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CFPB publishes BNPL borrower profiles
On March 2, the CFPB released a report examining the financial profiles of Buy Now, Pay Later (BNPL) borrowers using data pulled from the agency’s Making Ends Meet survey and its access to credit bureau data. The report follows previous Bureau research conducted on the BNPL market (covered by InfoBytes here). The Bureau observed that, while many BNPL borrowers used the product without any noticeable markers of financial stress, these borrowers (as compared to non-BNPL borrowers) were, on average, more likely to have higher credit card debt and utilization rates and were more likely to have revolving balances on their credit cards. BNPL borrowers also had lower credit scores and higher utilization rates of alternative financial services such as payday loans and pawn loans that charge high interest rates and were more likely to incur bank account overdrafts. The report noted, however, that while BNPL borrowers generally have access to traditional credit products, they are more likely to borrow using retail accounts, personal loans, student loans, and auto loans compared to non-BNPL borrowers (BNPL borrowers were more than twice as likely to be delinquent on at least one of those products by 30 days or longer). The Bureau commented though “that many of these differences pre-date [BNPL] use and [the report] highlights the need for further research into whether the products have any causal impact on consumer indebtedness.” Black, Hispanic, and female consumers are also more likely than average to use BNPL products, the report found, along with consumers with income between $20,001-$50,000.
Colorado AG releases consumer lending study
On January 23, the Colorado attorney general announced that it sent a study examining the availability of consumer lending in the state to the Colorado General Assembly. Among other things, the study analyzed the availability of safe and affordable credit in Colorado and focused on the availability of two types of loans: (i) small-dollar loans, defined as loans up to $1,000, and (ii) larger installment loans.
Regarding small-dollar loans in Colorado, Proposition 111 enacted in 2018, capped rates on deferred deposit loans at 36 percent. As such, the study noted that there was a significant decrease in the number of lenders who were making deferred deposit (payday) loans and the number of licensed locations as of 2018. It was reported that 95,747 individuals in Colorado obtained alternative charge loans in 2021, which represented a significant decline from 2018. The study also found that, while there was a drop in the number of retail outlets, available evidence indicates consumers who qualify are able to obtain alternative charge loans, given the growth of online lending.
The affordability of alternative charge borrowers is mixed, according to the report. It appears that about one in five borrowers experience substantial difficulty in making the required payments. Other measures suggest a substantially lower percentage struggle.
Regarding larger installment loans, 39,295 consumers obtained “Other Supervised Loans” (defined as loans with an APR above 12 percent) from non-depositories, and non-depositories took by assignment an additional 87,880 Other Supervised Loans in 2021. The number of originated Other Supervised Loans in 2021 was nearly identical to the number originated in 2019. Overall, 25.9 percent of consumers who applied for Other Supervised Loans were approved.
Company to pay $45 million to SEC, states for unregistered crypto-lending product
On January 19, the SEC charged a Cayman Islands digital asset firm for allegedly failing to register the offer and sale of its retail crypto-asset lending product. According to the SEC’s cease-and-desist order, the company’s product allowed U.S. investors to tender certain crypto assets with the company, which were then deposited in interest-yielding accounts and used by the company to generate income and fund interest payments to investors.
The SEC maintained that the company’s product was marketed as an opportunity for investors to earn interest on their crypto assets, and that company actions “included staking, lending, and engaging in arbitrage on purportedly ‘decentralized’ finance platforms; investing in certain crypto assets; loaning funds to retail and institutional borrowers; and entering into options and swap contracts with respect to the crypto assets tendered”— resulting in the company acquiring $2.7 billion in assets from approximately 112,000 investors. The SEC found that because the product qualified as a security and did not qualify for an exemption from registration under the Securities Act of 1933, the company was required to register its offer and sale of the product, which it failed to do.
The company did not admit or deny the SEC’s findings, but agreed to pay $22.5 million to the SEC, and said it would stop offering and selling the unregistered lending product to U.S. investors. The SEC considered remedial actions promptly taken by the company, as well as its cooperation with Commission staff in determining the settlement amount. The SEC reported that the company voluntarily stopped offering its product to new U.S. investors and ceased paying interest on new funds added to existing accounts after the SEC announced charges against a different company that offered a similar crypto investment product. The company also announced that the product would stop being offered in certain states and that it was phasing out all of its products and services in the U.S.
The company also agreed to pay another $22.5 million to state regulators from California, Kentucky, Maryland, New York, Oklahoma, South Carolina, Vermont, and Washington in a parallel action claiming the company offered interest-earning accounts without first registering the investment products as securities. According to the announcement, the company allegedly failed to comply with state securities registration requirements, and, among other things, deprived investors “of critical information and disclosures necessary to understand the potential risks of the [product].”
Arizona AG: Earned wage access products are not loans
Recently, the Arizona attorney general issued an opinion confirming that earned wage access (EWA) products are not considered consumer loans under Arizona law, and that persons who make, procure, or advertise an EWA product are not subject to licensure as a consumer lender by the Arizona Department of Insurance and Financial Institutions. The opinion concluded that an EWA product offered as a no-interest, no-fee, non-recourse product does not fall within the definition of “consumer loan” under Arizona Revised Statutes § 6-601(7).
First, a fully non-recourse EWA product “represents a payment of wages already earned by the employee” and “does not allow recourse against the employee in the event the provider is unable to recoup all or some portion of the advance,” the opinion explained. The opinion added that a fully non-recourse EWA product is one in which “the provider obtains no legal or contractual right to repayment against the employee, does not engage in any debt collection activities with regard to any unpaid balance, does not sell or assign any unpaid balance to a third party, and does not report non-payment to any consumer credit reporting agency.”
Second, and independently, the AG opined that an EWA product is not a consumer loan so long as the provider does not impose a “finance charge,” as that term is defined by A.R.S. § 6-601(11). Specifically, “a non-recourse EWA product that requires repayment only of the principal balance is not a 'loan.'” While the Consumer Lenders Act (CLA) “does not expressly state that the obligation to repay principal is not a “finance charge,” requiring repayment of principal is self-evidently not an amount payable incident to or as a condition of a consumer lender loan.”
The opinion noted, however, that a provider “may also receive revenue through services ancillary to providing an EWA product without converting the EWA product into a “loan” under the CLA, such as by requesting a voluntary gratuity, charging a fee for expedited transfer of an EWA payment, or earning interchange revenue for processing a card payment. As long as the provider does not condition the provision of an EWA product on the “receipt of any such ancillary revenue” or impose fees or charges that fall within the CLA’s definition of “finance charge,” the EWA product will not meet the CLA’s definition of a “consumer loan.”
The opinion referred to guidance issued by other regulators who have drawn similar conclusions that an EWA product is not a loan so long as the program meets specific criteria. Such references include the 2020 CFPB advisory opinion on EWA products. As previously covered by InfoBytes, the Bureau’s advisory opinion addressed uncertainty as to whether EWA providers that meet short-term liquidity needs that arise between paychecks “are offering or extending ‘credit’” under Regulation Z, which implements TILA. The advisory opinion stated that “‘a Covered EWA Program does not involve the offering or extension of ‘credit,’” and noted that the “totality of circumstances of a Covered EWA Program supports that these programs differ in kind from products the Bureau would generally consider to be credit.” The Arizona AG opinion highlighted the Bureau’s conclusion that EWA products do not involve debt because “a Covered EWA Program facilitates employees’ access to wages they have already earned, and to which they are already entitled, and thus functionally operate[] like an employer that pays its employees earlier than the scheduled payday.”
Last January, CFPB General Counsel Seth Frotman issued a letter in response to concerns raised by consumer advocates (covered by InfoBytes here), stressing that the CFPB’s 2020 advisory opinion “is limited to a narrow set of facts—as relevant here, earned wage products where no fee, voluntary or otherwise, is charged or collected.” Frotman noted, however, that due to “repeated reports of confusion caused by the advisory opinion due to its focus on a limited set of facts,” he planned to recommend that the CFPB director consider ways to provide greater clarity on these issues. He emphasized that the advisory opinion did not purport to interpret whether covered EWA products would be “credit” under other statutes other than TILA, such as the CFPA or ECOA, or whether they would be considered credit under state law.
Maryland Court of Appeals says law firm collecting HOA debt is not engaged in the business of making loans
On August 11, a split Maryland Court of Appeals held that “a law firm that engages in debt collection activities on behalf of a client, including the preparation of a promissory note containing a confessed judgment clause and the filing of a confessed judgment complaint to collect a consumer debt, is not subject to the Maryland Consumer Loan Law [(MCLL)].” A putative class action challenging the law firm’s debt collection practices was filed in Maryland state court in 2018. According to the opinion, several homeowners associations and condominium regimes (collectively, “HOAs”) retained the law firm to help them draft and negotiate promissory notes memorializing repayment terms of delinquent assessments. These promissory notes, the opinion said, included confessed judgment clauses that were later used against homeowners who defaulted on their obligations. The suit was removed to federal court and was later stayed while the Maryland Court of Appeals weighed in on whether the law firm was subject to the MCLL. Loans made under the MCLL by an unlicensed entity render the loans void and unenforceable, the opinion said.
Class members claimed that the law firm is in the business of making loans and that the promissory notes are subject to the MCLL and “constitute ‘loans’ because they are an extension of credit enabling the homeowners to pay delinquent debt to the HOAs.” Because neither the law firm nor the HOAs are licensed to make loans the promissory notes are void and unenforceable, class members argued. The law firm countered that it (and the HOAs) are not obligated to be licensed because they are not lenders that “engage in the business of making loans” as provided in the MCLL.
On appeal, the majority concluded that there is no evidence that the state legislature intended to require HOAs to be licensed “in order to exercise their statutory right to collect delinquent assessments or charges, including entering into payment plans for the repayment of past-due assessments.” Moreover, in order to qualify for a license, an applicant “must demonstrate, among other things, that its ‘business will promote the convenience and advantage of the community in which the place of business will be located[]’”—criteria that does not apply to an HOA or a law firm, the opinion stated. Additionally, applying class members’ interpretation would lead to “illogical and unreasonable results that are inconsistent with common sense,” the opinion read, adding that “[t]o hold that the MCLL covers all transactions involving any small loan or extension of credit—without regard to whether the lender is ‘in the business of making loans’—would cast a broad net over businesses that are not currently licensed under the MCLL.”
The dissenting judge countered that the law firm should be subject to the MCC because to determine otherwise would allow law firms to engage in the business of making loans in the form of new extensions of credit with confessed judgment clauses and would “create a gap in the Maryland Consumer Loan Law that the General Assembly did not intend.”
Oklahoma adjusts loan finance charge thresholds
On May 4, the Oklahoma governor signed SB 1687, which adjusts the amounts a supervised lender may charge in lieu of a loan finance charge on loans carrying principals of $3,000 or less. Previously, the principal limit was $300. The amendments outline specific allowable loan charges based on principal amount that may be made on qualifying loans. Additionally, for loans greater than $1,620 but not more than $3,000, lenders are allowed an acquisition charge for making the loan that may not exceed one-tenth of the amount of the principal. The threshold rate changes are effective July 1.
Special Alert: Federal court says state bank, fintech partner must face Maryland’s allegation of unlicensed lending before state ALJ
A federal court late last month told a state-chartered bank and its fintech partner that they must return to a state administrative law proceeding to fight a Maryland enforcement action alleging that their failure to obtain a license to lend and collect on loans violated state law — potentially rendering the terms of certain loans unenforceable.
The Missouri-chartered bank and its partners attempted to remove an action brought by the Office of the Maryland Commissioner of Financial Regulation to the U.S. District Court for the District of Maryland, but the district court determined that removal was not proper and that Maryland’s Office of Administrative Hearings was the appropriate venue.
OCFR initially filed charges in January 2021 in Maryland’s Office of Administrative Hearings against the bank and its partner asserting the bank made installment and consumer loans and extended open-ended or revolving credit in the state without being licensed or qualifying for an exception to licensure. As a result, OCFR said they “‘may not receive or retain any principal, interest, or other compensation with respect to any loan that is unenforceable under this subsection.’” It said that not only are the bank’s loans to all Maryland consumers possibly unenforceable, but also that the bank, or its agents or assigns, could in the alternative be “prohibited from collecting the principal amount of those loans from any of these consumers or from collecting any other money related to those loans.”
The OCFR’s charge letter also said the fintech company that provided services to the bank violated the Maryland Credit Services Business Act by providing advice and/or assistance to consumers in the state “with regard to obtaining an extension of credit for the consumer when accepting and/or processing credit applications on behalf of the Bank without a credit services business license.” Additionally, the OCFR alleged violations of the Maryland Collection Agency Licensing Act related to whether the fintech company engaged in unlicensed collection activities, thus subjecting it to the imposition of fines, restitutions, and other non-monetary remedial action.
The defendants filed a notice of removal to federal court last year while the enforcement action was still pending before the OAH; OCFR moved to remand the case back to the agency.
In granting the OCFR’s motion to remand, the court concluded that the OCFR persuasively argued that the defendants have not properly removed this case from the OAH for several reasons, including that the OAH does not function as a state court. “Pursuant to 28 U.S.C. § 1441, a defendant may remove to federal court ‘any civil action brought in a State court of which the district courts of the United States have original jurisdiction.’” However, the court determined that, while defendants correctly observed that the OAH possesses certain “court-like” attributes, its limitations clearly showed that it does not function as a state court.
In reaching this conclusion, the court considered several undisputed facts, including that the OCFR is a unit of the Maryland Department of Labor “responsible for, among other things, issuing licenses to entities wishing to issue loans to consumers in Maryland and investigating violations of Maryland’s consumer loan laws.” The court also said that, while OCFR has authority under Maryland law to investigate potential violations of law or regulation and has the ability to issue cease and desist orders, revoke an individual’s license, or issue fines, it cannot enforce its own subpoenas or orders — and that its decisions are not final and may be appealed to a state circuit court.
The defendants had argued that the case involved a federal question as a result of the complete preemption of state usury laws by Section 27 of the FDI Act. The court said licensure, not state usury law claims, was the issue at hand.
During a status conference held last month to discuss OCFR’s motion to remand, defendants requested an opportunity to file a motion certifying the case for appeal. The court will hold in abeyance its remand order pending resolution of that motion. Parties’ briefings are due by the end of May.
If you have any questions regarding the ruling or its ramifications, please contact a Buckley attorney with whom you have worked in the past.
House fintech task force examines buy now/pay later industry
On November 2, the House Financial Services Committee’s Task Force on Financial Technology held a hearing titled “Buy Now, Pay More Later? Investigating Risks and Benefits of BNPL and Other Emerging Fintech Cash Flow Products,” urging regulators to examine the BNPL industry. The committee memorandum highlighted the rise in consumers products offered by fintechs, such as BNPL, earned wage access, and overdraft avoidance products, and warned that while these products may help consumers manage their personal cash flow, they also have the potential to create unsustainable levels of debt. FSC staff noted that many lending disclosure requirements, including those under TILA, may not apply to several of these products, thus creating concerns regarding consumers’ understanding of the associated risks. Pointing out that payments made on many of these products are not reported to credit bureaus, FSC staff raised the issue of whether consumers are missing out on opportunities to build credit.
The task force heard from several industry witnesses who discussed, among other things, current federal and state consumer protection regulations that apply to BNPL products. One witness stressed the importance of “balanced and thoughtful regulation” that benefits consumers and merchants using these new payment solutions, and noted that the industry is actively working with credit bureaus on ways to share repayment data. House Financial Services Chair Maxine Waters (D-CA) also urged the CFPB to “look[ ] deeply” at these emerging products to gain a better understanding of how they may impact low- and moderate-income consumers and borrowers of color. Representative Blaine Luetkemeyer (R-MO) noted, however, that these products “allow[] people to purchase products, [and] pay for them in a timely manner as they can afford them.” Representative Warren Davidson (R-OH) agreed, stressing that policymakers need to “avoid punishing new products for not fitting within regulatory buckets that were already built” and “should avoid overly impairing consumer choices on how they spend money.”
NCUA approves expansion of CUSO lending rights
On October 21, the National Credit Union Administration Board approved a final rule by a 2-1 vote to expand the range of permissible activities and services that credit union service organizations (CUSOs) may engage in. Under the final rule, CUSOs will be allowed to originate, purchase, sell, and hold any type of loan a federal credit union is permitted to, including auto and payday loans. The final rule also provides the Board “additional flexibility to approve permissible CUSO activities and services outside of notice and comment rulemaking.” NCUA Vice Chairman Kyle Hauptman stated the rule “gives credit unions the tools to compete more effectively in the digital marketplace.” However, NCUA Chairman Todd Harper opposed the final rule, warning that because NCUA “lacks the third-party vendor authorities that the other federal banking agencies and several state regulators have, the NCUA has no power to supervise CUSOs for compliance with federal consumer financial protection laws and regulations and compliance with prudential standards like concentration limits, maximum loan-to-value ratios, and minimum capital levels.” The final rule takes effect 30 days after publication in the Federal Register.
Illinois amends state Human Rights Act
On August 13, the Illinois governor signed SB 1561, which amends the Illinois Human Rights Act to include provisions regarding third-party loan modification service providers. According to the bill, it is a civil rights violation for a third-party loan modification service provider because of unlawful discrimination, familial status, or an arrest record, to (i) refuse to engage in loan modification services or to discriminate in making such services available; or (ii) alter the terms, conditions, or privileges of such services. The bill also clarifies that a third-party loan modification service provider is a person or entity, licensed or unlicensed, that “provides assistance or services to a loan borrower to obtain a modification to a term of an existing real estate loan or to obtain foreclosure relief,” but does not include lenders, brokers or appraisers of mortgage loans, or the servicers, subsidiaries, affiliates, or agents of the lender. Among other things, the bill provides that, in relation to real estate transactions, the failure of the Department to notify a complainant or respondent in writing for not completing an investigation on the allegations set forth in a charge within 100 days shall not deprive the Department of jurisdiction over the charge. This bill is effective January 1, 2022.