—and then charging interest and fees beyond the limits allowed by the state’s statutes applicable to pawnbrokers. According to a press release issued by the Attorney General’s office, the settlement requires the company to provide refunds of more than $27,000 to borrowers and reimburse the state for expenses incurred during the investigation. A permanent injunction also prohibits the company from violating state pawnbroker statutes and the VCPA.

    State Issues State AG Lending Payday Lending

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  • Payday Lenders Argue Case for Operation Choke Point Injunction, Claim Regulator Activities Violate Their Rights to Due Process

    Courts

    On May 19, a group of payday lenders filed a brief with the Court of Appeals for the District of Columbia claiming a U.S. district court judge was wrong to deny their request for a preliminary injunction against regulator activities they claim violate their rights to due process. (See Advance America v. FDIC, et al, 2017 WL 2212168 (C.A.D.C.).)  As previously discussed in InfoBytes, the lenders claim the DOJ’s “Operation Choke Point” initiative—designed to target fraud by investigating U.S. banks and the business they do with companies believed to be a higher risk for fraud and money laundering—is a threat to their survival. The lenders’ brief alleges that federal agencies, including the DOJ and the FDIC, began as early as June 2008 to expand the interpretation of “reputation risk.” According to the lenders, reputation risk originally referred to risk to a bank’s reputation that arose from its own actions; however, the regulators expanded that to apply to risks that could arise from activities of a bank’s customers, which meant “bank servicing businesses identified as ‘high risk’ would be required to incur significant additional regulatory compliance costs and  face the risk of increased regulatory scrutiny.” This, the lenders assert, became a justification to pressure banks to sever their banking relationships with payday lenders.

    Notably, the U.S. district court judge refused to issue a preliminary injunction and was not persuaded that the lenders would be able to prove that these regulatory actions caused banks to deny services the lenders needed to operate.

    However, the lenders claim in their brief that they can show a violation of their procedural due process rights under three theories: “stigma-plus,” “reputation-plus,” and “broad preclusion.”

    • The lenders describe the “stigma-plus” theory as requiring them to show they were stigmatized in connection with an “alteration of their background legal rights” without any due process protections. They believe they can prove this occurred because they were labeled as high-risk customers and denied access to the banking system with no legal protections.
    • The “reputation-plus” theory would require a deprivation of banking services in connection with defamatory statements that harmed their reputation, the lenders claim. The lenders contend this can be proved because the “’stigmatizing charges certainly occurred in the course of the termination of the accounts, which is all that is required for a reputation-plus claim to succeed.” Each lender claims to have lost a relationship with at least one bank due to false regulator claims that the relationships could threaten the bank’s stability.
    • The “broad preclusion” theory also applies, the lenders assert, because the regulators’ statements to banks have prevented them “pursuing their chosen line of business.”

    Furthermore, the lenders take issue with the U.S. district court judge’s position that they are required to show they lost all access to banking services in order to show a due process violation. They also argue that a loss of their constitutional right to due process is a sufficient irreparable injury to justify a preliminary injunction.

    Courts Payday Lending Consumer Finance Prudential Regulators CFPB DOJ Operation Choke Point

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  • Nevada Company Executives Agree to Pay Tribe $2.5 Million for Participating in Embezzlement and Kickback Scheme

    Courts

    On May 2, during a change of plea hearing in the U.S. District Court for the District of Montana, a Nevada-based company and three of its executives pled guilty for their roles in a scheme to help tribal officials embezzle money and provide kickbacks to its payday lender officials. Specifically, the company pled guilty to charges of conspiracy to commit wire fraud and conspiracy to commit money laundering, while one of the principals and the President and CEO both pled guilty to charges of “conspiracy to commit wire fraud and engaging in monetary transactions in property derived from specified unlawful activity.” The other principal pled guilty to charges of misprision of felony, according to the plea agreement. The plea agreements further stipulate that full restitution is due to the tribe in the amount of $2.5 million. The payment in the 2015 settlement of the civil case in this matter (see writ of execution in The Chippewa Cree Tribe of The Rocky Boy Reservation of Montana v. Encore Services No. 2:14-cv-01294-JCM-PAL (D. Nev. Feb. 2, 2015)) will offset the restitution in the criminal case. In addition, one of the principals and the President/CEO are responsible for paying an additional $700,000 each, according to the breakdown contained within two of the plea deals. Sentencing is scheduled for August 24.

    Courts Anti-Money Laundering Fraud Payday Lending

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  • Oklahoma Governor Vetoes Legislation Expanding High-Cost Payday Lending

    Consumer Finance

    On May 5, Oklahoma Governor Mary Fallin vetoed legislation that would have expanded consumer payday lending in the state. Oklahoma House Bill 1913—known as the “Oklahoma Small Loan Act”—would have allowed lenders to offer installment loans with terms no longer than 12 months and interest rates up to 17 percent per month. Fallin’s veto message to the House expressed concerns about adding another high interest loan product without eliminating or restricting existing payday loan products: “House Bill 1913 adds yet another level of high interest borrowing (over 200% APR) without terminating or restricting access to existing payday loan products.” Fallin further asserted that “some of the loans created by this bill would be more expensive than the current loan options.” Four years prior, Fallin vetoed Senate Bill 817 “due to [her] concerns with the frequency [with which] low-income families in Oklahoma were using these lending options, and the resulting high cost of repayment to those families.” In the veto message, Fallin requested that the state legislature seek advice from her office as well as consumer advocates and mainstream financial institutions if it decides to revisit these issues. Under Section 11 of Article 6 of the Oklahoma Constitution, the legislation can still be enacted if two-thirds of the members of both legislative chambers vote to override the veto. In earlier votes, the legislation fell short of the two-thirds threshold, passing the Oklahoma House 59-31 and the Senate by a 28-16 margin.

    Notably, last year, the CFPB published proposed rules in the Federal Register affecting payday, title, and certain other high-cost installment loans (see previously posted Special Alert).

    Consumer Finance State Issues Payday Lending CFPB

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