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Financial Services Law Insights and Observations

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  • New Hampshire enacts amendments to banking and consumer credit laws

    State Issues

    On June 8, the governor of New Hampshire signed HB 1687, to clarify the applicability of various state banking and consumer credit laws. Among other changes, the law (i) clarifies information required to be provided in a note, agreement, or promise to pay that is entered into by a small, title, or payday lender; (ii) prohibits small, title, or payday lenders from taking “any note, agreement, or promise to pay in which blanks are left to be filled in after the loan is made”; and (iii) makes certain other clarifying technical updates. The law is effective August 7.

    State Issues State Legislation Licensing Payday Lending Mortgages

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  • Native American tribes to forfeit $3 million in profits made from payday lending scheme

    Federal Issues

    On June 26, the Department of Justice (DOJ) filed two forfeiture complaints, which cover agreements with two Native American tribes to forfeit a combined $3 million in profits made from their involvement in an allegedly fraudulent payday lending scheme (see here and here). As previously covered by InfoBytes, in October 2016, the FTC required a Kansas-based operation and its owner to pay more than $1.3 billion for allegedly violating Section 5(a) of the FTC Act by making false and misleading representations about costs and payment of the loans. The business owner and his attorney were subsequently found guilty in October 2017 of operating a criminal payday loan empire. As part of the agreements, the two tribes admit that representatives filed affidavits containing false statements in the legal actions against the payday loan scheme. If the tribes comply with agreement requirements, the DOJ will not pursue criminal action for the specified violations.

    In February, multiple federal agencies entered into a $613 million deferred prosecution agreement over Bank Secrecy Act (BSA) and anti-money laundering (AML) compliance program deficiencies with a national bank, which included allegations that the bank was on notice of the owner’s use of the bank to launder proceeds from his fraudulent payday lending scheme. (Previously covered by InfoBytes here.)

    Federal Issues DOJ Payday Lending FTC Consumer Finance Bank Secrecy Act Anti-Money Laundering FTC Act

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  • NCUA proposes additional payday loan alternative option

    Agency Rule-Making & Guidance

    On June 4, the National Credit Union Administration (NCUA) published in the Federal Register a proposal to create a new payday alternative loan product (PAL II) in addition to the current payday alternative loan product (PAL I), which has been available since 2010. According to the NCUA announcement, the goal of PAL II is to expand access to safe and affordable short-term, small-dollar loans for consumers of modest means. PAL II would include most features of PAL I, with four changes: (i) eliminating a loan minimum while setting the maximum at $2,000; (ii) setting a term maximum of 12 months; (iii) eliminating the requirement for membership minimum length; and (iv) as long as the consumer only has one outstanding loan at the time, eliminating the time restriction on the number of loans a credit union can make to the borrower in a six month period.

    The proposal also requests input on the potential features of a possible third option, PAL III, including lending restrictions, associated fees, and underwriting guidelines.

    As previously covered by InfoBytes, the OCC recently issued a bulletin encouraging banks to offer short-term, small dollar installment lending.

    Agency Rule-Making & Guidance NCUA Payday Lending Federal Register Credit Union

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  • FTC reports on certain 2017 enforcement activities to the CFPB

    Federal Issues

    On May 17, in response to a request from the CFPB, the FTC transmitted a letter summarizing its 2017 enforcement activities related to Regulation Z (TILA), Regulation M (Consumer Leasing Act), and Regulation E (Electronic Fund Transfer Act) for the CFPB’s use in preparing its 2017 Annual Report to Congress. The FTC highlighted numerous activities related to the enforcement of the pertinent regulations, including:

    • Payday Lending. The FTC acknowledged the continued litigation against two Kansas-based operations and their owner for allegedly selling lists of counterfeit payday loan debt portfolios to debt collectors in violation of the FTC Act, previously covered by InfoBytes here.
    • Military Protection. The FTC identified the July 2017 military consumer financial workshop and the launch of the new Military Task Force (previously covered by InfoBytes here and here) among the activities the agency engaged in related to protecting the finances of current and former members of the military. The FTC also noted continued participation in the interagency group working with the Department of Defense on amendments to its rule implementing the Military Lending Act.
    • “Negative Option.” For actions under the Regulation E/EFTA, the FTC highlighted numerous “negative option” enforcement actions, in which the consumer agrees to receive goods or services from a company for a free trial option, but if the consumer does not cancel before the trial period ends, the consumer will incur recurring charges for continued goods or services. Among the actions highlighted is a case in which the FTC imposed a $179 million judgment (suspended upon the payment of $6.4 million) settling allegations that the online marketers’ offers of “free” and “risk free” monthly programs for certain weight loss and other products were deceptive.
    • Auto Loans. The letter highlighted, among others, the FTC action against a Southern California-based group of auto dealerships that allegedly violated a prior consent order with the FTC by misrepresenting the cost to finance or lease a vehicle, previously covered by InfoBytes here.

    Federal Issues FTC Act Payday Lending FTC Auto Finance Enforcement Military Lending Act Department of Defense CFPB TILA Consumer Leasing Act EFTA Congress

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  • District Court rules South Dakota banking regulator exceeded authority in revoking payday lender’s license

    Courts

    On May 29, the U.S. District Court for the District of South Dakota denied a motion to dismiss filed by the director of the South Dakota Division of Banking (defendant), ruling that the defendant exceeded his authority when he revoked a payday lender’s (plaintiff) operating license instead of initiating a cease and desist order, and that he failed to provide sufficient opportunities for the plaintiff to respond. According to the court, the defendant “had good cause to revoke [the plaintiff’s] money lending licenses,” having determined that late fees on the plaintiff’s loan product violated the 36 percent finance charge cap in the state’s 2017 payday lending law. But the court also held that the defendant committed a “procedural error” when he chose to “revoke the licenses rather than afford[] a hearing or [give the plaintiff] an opportunity to bring its practices into compliance. . . .”

    The court further granted the plaintiff’s motion for partial summary judgment “on the violation of procedural due process” for a period from September 13 through September 28, 2017—the date that the defendant issued a limited stay on the license revocation allowing the company to collect on loans issued before the South Dakota payday lending law went into effect. “In short, [the defendant’s] Order did not meaningfully advance the interests of the state (and indeed contravened state law), and the ‘substitute procedures’ sought by [the plaintiff] (and required under state law) would have accommodated the competing interests, provided due process, and not needlessly compromised the private interests of [the plaintiff],” the court wrote.

    Courts State Issues Payday Lending Licensing Bank Regulatory

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  • 4th Circuit affirms sanctions for attorneys in payday lawsuit

    Courts

    On May 31, the U.S. Court of Appeals for the 4th Circuit affirmed sanctions against three attorneys for challenging the authenticity of a loan document for two years without revealing they had obtained a copy of the document from their client before filing the original complaint. The action results from a now closed case in which a consumer alleged he received loans at predatory interest rates (annual interest rate of about 139 percent) from a tribal lender and sought to impose liability on the non-lenders, including a credit union, which processed the debit transactions under the loan agreement. In response to a motion to dismiss, the attorneys for the consumer challenged the authenticity of the loan agreement provided by the credit union. After years of litigation, the credit union discovered the consumer had provided his attorneys with the loan agreement prior to the original complaint filing and moved for sanctions against the attorneys. The attorneys argued that they had no affirmative duty to disclose documents before the opening of discovery.

    The lower court disagreed, determining that each attorney had “acted in bad faith and vexatiously and violated their duty of candor by hiding a relevant and potentially dispositive document from the Court in connection with a long-running dispute over arbitrability.” In February 2017, the lower court ordered two attorneys and their respective law firms jointly liable for $150,000 in attorneys’ fees and a third associate attorney jointly liable for $100,000. Upon appeal, the 4th Circuit held that the lower court did not abuse its discretion in awarding the compensatory sanctions, stating “without losing the forest for the trees, we conclude that the district court reasonably described sanctioned counsels’ conduct as evincing a multi-year crusade to suppress the truth to gain a tactical litigation advantage.”

    Courts Appellate Fourth Circuit Payday Lending Attorney Fees Sanctions

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  • OCC encourages banks to offer short-term, small-dollar installment lending

    Consumer Finance

    On May 23, the OCC released Bulletin 2018-14, which encourages banks to meet the credit needs of consumers by offering short-term, small-dollar installment loans subject to the OCC’s core lending principles. The Bulletin acknowledges the CFPB’s final rule on Payday, Vehicle Title, and Certain High-cost Installment Loans (Payday Rule) – which generally covers loans with maturities shorter than 45 days or longer-term loans with balloon payments – and states the OCC intends on working with the Bureau to ensure banks can “can responsibly engage in consumer lending, including lending products covered by the Payday Rule.”

    Specifically, the Bulletin encourages banks to offer loans without balloon payments and with maturities greater than 45 days subject to three core lending principles: (i) the product should be consistent with safe and sound banking, treat customers fairly, and comply with all applicable laws and regulations; (ii) banks should effectively manage risks associated with the product; and (iii) the product should be underwritten based on reasonable policies and practices, such as amount and repayment terms aligning with eligibility, use internal and external data sources to assess a consumer’s creditworthiness, and loan servicing processes that assist distressed borrowers. Additionally, with regard to pricing, the Bulletin stated that the “OCC views unfavorably an entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state(s).”

    Immediately after the OCC’s release, the CFPB issued a statement applauding the Bulletin because “[m]illions of Americans desperately need access to short-term, small-dollar credit.” In January, the CFPB stated it plans to reconsider the Payday Rule and the Spring 2018 rulemaking agenda indicates the Bureau expects a notice of proposed rulemaking to be issued by February 2019 (previously covered by InfoBytes here and here).

    Consumer Finance Payday Lending Installment Loans OCC CFPB Payday Rule

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  • CFPB Succession: Bureau dismantles Office for Students; no longer plans student loan regulations; and more

    Federal Issues

    On May 9, according to multiple reports, the CFPB internally announced that the Bureau would eliminate the Office of Students & Younger Consumers and move its staff into the Office of Financial Education as part of acting Director Mulvaney’s agency reorganization. The Bureau will continue to have a Student Loan Ombudsman position, which is required by the Dodd-Frank Act. It is also reported that the Bureau intends to create a new “Office of Cost Benefit Analysis” and rename certain existing offices. As previously covered by InfoBytes, acting Director Mulvaney plans to move the Office of Fair Lending and Equal Opportunity from the Division of Supervision, Enforcement and Fair Lending to the Office of the Director, in order to focus on “advocacy, coordination and education.”  Day-to-day responsibility for enforcement and supervision oversight will remain in the renamed Division of Supervision and Enforcement (SE).

    The Office of Management Budget (OMB) released the CFPB’s Spring 2018 rulemaking agenda, which no longer includes “Student Loan Servicing” as a Long-Term Action. In previous agendas, the Bureau described its plan for Student Loan Servicing as “The CFPB will continue to monitor the student loan servicing market for trends and developments.  As this work continues, the Bureau will evaluate possible policy responses, including potential rulemaking.  Possible topics for consideration might include specific acts or practices and consumer disclosures.” In addition to dropping Student Loan Servicing, the Spring 2018 agenda also no longer lists plans for Supervision of Larger Participants in Markets for Personal Loans, Overdraft Services, or Submission of Credit Card Agreements under TILA (more information on the CFPB’s previous plans for these rules can be found here).

    As expected, the Spring 2018 agenda also included two new additions to the Proposed Rule Stage:

    • HMDA. The Bureau has previously announced it intends to engage in a broader rulemaking to (i) re-examine the criteria determining whether institutions are required to report data; (ii) adjust the requirements related to reporting certain types of transactions; and (iii) re-evaluate the required reporting of additional information beyond the data points required by the Dodd-Frank Act (InfoBytes coverage here). The Bureau indicates it expects a Notice of Proposed Rulemaking (NPRM) on any changes to the HMDA rule before 2019. 
    • Payday, Vehicle Title, and Certain High-Cost Installment Loans. In January, the Bureau announced the intention to reconsider the 2017 payday rule (covered by InfoBytes here). The OMB agenda indicates the Bureau expects a NPRM by February 2019.

    Notably, the CFPB continues to include “Debt Collection Rule” in a Proposed Rule Stage, as it has in previous agenda iterations. However, the Bureau has extended the deadline for its NPRM to February 2019.

      

    Federal Issues CFPB Succession Student Lending CFPB Overdraft Debt Collection Payday Lending HMDA

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  • 5th Circuit will hear CFPB constitutionality challenge

    Courts

    On April 24, the U.S. Court of Appeals for the 5th Circuit agreed to hear a challenge by two Mississippi-based payday loan and check cashing companies to the constitutionality of the CFPB’s single-director structure. The CFPB filed a complaint against the two companies in May 2016 alleging violations of the Consumer Financial Protection Act for practices related to the companies’ check cashing and payday lending services, previously covered by InfoBytes here. The district court denied the companies’ motion for judgment on the pleadings, rejecting their arguments that the structure of the CFPB is unconstitutional and that the CFPB’s claims violate due process. However, the district court granted the companies’ motion to certify an interlocutory appeal as to the question of the constitutionality of the CFPB’s structure, referencing the D.C. Circuit’s decision in PHH Corp. v. CFPB, (covered by a Buckley Sandler Special Alert here), and noting the “substantial ground for difference of opinion as to this issue as exhibited by the differences of opinion amongst the jurists in the [D.C. Circuit] who have considered this issue.” The district court emphasized that the question is a “controlling question of law” that the 5th Circuit has yet to decide and, if the CFPB were determined to be an unconstitutional entity, this would materially advance the underlying action’s termination. A panel of the 5th Circuit has now granted the companies’ motion for leave to appeal from the interlocutory order on the issue of the constitutionality of the CFPB’s structure.

    Courts Fifth Circuit Appellate Federal Issues CFPB PHH v. CFPB CFPB Succession Dodd-Frank CFPA Payday Lending

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  • CFPB Succession: Mulvaney pleads for Congress to restructure the CFPB; oral arguments held in English litigation

    Federal Issues

    On April 11 and 12, acting Director of the CFPB, Mick Mulvaney, testified before the House Financial Services Committee and the Senate Banking Committee regarding the Bureau’s semi-annual report to Congress. (Previously covered by InfoBytes here). Mulvaney’s prepared testimony, which was submitted to both committees, covers the salient points of the semi-annual report but also includes the same request to Congress that he made in the report: change the law “in order to establish meaningful accountability for the Bureau.” This request, which includes four specific changes (such as, subjecting the Bureau to the Congressional appropriations process and creating an independent Inspector General for the Bureau), was the focus of many of Mulvaney’s responses to questions posed by members of each committee. Specifically, during the House Financial Services hearing, Mulvaney encouraged the members of the committee to include the CFPB restructure in negotiations with the Senate regarding the bipartisan regulatory reform bill, S.2155, which passed the Senate last month. (Previously covered by InfoBytes here).

    Mulvaney also fielded many questions regarding the Bureau’s announcement that it plans to reconsider the final rule addressing payday loans, vehicle title loans, and certain other extensions of credit (Rule); however, his responses gave little indication of what the Bureau’s specific plans for the Rule are. As previously covered by InfoBytes, resolutions have been introduced in the House and the Senate to overturn the rule under the Congressional Review Act. Additionally, on April 9, two payday loan trade groups filed a lawsuit in the U.S. District Court for the Western District of Texas asking the court to set aside the Rule because, among other reasons, the CFPB is unconstitutional and the Bureau’s rulemaking failed to comply with the Administrative Procedure Act. The complaint alleges that the Rule is “outside the Bureau's constitutional and statutory authority, as well as unnecessary, arbitrary, capricious, overreaching, procedurally improper and substantially harmful to lenders and borrowers alike.” The complaint also argues that the rule is a product of an agency that violates the Constitution’s separation of powers due to the Bureau’s structure of a single director who may only be removed by the president “for cause.” A similar argument in CFPB v. PHH Corporation was recently rejected by the U.S. Court of Appeals for the D.C. Circuit (covered by a Buckley Sandler Special Alert).

    Additionally, on April 12, the U.S. Court of Appeals for the D.C. Circuit heard oral arguments in English v. Trump. In this suit, Leandra English, the current deputy director of the CFPB, challenges Mulvaney’s appointment as acting director. Unlike previous arguments, which focused on the president’s authority to appoint Mulvaney under the Federal Vacancies Reform Act (FVRA), the court spent considerable time discussing Mulvaney’s concurrent role as head of the Office of Management and Budget (OMB), and whether that dual role is inconsistent with the independent structure of the Bureau, as established by the Dodd-Frank Act.

    Federal Issues CFPB Succession Payday Lending Senate Banking Committee House Financial Services Committee Appellate D.C. Circuit CFPB English v. Trump

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