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CFPB settles unauthorized payday loan allegations
On August 10, the CFPB announced a settlement with multiple defendants that allegedly made unauthorized payday loans. The settlement results from a 2014 complaint that alleged, among other things, that the defendants accessed consumer checking accounts to illegally deposit the proceeds of payday loans and withdraw related fees without consumer consent. The stipulated final judgment and order, among other things, (i) imposes a penalty of up to approximately $69 million if the defendants fail to fully comply with the operative terms of the settlement; (ii) prohibits the defendants from performing similar activities in the future; and (iii) assesses a civil money penalty of $1, in part based on the defendants’ inability to pay.
On July 23, as previously covered by InfoBytes, a court approved a stipulated final judgment and order against one of the defendants, who neither admitted nor denied the Bureau’s allegations, for a civil money penalty of $1 (based, in part, on his inability to pay) and agreement to fully cooperate with the Bureau.
Ohio Governor signs bill limiting payday lending
On July 30, Ohio’s governor signed into law HB 123, which “modifies the Short-Term Loan Act, specifies a minimum loan amount and duration for loans made under the Small Loan Law and General Loan Law, and limits the authority of credit services organizations to broker extensions of credit for buyers.” Under these amendments, payday lenders in the state will now be restricted to short-term loans of $1,000 or less, with terms for a single short-term loan set at a 91-day minimum and a one year maximum. Exemptions provided under the legislation will allow short-term loans with a minimum term of less than 91 days if the total monthly payments do not exceed an amount greater than six percent of the borrower’s verified gross monthly income or seven percent of the borrower’s verified net monthly income. Moreover, lenders are: (i) prohibited from demanding collateral for short-term loans; (ii) restricted to a small-dollar loan cap—including both fees and interest—set at 60 percent of the original principal; and (iii) required to grant borrowers three business days to rescind loans without interest. HB 123 further prohibits credit service organizations from extending credit in amounts of $5,000 or less, with repayment terms of one year or less, or with annual percentage rates exceeding 28 percent. The amendments, which take effect 90 days after the governor’s signature, will “apply only to loans that are made, or extensions of credit that are obtained, on or after the date that is [180] days after the effective date of this act.”
District court approves stipulated final judgment in favor of CFPB against one of the operators of online lending operation
On July 23, the U.S. District Court for the Western District of Missouri approved a stipulated final judgment and order against one of the two dozen defendants in the CFPB’s suit against an alleged online payday lending operation. In 2014, the Bureau filed a complaint against numerous entities and three individuals, accusing the defendants of violating the Consumer Financial Protection Act, Truth in Lending Act, and Electronic Fund Transfer Act by, among other things, purchasing information from online lead generators in order to access checking accounts to illegally deposit payday loans and withdraw fees without consumer consent, along with falsifying loan documents as evidence that the consumers had agreed to the loans. The stipulated final judgment and order resolved the Bureau’s claims against one of the individual defendants, an in-house accountant who monitored the bank accounts and the movement of funds between the entity and individual defendants. While the settling defendant neither admitted nor denied the Bureau’s allegations (except with respect to jurisdiction), he agreed to pay a civil money penalty of $1 (based, in part, on his inability to pay) and to fully cooperate with the Bureau.
New Hampshire enacts amendments to banking and consumer credit laws
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.
Native American tribes to forfeit $3 million in profits made from payday lending scheme
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.)
NCUA proposes additional payday loan alternative option
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.
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.
District Court rules South Dakota banking regulator exceeded authority in revoking payday lender’s license
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.
4th Circuit affirms sanctions for attorneys in payday lawsuit
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.”
OCC encourages banks to offer short-term, small-dollar installment lending
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).