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OCC updates Comptroller’s Handbook booklet to address deposit-related credit
On September 12, the OCC issued Bulletin 2018-28, which updates the “Deposit-Related Credit” booklet of the Comptroller’s Handbook previously issued March 2015. The booklet provides guidance for OCC examiners to be used in connection with the examination and supervision of national banks and federal savings associations who offer small-dollar, unsecured deposit-related credit products and services, such as check credit, overdraft protection, and deposit advance products. The booklet also includes, among other things, (i) updated guidance following the rescission of OCC Bulletin 2013-40, “Deposit Advance Products: Final Supervisory Guidance,” (previously covered by InfoBytes here) and the issuance of OCC Bulletin 2018-14, “Installment Lending: Core Lending Principles for Short-Term, Small-Dollar Installment Lending” (previously covered by InfoBytes here); (ii) information concerning limitations and requirements for consumer credit products extended to active-duty servicemembers covered by the Military Lending Act; (iii) integrated citations to third-party risk management guidance and procedures; (iv) information pertaining to new products and services, including sound due diligence practices; and (v) prohibitions against unfair, deceptive, or abusive acts or practices under Dodd-Frank.
CFPB Succession: Bureau reportedly no longer examining for MLA compliance
According to reports citing “internal agency documents,” acting Director of the CFPB Mick Mulvaney intends to cease supervisory examinations of the Military Lending Act (MLA), contending the law does not explicitly prescribe the Bureau the authority to examine financial institutions for compliance with the MLA. In 2013, amendments to the MLA granted enforcement authority to the same agencies with administrative enforcement power under TILA, including the Bureau, but these amendments did not also provide these same agencies with the statutory authority to supervise institutions for compliance with the MLA. The Bureau currently includes the MLA in the statutory- and regulation-based procedures section of the Supervision and Examination Manual and has not released a formal statement in response to reports of this supervisory change.
Federal Reserve Board launches inaugural Consumer Compliance Supervision Bulletin
On July 26, the Federal Reserve Board released its inaugural Consumer Compliance Supervision Bulletin (Bulletin) to share information about the agency’s supervisory observations and other noteworthy developments related to consumer protection, and provide practical steps for banking organizations to consider when addressing consumer compliance risk. The first Bulletin focuses on fair lending issues related to the practice of redlining and outlines key risk factors the Fed considers in its review, such as (i) whether a bank’s Community Reinvestment Act (CRA) assessment areas inappropriately exclude minority census tracts; (ii) whether a bank’s Home Mortgage Disclosure Act or CRA lending data show “statistically significant disparities in majority minority census tracts when compared with similar lenders”; or (iii) whether the bank’s branches, loan production offices, or marketing strategies appear to exclude majority minority census tracts. Practical steps for mitigating redlining risk are also provided. The Bulletin also discusses fair lending risk related to mortgage pricing discrimination against minority borrowers, small dollar loan pricing that discriminates against minorities and women, disability discrimination, and maternity leave discrimination.
The Bulletin additionally addresses unfair or deceptive acts or practices risks related to overdrafts, misrepresentations made by loan officers, and the marketing of student financial products and services. The Bulletin also highlights regulatory and policy developments related to the Federal Financial Institutions Examination Council’s updated Uniform Interagency Consumer Compliance Rating System along with recent changes to the Military Lending Act.
FTC reports on certain 2017 enforcement activities to the CFPB
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.
Maryland governor signs provisions amending Maryland Consumer Loan Law’s small lending requirements
On May 15, the Maryland governor signed legislation to establish requirements for lenders making covered loans in the state. Among other things, HB1297 increases the threshold for which a loan is subject to small lending requirements within the Maryland Consumer Loan Law (MCLL) from $6,000 to $25,000. The law also prohibits (i) lenders who are not licensed in the state from making loans of $25,000 or less, unless the person is exempt from requirements under MCLL; (ii) a person contracting “for a covered loan that has a rate of interest, charge, discount, or other consideration greater than the amount authorized under state law”; and (iii) covered loans that would be a violation of the Military Lending Act. Loans that violate these provisions are deemed void and unenforceable except in limited circumstances. The law takes effect January 1, 2019.
Maryland expands scope of unfair and deceptive practices under the Maryland Consumer Protection Act, increases maximum civil penalties
On May 15, the Maryland governor signed HB1634, the Financial Consumer Protection Act of 2018, which expands the definition of “unfair and deceptive trade practices” under the Maryland Consumer Protection Act (MPCA) to include “abusive” practices, and violations of the federal Military Lending Act (MLA) and Servicemembers Civil Relief Act (SCRA). The law also, among other things:
- Civil Penalties. Increases the maximum civil penalties for certain consumer financial violations to $10,000 for the initial violation and $25,000 for subsequent violations
- Debt Collection. Prohibits a person from engaging in unlicensed debt collection activity in violation of the Maryland Collection Agency Licensing Act or engaging in certain conduct in violation of the federal FDCPA.
- Enforcement Funds. Requires the governor to appropriate at least $700,000 for the Office of the Attorney General (OAG) and at least $300,000 to the Office of the Commissioner of Financial Regulation (OCFR) for certain enforcement activities.
- Student Loan Ombudsman. Creates a Student Loan Ombudsman position within the OCFR and establishes specific duties for the role, including receiving, reviewing, and attempting to resolve complaints from student loan borrowers.
- Required Studies. Requires the OCFR to conduct a study on Fintech regulation, including whether the commissioner has the statutory authority to regulate such firms. The law also requires the Maryland Financial Consumer Protection Commission (MFCPC) to conduct multiple studies, including studies on (i) cryptocurrencies and initial coin offerings and (ii) the CFPB’s arbitration rule (repealed by a Congressional Review Act measure in November 2017).
OCC updates Comptroller’s Handbook to include Military Lending Act booklet
On May 11, the OCC issued the “Military Lending Act” (MLA) booklet of the Comptroller’s Handbook. According to the announcement, the booklet reflects the 2015 Department of Defense amendments, as well as the interpretive guidance published in 2016 and updated in 2017 (covered by InfoBytes here and here), and applies to the examinations of OCC-supervised institutions that establish consumer credit products covered by the MLA. The booklet includes, among other things, (i) rules for determining fees and charges included in the calculation of the military annual percentage rate (MAPR); (ii) rules for calculating the MAPR; (iii) required disclosures to be provided to covered borrowers; and (iv) consumer credit limitations for covered borrowers.
FTC releases report on military consumer finance
On February 2, the FTC released a new Staff Perspective (perspective) which highlights takeaways from a July 2017 FTC workshop focused on examining the array of financial issues that may affect military consumers (defined as servicemembers, veterans, and their families). The perspective notes, among other things, that servicemembers may struggle during auto financing transactions because of a lack of time to shop and lack of credit history, which may result in disadvantageous credit terms. Additionally, the perspective highlights that debt collection problems may result in a servicemember not qualifying for a security clearance and that debt collectors may threaten to contact servicemembers’ commanding officers. The perspective also summarized the additional legal rights that may apply to military consumers, such as the Military Lending Act (MLA) and the Servicemembers Civil Relief Act (SCRA), and emphasized the FTC’s focus on financial education for servicemembers throughout the various stages of their military career.
OCC highlights supervisory priorities in fall 2017 semiannual risk report
On January 18, the OCC announced the release of its Semiannual Risk Perspective for Fall 2017, identifying key risk areas for national banks and federal savings associations. Top supervisory priorities will focus on credit, operational, and compliance risk. As previously discussed in the spring 2017 semiannual report, compliance risk continues to be an ongoing concern, particularly as banks continue to adopt new technologies to help them comply with anti-money laundering rules and the Bank Secrecy Act (BSA), in addition to addressing increased cybersecurity challenges and new consumer protection laws. (See previous InfoBytes coverage here.) The OCC commented that these types of risks can be mitigated by banks with “appropriate due diligence and ongoing oversight.”
Specific areas of particular concern include the following:
- easing of commercial credit underwriting practices;
- increasing complexity and severity of cybersecurity threats, including phishing scams that are the primary method of breaching bank data systems;
- using limited third-party service providers for critical operations, which can create “concentrated points of failure resulting in systemic risk to the financial services sector”;
- compliance challenges under the BSA; and
- challenges in risk management involving consumer compliance regulations.
The report also raises concerns about new requirements under the Military Lending Act along with pending changes to data collection under the Home Mortgage Disclosure Act, which could pose compliance challenges. It further discusses a new standard taking effect in 2020 for measuring expected credit losses, which “may pose operational and strategic risk to some banks when measuring and assessing the collectability of financial assets.”
The data relied on in the report was effective as of June 30, 2017.
Department of Defense Updates MLA Interpretive Guidance; Addresses Timing for Safe Harbor Qualification
The Department of Defense (DoD) published a new interpretive rule (rule) under the Military Lending Act (MLA) on December 14. This interpretive rule takes effect immediately, and it both amends and adds to the interpretive rule issued by DoD in August 2016 (previously covered by a Buckley Special Alert). In general, the rule contains the following updated interpretations:
- Exemption of Credit Secured by a Motor Vehicle or Personal Property. The rule provides additional guidance on the exemption covering purchase money-secured motor vehicle and personal property loans. Specifically, the rule states that additional costs may be added to an extension of credit so long as these costs relate to the object securing the credit, and not the extension of credit itself. For example, the rule explains that credit used to finance “optional leather seats,” “an extended warranty,” or “negative equity” in connection with the purchase of a motor vehicle will not cause the loan to be subject to the MLA. However, the rule also states that, if credit is extended to cover “Guaranteed Auto Protection insurance or a credit insurance premium” or additional “cashout,” the loan is not eligible for the MLA exception.
- Security Interests in Covered Borrowers’ Accounts. The rule addresses the ability of a creditor to take a security interest in a covered borrower’s account. Specifically, the rule states that a covered borrower may “convey security interest for all types of consumer credit” to a creditor, so long as the creditor complies with all other laws and the MLA rule. Similarly, the rule notes that the MLA does not prohibit a creditor from exercising rights to take an otherwise-valid statutory lien on funds that have been deposited into a covered borrower’s account “at any time.” However, the rule also emphasizes methods a creditor may not use to obtain payment from a covered borrower’s account, such as a “remotely created check.”
- Timing for Safe Harbor Qualification. The rule provides additional clarity on when a creditor must check an applicant’s active duty status to obtain the MLA’s safe harbor. The rule states that an applicant’s covered borrower status should be determined when the applicant (i) initiates the transaction, (ii) submits an application to establish an account or during the processing of that application, or (iii) anytime during a 30-day period of time prior to such action. In addition, the rule states that a covered borrower check can qualify for the safe harbor if it is performed “during the course of the creditor’s processing of that application for consumer credit.”