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CFPB Announces First Enforcement Action Against Payday Lender
On November 20, the CFPB announced the resolution of an enforcement action against one of the largest payday lenders in the country. The consent order alleges that the lender and an online lending subsidiary made hundreds of payday loans to active duty military members or dependents in violation of the Military Lending Act, and that call center training deficiencies have allowed additional loans to be originated to spouses of active-duty members. The order also alleges unfair and deceptive debt collection practices, including so-called “robosigning” that allegedly yielded inaccurate affidavits and pleadings likely to cause substantial injury. In July, the CFPB issued a notice that it would hold supervised creditors accountable for engaging in acts or practices the CFPB considers to be unfair, deceptive, and/or abusive when collecting their own debts, in much the same way third-party debt collectors are held accountable for violations of the FDCPA.
Notably, this is the first public action in which the CFPB alleges that the supervised entities engaged in unlawful examination conduct. The Bureau asserts that the lender and subsidiary failed to comply with examination requirements, including by not preserving and producing certain materials and information required by the CFPB. Both the lender and its subsidiary are nonbanks and have not previously been subject to regular federal consumer compliance examinations; the CFPB does not allege that the exam failures were intentional violations potentially subject to criminal charges.
Pursuant to the consent order, the lender must pay $8 million in consumer redress, in addition to the more than $6 million the lender has already distributed to consumers for alleged debt collection and MLA violations. The lender also must pay a $5 million civil money penalty. The CFPB did not reveal how it determined the penalty amount or what portion of the fine is attributable to the alleged consumer-facing violations versus the alleged unlawful exam conduct. Finally, the order requires comprehensive compliance enhancement and imposes ongoing reporting and recordkeeping obligations for a period of three years.
In written remarks released by the CFPB, Director Cordray stated: “This action should send several clear messages to everyone under the jurisdiction of the Consumer Bureau. First, robo-signing practices are illegal wherever they occur, and they need to stop – period. Second, violations of the Military Lending Act harm our servicemembers and will be vigorously policed. Third, the Bureau will detect and punish entities that withhold, destroy, or hide information relevant to our exams.”
CFPB Director Testifies Before Senate Banking Committee
On November 12, CFPB Director Richard Cordray testified before the Senate Banking Committee in connection with the CFPB’s recent Semi-Annual Report to Congress, which covered the period April 1, 2013 through September 30, 2013.
The session covered a range of topics, including mortgage rule implementation, auto finance, student lending, Military Lending Act rulemaking, prepaid cards, Gramm-Leach-Bliley Act privacy notices, and the CFPB’s data collection practices. A summary of the discussion of each of those topics follows. Notably, the hearing did not touch on (i) short-term, small dollar lending (outside of the Military Lending Act), online lending, or the ongoing investigations of payment processors, (ii) the status of the CFPB’s HMDA rulemaking or small business lending rule, or (iii) the CFPB’s integrated mortgage disclosure rule, which is expected later this month.
Mortgage Rule Implementation
Several committee members asked the Director about the CFPB’s compliance expectations for financial institutions when the various mortgage rules take effect in January. Director Cordray reiterated statements he has made recently in other forums: (i) the CFPB believes the vast majority of financial institutions, both large and small, will be in substantial compliance by January, (ii) the CFPB is sticking with the January implementation deadline, and (iii) “in the early months” the CFPB will not be looking for strict compliance, but rather will assess whether institutions have made “good faith efforts” to come into “substantial compliance.”
Senator Coburn (R-OK) sought clarification on the terms “early months” and “good faith effort.” On the former, the Director stated that it remains undefined. With regard to the latter, the Director explained that the CFPB will look to see whether institutions generally are taking the rules seriously and if they have compliance management system is in place that allow for monitoring and reporting to the institution’s board. He added that the CFPB does not intend to play “gotcha.”
Auto Finance
Several Republican members raised concerns about the CFPB’s approach to auto finance supervision and enforcement and specifically the indirect auto finance bulletin issued earlier this year. For example, Senator Moran (R-KS) urged Director Cordray to provide more specific answers to questions recently posed by a bipartisan group of Senators, including more detail on the CFPB’s statistical methodology for determining disparate impact and its use of proxies. Director Cordray’s November 4 response to the Senate letter largely re-stated the CFPB’s response to a similar inquiry submitted by a group of House members over the summer.
In the most recent letter, Director Cordray explained further the CFPB’s integrated methodology for proxying race and national origin, which combines probabilities about an individual’s race or ethnicity based on surname and geocoding. In a related blog post, the CFPB’s Assistant Director of Fair Lending and Equal Opportunity described proxy methodologies employed by “responsible lenders,” and attempted to further justify the CFPB’s methodology. During the hearing, Director Cordray asserted that the CFPB’s approach to both is time honored and well-tested. He explained that the CFPB’s proxy methodology is a refinement of that used by the Federal Reserve Board and is “state of the art.” He acknowledged that some may have a problem with the state of the art, but asserted that the methodology is proven in social science literature and used beyond the lending context, and added that the CFPB has to have confidence in the approach knowing that it could be tested in court.
Director Cordray expressed concern about discussing the CFPB’s specific methods in detail because they relate to ongoing investigative processes the CFPB is pursuing with the DOJ. He also repeatedly referenced today’s auto finance forum as a venue in which these issues will be discussed in more detail, and one that will provide industry an opportunity to weigh in on the CFPB’s approach. He dismissed concerns that the CFPB’s activities in the auto finance realm—in particular its push towards flat fee compensation arrangements for dealers—might constrain credit or raise consumer costs, citing the “red hot” car market.
Senator Warren (D-MA) commented on dealer markups, citing “studies” that show markups cost consumers $26 billion a year and that minorities pay a higher share of those costs. She called for Congress to remove the Dodd-Frank Act exemption for dealers and provide the CFPB authority over all auto lending. Director Cordray later stated that the law drew an “unnatural line” between finance companies on the one hand and dealers on the other, but that the CFPB understands its jurisdiction and does not want to be perceived to be extending its reach to cover dealers.
Student Lending
Student loans were the only product that received special, though not new, attention in the CFPB Director’s written testimony. There and in his oral statement he highlighted the comments and complaints the CFPB has received on student lending issues and again identified problems in the student loan market that the CFPB believes mirror those seen in the mortgage market prior to the financial crisis.
Senator Coburn posited that some of the student debt problem is attributable to borrowers maxing out loans for purposes other than paying for costs not directly associated with education and suggested that Congress look at limiting acceptable uses of federal loans.
Military Lending Act
In response to a question from Senator Reed (D-RI), Director Cordray stated that the CFPB, the DOD and other agencies are close to proposing new rules under the MLA. He indicated that the proposal is pending OMB review.
Prepaid Cards
Senator Menendez (D-NJ) complained about prepaid card fees and stated he plans to reintroduce his prepaid card bill. Director Cordray generally agreed that the CFPB has concerns about the prepaid market and noted the Bureau’s 2012 ANPR. The CFPB’s spring rulemaking agenda indicated the CFPB could propose a prepaid card rule before the end of this year. However, the Director did not provide an updated timetable for issuing a prepaid card rule during his testimony.
GLB Act Privacy Notices
Senator Brown (D-OH) continued to push his bill that would exempt from the Gramm-Leach-Bliley Act’s annual privacy policy notice requirement any financial institution that (i) provides nonpublic personal information only in accordance with specified requirements and (ii) has not changed its policies and practices with regard to disclosing nonpublic personal information from its most recent disclosure. The House of Representatives passed its version earlier this year and the Senate could move the bill before the end of this year. Director Cordray indicated that the CFPB continues to work on a rulemaking on this issue, and that while the CFPB may not be able to go as far as Congress could through legislation, the CFPB rule is “moving in the same direction” as the legislation.
CFPB Data Collection
Much of the hearing again centered on the CFPB’s collection and use of personally identifiable information (PII). Sen. Crapo (R-ID) continued to press the issue for Republicans, and was joined by Senators Vitter (R-LA) and Toomey (R-PA). Those members asked Director Cordray to describe the types of data the CFPB collects and how that data is protected. Sen. Crapo focused primarily on the credit card account data that the CFPB obtains from Argus, which the Senator estimated to include 900 million accounts. Senator Crapo believes that even though the data may be “de-identified,” the possibility exists that it could be reverse engineered to allow CFPB staff to obtain PII or review individual accounts. Director Cordray repeatedly explained that the CFPB’s interest in that data set is to monitor market trends and the broad treatment of card holders, and the CFPB is not interested in monitoring individual accounts. He asserted the CFPB lacks the capability or interest to obtain or use consumer PII in that context. He pointed out that other regulators have had and continue to have access to the same data. Senator Crapo noted that he has requested a GAO review of this issue; Director Cordray welcomes the audit.
CFPB Rulemaking and Examination Processes
Senators Corker (R-TN) and Toomey (R-PA) brought up the recent Bipartisan Policy Center report on the CFPB to make the case that the CFPB should pursue open rulemakings instead of issuing guidance. Director Cordray stated that the CFPB will continue to use guidance when it is restating or clarifying the law, but otherwise will use open rulemakings. He admitted the auto finance guidance process could have been more open or inclusive, but again cited the upcoming forum as a way to address those concerns. He defended the CFPB’s debt collection bulletin and its 2012 fair lending bulletin.
Director Cordray stated that the CFPB still is only 80% staffed on supervision. While he agrees that the CFPB may have been slow on closing out examinations, the CFPB deliberately chose quality and consistency over speed while it staffed-up. He asserted that speed and responsiveness have greatly improved in recent months and will continue to improve next year.
CFPB Releases Revised Payday Loan Exam Manual Incorporating MLA Requirements
On September 17, the CFPB released revised short-term, small-dollar lending Examination Procedures that incorporate the regulations issued by the Department of Defense (DoD) to implemente the Military Lending Act (MLA), which addresses alleged predatory lending practices by lenders that operate near military bases. The CFPB was given explicit power to enforce the MLA in the National Defense Authorization Act for Fiscal Year 2013.
The revised Procedures note that the MLA covers active-duty military members and their dependents and applies to “consumer credit,” defined as closed-end loans that are payday loans with a term of 91 days or fewer and an amount financed of $2,000 or less as well as certain vehicle title loans and tax refund anticipation loans. The revised Manual notes the special requirements of the MLA, including: (i) capping the Military Annual Percentage Rate (the APR under TILA plus other charges such as credit insurance premiums and fees for certain credit-related ancillary products) at 36 percent; (ii) prohibiting a lender from holding a post-dated personal check, debit authorization, or title to a vehicle for repayment or security; (iii) prohibiting mandatory arbitration clauses and waivers of legal rights under the SCRA or other consumer protection laws; (iv) prohibiting lenders from rolling over loans, unless the new transaction results in more favorable terms for the consumer; (v) prohibiting lenders from requiring consumers to pay through the military wage allotment system; and (vi) prohibiting prepayment penalties.
The CFPB’s press release notes the Bureau’s ongoing coordination with the Department of Defense on servicemember protection, as described in the agencies’ 2012 Joint Statement of Principles on small-dollar lending.
August Beach Read Series: Increasing Scrutiny of Short-Term, Small-Dollar Credit Products
The interest of regulators and enforcement authorities in short-term, small-dollar credit products - including payday loans, advance deposit products, installment loans, and more – has intensified in 2013. State and federal authorities have taken numerous actions to enforce existing law and to develop new rules for these products.
Earlier this year we reported on the DOJ’s prioritization of this area of consumer finance, and we have since reported on many other state and federal developments, including those related to state enforcement of licensing and usury laws against online lenders, federal regulators' scrutiny of advance deposit products and payday loans, congressional interest in small dollar loans (here and here), and the Department of Defense’s potential expansion of the Military Lending Act.
With regard to this last issue, BuckleySandler Partner Valerie Hletko recently examined the DOD’s advance notice of proposed rulemaking related to installment loans used by members of the armed forces and their families. The authors point out that the DOD’s interest in installment loans is emblematic of the scrutiny of short-term, small-dollar credit products, which appear to be increasingly vexing to regulators who recognize widespread demand for them but are concerned that such products may create a high-cost borrowing cycle.
In a 2012 article Partners John Kromer and Valerie Hletko previewed the CFPB’s interest in these products and identified some best practices for short-term, small-dollar lenders.
Banking Industry Trade Groups Oppose Expansion of MLA Covered Loans
On August 1, six banking industry trade groups submitted a joint comment letter relating to a proposal by the Department of Defense (DOD) to revise protections under the Military Lending Act (MLA), which apply to consumer credit extended to members of the military and their families. Among other things, the MLA caps the annual interest on short-term, small-dollar loans — including certain payday, car title, and refund anticipation loans. The MLA does not currently include credit cards, bank loans secured by funds on deposit, installment loans, or open-end credit.
In June, the DOD issued an advanced notice of proposed rulemaking (ANPR) to solicit input on potential changes to the definition of “consumer credit” in the regulations that implement the MLA, which would significantly broaden its application. The ANPR sought comment on whether the definition of “consumer credit” should be revised to expand coverage of the MLA to additional small-dollar loan products. The trade groups suggest that expanding coverage would be redundant, costly, and confusing in light of the “well-established system of financial protections for consumers [that] exists beyond the [MLA].” In other words, there is no need to create an entirely separate class of credit products for servicemembers and their families not directly related to military service.
The trade groups specifically identify several potential negative consequences of expanded coverage, including reduced access to installment loans and other credit products, and inability to refinance existing credit. On balance, the trade groups view the current rules — adopted after plenary discussion and careful consideration by all stakeholders — to be effective in achieving the proper balance between protecting military families and ensuring their access to credit. Thirteen state attorneys general took an opposing view in a comment letter submitted on June 24.
For additional commentary on the ANPR, please see the recent article from BuckleySandler Partner Valerie Hletko.
DOD Seeks Input on Military Lending Act Regulations; State AGs Seek Expansion of Covered Loans
Last week, the Department of Defense (DOD) issued an advanced notice of proposed rulemaking to solicit input on potential changes to the definition of “consumer credit” in the regulations that implement the Military Lending Act (MLA). Currently, the MLA regulations cover certain payday, car title, and refund anticipation loans to servicemembers and their dependents. The DOD notice seeks (i) comment on whether the definition of “consumer credit” should be revised to cover other small dollar loans and (ii) examples of alternative programs designed to assist servicemembers who need small dollar loans. Responses to the DOD notice are due by August 1, 2013. On June 24, a bipartisan group of 13 state attorneys general submitted a comment letter urging the DOD to amend the MLA regulations to close loopholes in the definitions of covered loans and to cover any other type of consumer credit loan presenting similar dangers, such as overdraft loans.
President Signs Bill Enhancing Enforcement of the Military Lending Act
On January 2, President Obama signed H.R. 4310, the National Defense Authorization Act (NDAA) for Fiscal Year 2013, which includes provisions that enhance federal enforcement of the Military Lending Act (MLA). The MLA (i) caps the annual interest on certain loans to servicemembers at 36 percent, (ii) prohibits such loans from being secured with a personal check, debit authorization, car title, or wage allotment, and (iii) includes other servicemember protections related to the offering of consumer credit. The MLA generally covers short-term, small dollar loans, including payday, car title, and refund anticipation loans, but, pursuant to DOD regulations, excludes credit cards, overdraft loans, military installment loans, and all forms of open-end credit. By amending the MLA to state that the same regulators that enforce the Truth in Lending Act now have administrative authority to enforce consumer credit protections for servicemembers and their dependents under the MLA, the NDAA (Secs. 661-663) makes clear that the CFPB has enforcement authority under the MLA. Further, the bill gives the CFPB an opportunity to influence implementation of the MLA regulations, including their scope, by adding the CFPB to the list of agencies with which the DOD must consult regarding implementation of the MLA’s protections, and by requiring that such consultation occur at least every two years. These changes add new force to the MLA and provide additional legislative support for the CFPB and DOD to collaborate on servicemember protection issues. The CFPB and DOD already have collaborated on issues related to, for example, fraud protection and student lending. The bill also adds a civil liability section to the MLA, which permits private actions to obtain actual damages (but not less than $500 per violation), as well as punitive damages. Finally, the bill simplifies the definition of dependents protected under the MLA.