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CFPB reports on the relationship between discount points and interest rates
On April 5, the CFPB issued a report on the relationship between trends in discount points and interest rates. The report used HMDA data between Q1 of 2019 and Q3 of 2023 when interest rates were at “record-highs” and before the Federal Reserve announced its intention to lower interest rates. The CFPB found that (i) the majority of borrowers paid discount points, (ii) more borrowers paid discount points as interest rates increased, and (iii) borrowers with low credit scores were even more likely to pay discount points. Delving deeper into the data, 87 percent of borrowers with cash-out refinances paid discount points (up from 61 percent in 2021), and borrowers with cash-out refinance loans paid twice the number of discount points compared to other borrowers (with a median of 2.1 points per loan). Additionally, almost 77 percent of FHA borrowers with a credit score below 640 paid discount points compared to 65 percent of all FHA borrowers. Considering these trends, the CFPB will plan to monitor the use of discount points and weigh the advantages against the potential risks to borrowers.
Trade groups sue Colorado Attorney General to block enforcement of law limiting out-of-state bank charges on consumer credit
On March 25, three trade groups filed a lawsuit in the U.S. District Court for the District of Colorado, against the Colorado Attorney General and the Administrator of the Colorado Uniform Consumer Credit Code to prevent enforcement of Section 3 of House Bill 23-1229, which was signed into law last year to limit out-of-state bank charges on consumer credit (the “Act”). As previously covered by InfoBytes, the Act amended the state’s Uniform Consumer Credit Code to opt out of the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) provision that allowed state-chartered banks to charge the interest allowed by the state where they are located, regardless of the location of the borrower and regardless of conflicting out-of-state law. The Act would go into effect on July 1.
According to the complaint, the Act “far exceed[s]” the authority Congress granted Colorado under DIDMCA and would be deemed “invalid on its face.” Plaintiffs alleged that Colorado ignored the federal definition of where a loan was deemed to be “made,” imposing “its state interest-rate caps on any ‘consumer credit transaction[] in’ Colorado,” including “any loan to a Colorado consumer by any state-chartered bank that advertises on the internet in Colorado.” Plaintiffs further alleged that the Act’s opt out “is preempted by DIDMCA and violates the Supremacy Clause of the U.S. Constitution by attempting to expand the federally granted opt-out right to loans not actually ‘made in’ Colorado under federal law,” and “violates the Commerce Clause because it will impede the flow of interstate commerce and subject state-chartered banks to inconsistent obligations across different states.” The Plaintiffs also alleged that Colorado’s stated goal of combatting “predatory, payday-style lending” will not be accomplished through the opt out, as plaintiffs’ members are not payday lenders and offer “a wide variety of useful, familiar, everyday credit products” that “are provided at a range of rate and fee options, which sometimes—to account for credit risk—are above Colorado’s rate and fee caps, but within the rate caps allowed by DIDMCA.” Furthermore, plaintiffs warn that the Act “will prevent Plaintiffs’ members from offering these mainstream products to many Colorado consumers,” while “national banks will still offer these very same loan products to Colorado residents at interest rates in excess of Colorado’s interest-rate and fee caps.” Plaintiffs urged the court to issue a ruling stating that the Act “is void with respect to loans not ‘made in’ Colorado as defined by applicable federal law” and to enjoin Colorado from enforcing or implementing the Act with respect to those loans.
Minnesota Attorney General settles with tribal company over high interest rates
On February 21, the Minnesota Attorney General announced a settlement with a tribal economic development entity to resolve a 2023 federal lawsuit that alleged the entity’s lending subsidiaries were engaged in predatory lending and illegal interest rates, in violation of Minnesota and federal consumer lending laws. As previously covered by InfoBytes, the complaint claimed that the entity’s lending subsidiaries charged interest rates of up to 800 percent in violation of state statutory caps of eight percent, and led state residents to believe that the entity was exempt from state laws that protect against predatory lending.
Under the terms of the settlement, the entity and its subsidiaries can no longer lend to Minnesota residents nor advertise or market those loans. The settlement also required any loan issued to consumers in Minnesota before the settlement is canceled, except to recover the original principal balance with all past payments to be attributed towards paying down the principal balance.
CFPB reports “all-time high” interest rate margins on credit cards
On February 22, the CFPB released a blog post on credit card interest rates stating that the interest rate margins are at an all-time high. According to the Bureau, the margin is the difference between the average APR and the prime rate. The blog post notes that both the average APR and the margin between the average APR and the prime rate have reached record highs. Specifically, the Bureau noted that, over the last 10 years, the average APR on credit cards interest has nearly doubled from 12.9 percent in 2013 to 22.8 percent in 2023. Likewise, the average APR margin has increased from 3.3 percent in 2013 to 8.5 percent in 2023. According to the Bureau, this change has been brought on by banks and issuers who have raised their APR margins to increase profits. The CFPB noted that, although the CARD Act of 2009 kept APR margins lower throughout the 2010s, issuers began to increase the APR in 2016. The Bureau intends to take steps to ensure a fair market and to “help consumers avoid debt spirals.”
Basel Committee publishes report on recalibration of shocks for interest rate risk
On December 12, the Basel Committee released a report on the “Recalibration of shocks for interest rate risk in the banking book,” as an adjustment to the Committee’s 2016 commitment to recalibrate the interest rate shock parameters.
The Committee began its calibration of interest rate shocks before the March 2023 banking issues transpired and is now following up on fundamental shortcomings in traditional risk management of banks, including interest rate risks. The report is brief and focuses on specified topics: for the first topic, the current calibration and methodology outlining current interest rate shocks (measured in basis points), the calculation of average interest rates from 2000 to 2015, the application of three tiers for shock parameters, and problems with the methodology; for the second topic, a proposal of a new methodology and calibration using a formula with outlined steps for countries to adopt, a comparison between the existing and new methodology, and a recalibration table; and, the third and final topic emphasizes additional issues and next steps, including caps, non-parallel shocks, and impact assessment.
The Committee noted in its press release that these changes “are needed to address problems with how the current methodology captures interest rate changes during periods when interest rates are close to zero.” Comments can be submitted to the Committee until March 28, 2024.
Minnesota AG files complaint against a tribal company for steep rates
On October 30, the Minnesota Attorney General’s office filed a complaint against a Montana tribal economic development entity claiming that the entity’s lending subsidiaries violated state and federal usury laws through deceptive trade practices and false advertising. The complaint alleges that “[d]efendants ignore these laws and have in recent years made thousands of loans to consumers in Minnesota at interest rates exponentially higher than what is permitted. They do so while deceiving Minnesotans to believe the defendant lenders are immune from Minnesota law because they are owned by a federally recognized Indian tribe. But even sovereign entities and their subsidiaries must comply with Minnesota and federal law when they transact business in Minnesota.” The complaint claims that the company’s lending subsidiaries charged interest rates up to 800 percent and led state residents to believe that the entity was exempt from state laws that protect against predatory loans. Minnesota laws cap interest rates for written contracts at 8% unless otherwise exempted. Loan contracts that violate the law may be voidable and have no legal effect. The Attorney General is seeking an injunction to block the company from operating in Minnesota, a declaration that “marketing, offering, issuing, servicing, collection, and providing of [these] loans” is in violation of federal and state laws, and compensation for the residents affected by the defendants’ actions.
District Court says MLA’s statute of limitations begins upon discovery of facts
The U.S. District Court for the Eastern District of Virginia recently granted an installment lender’s motion to dismiss, ruling that most of the class members’ claims are time-barred by the Military Lending Act’s (MLA) two-year statute of limitations. Plaintiffs are active duty servicemembers who entered into installment loans with the defendant. Claiming four violations of the MLA, plaintiffs alleged the defendant (i) extended loans with interest rates exceeding the MLA’s 36 percent interest rate cap; (ii) extended loans that involved roll overs of prior loans; (iii) required plaintiffs to agree to repayment by allotment (with a backup preauthorized electronic fund transfer) as a condition to receiving a loan; and (iv) required plaintiffs to provide a security interest in their bank accounts as a condition for receiving a loan. Plaintiff sought to certify a class covering the five years preceding the date the complaint was filed. Defendant moved to dismiss, arguing that plaintiffs have only been harmed by technical violations of the MLA and did not suffer a concrete injury. Plaintiffs countered that the defendant’s MLA violations caused them to sustain injuries from making payments, including interest payments, “on loans that were ‘void from [their] inception’ [] due to their unlawful refinancing, allotment, and security interest requirements.”
The court reviewed a significant issue raised by the parties’ differing interpretations of the MLA’s statute of limitations and its applicability to plaintiffs’ loans. Specifically, the parties disagreed as to whether “discovery by the plaintiff of the violation,” which triggers the two-year limitations period, requires that a plaintiff only discover the facts constituting the basis for the violation, as argued by the defendant, or instead requires that a plaintiff also know that the MLA was violated, as the plaintiffs argued. While acknowledging that the text in question is inconclusive, the court stated that since the MLA “does not require ‘discovery’ of both the ‘violation’ and ‘liability’ but only the ‘violation that is the basis for such liability,’ the text appears to support the interpretation that only discovery of the violative conduct is required, and
not discovery of the actionability of that conduct.” The court also reviewed other federal statutory discovery rules where other courts “have consistently found that ‘discovery’ requires that a plaintiff have knowledge only of the facts constituting the violation and not the legal implications of those facts.” Relying on this, as well as other court interpretations, the court determined that “the two-year limitations period is triggered when a plaintiff discovers the facts
constituting the basis for the MLA violation and not when the plaintiff recognizes that these facts
support a legal claim.” Thus, the court found that most of the loans underlying the claims are time-barred.
However, for loans that fell within the applicable limitations period, the court granted defendant’s motion to dismiss for failure to state a claim, concluding, among other things, that a creditor is not prohibited from taking a security interest in a plaintiff’s bank account by way of a preauthorized electronic fund transfer provided the military annual percentage rate does not exceed the allowable 36 percent (a claim, the court noted, plaintiffs dismissed and did not otherwise address). Moreover, the court determined that plaintiffs failed to allege that the defendant was a “creditor” under the narrower definition used by the MLA in its refinancing and roll-over prohibition or that the defendant’s “characterization of the convenience of repayment by allotment amounted to a misrepresentation or concealment of facts giving rise to plaintiffs’ MLA claim.”
Colorado limits out-of-state bank charges on consumer credit
On June 6, the Colorado governor signed HB 23-1229 (the “Act”) to amend the state’s Uniform Consumer Credit Code (UCCC). Specifically, Colorado has invoked its right under the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) to opt out of a provision that allows state-chartered banks to preempt state interest rates applicable to consumer credit transactions. Sections 521-523 of DIDMCA currently allow state-chartered banks to charge the interest allowed by the state where they are located, regardless of where the borrower is located and regardless of conflicting out-of-state law. Section 525, however, provides states with the authority to opt out of these sections.
Modifications to the UCCC impact requirements for alternative charges for loans not exceeding $1,000, and include the following changes:
- Reduces the permissible acquisition charge on the original loan or any refinanced loan from 10 to eight percent of the amount financed;
- Reduces permissible monthly installment account handling charges based on categories of the amount financed;
- Increases the minimum loan term from 90 days to six months;
- Removes the ability for a lender to charge a delinquency charge on a loan;
- Amends provisions relating to the conditions upon which an acquisition charge must be refunded to a consumer; and
- Limits the number of times a lender can refinance a consumer loan to once a year.
The amendments take effect July 1, 2024, and only apply to consumer credit transactions made after that date.
Chopra highlights APOR in call for resilient and durable rules
On May 17, CFPB Director Rohit Chopra announced that the agency is currently reviewing several of its rules and guidance documents in an effort to eliminate unnecessary complexities and create “more durable rules that don’t over-rely on single entities.” Chopra flagged issues related to the federal mortgage rules as an example of unnecessarily complex policies with a penchant for accommodating “dominant industry incumbents.” Last month, the Bureau announced a revised version of its methodology for calculating the average prime offer rates (APORs), which highlighted broader weaknesses resulting from single points of failure and a reliance on overly complicated benchmarks. As previously covered by InfoBytes, the methodology statement was revised to address the imminent unavailability of certain data that the Bureau previously relied on to calculate APORs, including changes made by Freddie Mac to its Primary Mortgage Market Survey used to calculate APORs for three types of loans. Noting that the Bureau has had other challenges relying on a single entity for calculating the APOR benchmark over the last decade, Chopra commented that “[n]o consumer protection rule should be designed so that its important protections are threatened by single points of failure or single sources.” He added that the revised APOR methodology further “highlighted the risks of relying on complicated reference rates that must be manually constructed rather than potentially more robust market-based measures that stand on their own.”
Colorado establishes medical debt collection requirements
On May 4, the Colorado governor signed SB 23-093 to cap the interest rate on medical debt at three percent per year. The Act outlines numerous provisions, including that entities collecting on a medical debt must provide a consumer with a written copy of a payment plan within seven days for medical debt that is payable in four or more installments. The Act also outlines requirements for accelerating or declaring a payment plan longer operative, and lays out prohibited actions (such as collecting on a debt or reporting a debt to a consumer reporting agency within a certain timeframe) relating to medical debt that an entity knows, or reasonably should know, is under review or being appealed. An entity that files a legal action to collect a medical debt must provide to a consumer (upon written request) an itemized statement concerning the debt and must allow a consumer to dispute the debt’s validity after receiving the statement. Entities are prohibited from engaging in collection activities until the itemized statement is delivered. The Act outlines self-pay requirements and estimates, and further provides that it is a deceptive trade practice to violate outlined provisions relating to billing practices, surprise billing, and balance billing laws. The Act takes effect immediately and applies to contracts entered into after the effective date.