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  • DFPI issues annual reports on 2021 mortgage, payday loan trends

    State Issues

    Recently, the California Department of Financial Protection and Innovation (DFPI) issued two reports: Annual Report of Activity Under the California Residential Mortgage Lending Act and the Annual Report Of Payday Lending Activity Under The California Deferred Deposit Transaction Law. The DFPI’s first report noted decreases in the number and cumulative amounts of loan originations and payday loans in 2021 compared to 2020. Additionally, it found that the number of loans originated by licensees decreased from 1,130,230 in 2020 to 1,018,286 in 2021. The report also found that the number of brokered loans increased from 17,715 in 2020 to 18,508 in 2021. In addition, the report found that licensees’ complaints regarding non-traditional mortgage loans increased from 13,421 in 2020 to 17,404 in 2021.

    In its second report, the DFPI noted that the Covid-19 pandemic “likely played a role” in the decrease in payday lending in the state. The number of individuals taking out payday loans also fell from 1.128 million in 2020 to 790,143 in 2021. Other highlights of the reports include, among other things, that: (i) the number of payday loan customers referred by lead generators rose from 98,555 in 2020 to 109,486 in 2021; (ii) approximately 20 percent of licensees made payday loans over the Internet during 2021, with online payday loans accounting for about 45.2 percent (2,047,889) of all payday loans; and (iii) approximately 416,000 payday loan customers, or about 53 percent of the total, obtained their loans online.

    State Issues California Payday Lending DFPI

  • CFPB sues payday lender over debt collection practices

    Federal Issues

    On July 12, the CFPB filed a complaint against a Texas-based payday lender (defendant) for allegedly engaging in illegal debt-collection practices and allegedly generating $240 million in reborrowing fees from borrowers who were eligible for free repayment plans in violation of the CFPA. As previously covered by InfoBytes, in 2014, the Bureau ordered the defendant to, among other things, pay $10 million for allegedly using false claims and threats to coerce delinquent payday loan borrowers into taking out an additional payday loan to cover their debt. The Bureau stated that after the CFPB’s 2014 enforcement action, the defendant “used different tactics to make consumers re-borrow.” The complaint alleges that the defendant “engaged in unfair, deceptive, and abusive acts or practices by concealing the option of a free repayment plan to consumers who indicated that they could not repay their short term, high-cost loans originated by the defendant.” The Bureau also alleges that the defendant attempted to collect payments by unfairly making unauthorized electronic withdrawals from over 3,000 consumers’ bank accounts. The Bureau seeks permanent injunctive relief, restitution, disgorgement, damages, civil money penalties, and other relief.

    Federal Issues CFPB Enforcement Consumer Finance Payday Lending CFPA UDAAP Abusive Unfair Deceptive Debt Collection

  • Payday lender to pay $39 million in alleged misappropriated funds suit

    Courts

    On June 29, the U.S. District Court for the District of South Florida granted final judgment against a Florida-based payday loan company and an individual (collectively, “defendants”), resolving SEC allegations that the company fraudulently misappropriated funds from investors. According to the complaint, the SEC claimed that the defendants falsely represented to many Venezuelan-American investors that the company would use their funds to finance payday loans through the offer and sale of “safe and secured” promissory notes. However, the complaint noted that “the proceeds [the company] generated from its consumer loan business were woefully insufficient to cover principal and interest payments to investors,” and had been offered in violation of registration and anti-fraud provisions of the Securities Act and Exchange Act. The complaint also noted that the individual allegedly misappropriated $2.9 million for personal use and authorized the transfer of $3.6 million to friends and relatives for no apparent legitimate business purpose. According to the order, the company: (i) is permanently restrained and enjoined from violating sections of the Securities Act and Exchange Act; (ii) must pay $30.3 million in disgorgement; and (iii) must pay $2 million interest on disgorgement and a $7 million civil penalty. The individual is jointly liable for more than $4.6 million in disgorgement.

    Courts Securities Payday Lending Securities Act Securities Exchange Act SEC Enforcement

  • 9th Circuit says CFPB can seek restitution in action against payday lender

    Courts

    On May 23, the U.S. Court of Appeals for the Ninth Circuit upheld a district court’s judgment finding an online loan servicer and its affiliates liable for a deceptive loan scheme. However, the appellate court vacated the district court’s order, which had imposed a $10 million civil penalty (rather than the requested penalty of over $50 million) and had declined the CFPB's request for $235 million in restitution. As previously covered by InfoBytes, in 2018, the district court ordered the defendants to pay the civil penalty for offering high-interest loans in states with usury laws barring the transactions after determining in September 2016 that the online loan servicer was the “true lender” of the loans that were issued through entities located on tribal land (covered by a Buckley Special Alert). At the time, the district court found that a lower statutory penalty was more appropriate than the CFPB’s requested amount because the Bureau failed to show the company “knowingly violated the CFPA” or acted “recklessly.” In rejecting the Bureau’s requested restitution amount, the district court found that the agency had not put forth any evidence that the defendants “intended to defraud consumers or that consumers did not receive the benefit of their bargain from the [program]” for restitution to be an appropriate remedy.

    According to the 9th Circuit, the district court applied the wrong legal analysis in 2018 when it assessed only a $10 million civil money penalty against the defendants and no restitution payments to consumers harmed by the improper loans. By applying federal common law choice-of-law principles, the appellate court declined to apply tribal law, holding that state laws applied to the loans, thus rendering them invalid. The appellate court determined that the defendants acted recklessly when they attempted to collect on invalid debts after counsel advised in 2013 that such actions were likely illegal. While the defendants shut down the tribal lending program for new loans, the 9th Circuit said they continued to collect on existing loans. “We conclude that from September 2013 on, the danger that [defendants’] conduct violated the statute was ‘so obvious that [defendants] must have been aware of it,’” the appellate court wrote. Noting that penalties for “reckless” violations under tier two were appropriate beginning September 2013, the appellate court ordered the district court to recalculate the civil penalty on remand. The 9th Circuit also directed the district court on remand to reconsider the appropriate restitution without relying on irrelevant considerations that motivated its earlier decision, including (i) whether defendants acted in bad faith; and (ii) “whether consumers received the benefit of their bargain.” Moreover, the appellate court held that the district court erred by stating “that the ‘proposed restitution amount [should be] netted to account for expenses.’”

    The 9th Circuit also concluded that the district court was correct in holding one of the individual defendants personally liable for the company’s conduct. Furthermore, the appellate court held that the defendants’ argument that the structure of the Bureau is unconstitutional did not affect the validity of the lawsuit (which was filed when the Bureau was headed by lawfully appointed former Director Richard Cordray), writing that, as in Collins v. Yellen (covered by InfoBytes here), “the unlawfulness of the removal provision does not strip the Director of the power to undertake the other responsibilities of his office.”

    Courts CFPB Ninth Circuit Appellate Tribal Lending Enforcement Constitution Payday Lending Consumer Finance

  • 5th Circuit: CFPB enforcement may proceed but funding questions remain

    Courts

    On May 2, the U.S. Court of Appeals for the Fifth Circuit issued an en banc decision vacating a district court’s interlocutory decision denying the plaintiff payday lenders’ motion for judgment on the pleadings, and holding that the CFPB can continue its enforcement action against a Mississippi-based payday lending company subject to further order of the district court. As previously covered by InfoBytes, the CFPB filed a complaint against two Mississippi-based payday loan and check cashing companies for allegedly violating the CFPA’s prohibition on unfair, deceptive, or abusive acts or practices. In March 2018, a district court denied the payday lenders’ motion for judgment on the pleadings, rejecting the argument that the structure of the Bureau is unconstitutional and that the agency’s claims violate due process. The 5th Circuit agreed to hear an interlocutory appeal on the constitutionality question. And, prior to the U.S. Supreme Court’s ruling in Seila Law LLC v. CFPB, a divided panel held that the CFPB’s single-director structure is constitutional, finding no constitutional defect with allowing the director of the Bureau to only be fired for cause (covered by InfoBytes here).

    The 5th Circuit voted sua sponte to rehear the case en banc and issued an opinion in which the majority vacated the district court’s opinion as contrary to Seila Law. The majority did not, however, direct the district court to enter judgment against the Bureau because, though the Supreme Court had found that the director’s for-cause removal provision was unconstitutional, it was severable from the statute establishing the Bureau (covered by a Buckley Special Alert). The majority determined that the “time has arrived for the district court to proceed” and stated it “place[s] no limitation on the matters that that court may consider, including, without limitation, any other constitutional challenges.”

    In dissent, several judges issued an opinion arguing that the case should be dismissed because the agency’s funding structure violates the Constitution’s separation of powers and “is doubly removed from congressional review.” The dissenting judges explained that the Bureau is not subject to the Congressional appropriations process for its budget, unlike most federal agencies, but rather receives its funding directly from the Federal Reserve Board. This budgetary process was intended to ensure full independence from Congress and prevent future congresses from using budget cuts to influence the Bureau’s agenda and priorities. The dissenting judges argued, however, that such a structure violates the Appropriations Clause of the Constitution. “The CFPB’s double insulation from Article I appropriations oversight mocks the Constitution’s separation of powers by enabling an executive agency to live on its own in a kingly fashion,” the dissent stated. “The Framers warned that such an accumulation of powers in a single branch of government would inevitably lead to tyranny. Accordingly, I would reject the CFPB’s novel funding mechanism as contravening the Constitution’s separation of powers. And because the CFPB funds the instant prosecution using unconstitutional self-funding, I would dismiss the lawsuit.”

    Courts CFPB Enforcement Fifth Circuit Appellate Single-Director Structure Payday Lending CFPA UDAAP Seila Law Funding Structure

  • Florida court grants sovereign immunity to lender and company officials

    Courts

    On April 11, a Florida county court concluded that a defendant lender and certain company officials were entitled to sovereign immunity in a case concerning alleged usury claims. The plaintiff claimed the lender used its supposed federally-recognized tribal affiliation to escape state usury regulations. The court dismissed the complaint, however, finding that the lender is an “arm of the tribe” under a six-prong test established by the U.S. Court of Appeals for the Tenth Circuit in Breakthrough Management Group, Inc. v. Chukchansi Gold Casino & Resort. The test determines whether sovereign immunity should apply by examining, among other factors, an entity’s creation, the amount of control a tribe has over the entity, and the financial relationship between the tribe and the entity. According to the court, the defendant’s evidence suggests that the tribe created the defendant as a business entity “to generate and contribute revenues” to the tribe’s general fund. The court found that insufficient detail was presented to support the plaintiff’s assertion that the defendant pays a relatively small percentage of its gross revenues to the tribe. The court added that the plaintiff also failed to present evidence proving that large portions of the defendant’s revenue were distributed to non-tribal entities. In dismissing the case with prejudice, the court also dismissed claims against three individual defendants because they were entitled to sovereign immunity. The court concluded that the plaintiff’s allegations demonstrated that the individuals committed the alleged wrongs in their capacities as employees and officers and therefore the “real party in interest” is the lender.

    Courts State Issues Florida Payday Lending Tribal Lending Tribal Immunity Sovereign Immunity Interest Rate Usury Consumer Finance

  • CFPB reports on extended payment plans for payday loans

    Federal Issues

    On April 6, the CFPB released a report on consumer use of state payday loan extended payment plans, which is believed to be the first study to compare state extended payment plans and usage rates. The report examines state payday loan extended payment plans, an intervention which permits payday borrowers to repay their loan in no-cost installments. The report analyzed laws in states that authorize payday loans and determined that 16 of the 26 payday-authorizing jurisdictions address extended payment plans. According to the Bureau, the savings of a no-cost extended payment plan can be substantial when compared to the total charges associated with repeated rollover fees. A Bureau press release regarding the report highlighted findings from prior research that most payday loans were made to borrowers who use the rollover option so many times that the accrued fees were greater than the original principal.

    Key findings of the report include, among other things:

    • State payday loan extended payment plan laws typically address certain key provisions. Key provisions include, among other things, number of installments, plan length, allowable fees, frequency of use, consumer eligibility, and disclosures. While specific requirements vary by state, typical features include: disclosure of the right to elect an extended payment plan at the time consumers enter into a payday loan agreement, the requirement that an extended payment plan be repaid in several installments, and that there be no additional fees charged for an extended payment plan.
    • Eligibility requirements for extended payment plans vary by state and likely impact usage rates. For example, in Washington, which has possibly the most borrower-friendly extended payment plan, the usage rate is 13.4 percent, whereas states with more restrictive requirements, such as Florida, which requires credit counseling to be eligible, may have usage rates under 1 percent.
    • Despite the prevalence of state laws providing for no-cost extended payment plans, rollover and default rates consistently exceed extended payment plan usage rates. According to the report, monetary incentives encourage lenders to promote higher-cost rollovers, and collect the fees associated with such rollovers, at the expense of extended payment plans.

    Federal Issues CFPB Payday Lending Consumer Finance State Issues

  • District Court tosses challenge to CFPB’s payday rule

    Courts

    On January 14, the U.S. District Court for the District of Columbia granted two motions to dismiss a challenge to the Bureau’s 2020 final rule revoking certain underwriting provisions of the agency’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (Payday Lending Rule). As previously covered by InfoBytes, the final rule revokes, among other things (i) the provision that makes it an unfair and abusive practice for a lender to make covered high-interest rate, short-term loans or covered longer-term balloon payment loans without reasonably determining that the consumer has the ability to repay the loans according to their terms; (ii) the prescribed mandatory underwriting requirements for making the ability-to-repay determination; (iii) the “principal step-down exemption” provision for certain covered short-term loans; and (iv) related definitions, reporting, and recordkeeping requirements. The plaintiff (a national association of organizations serving Latino communities) filed suit alleging the Bureau’s 2020 final rule violated federal rulemaking requirements and arguing that the 2020 final rule rested on an “unreasonable” new evidentiary standard and advanced statutory definitions that “appear custom-designed to repeal the ability-to-repay protections” of the Payday Lending Rule. The plaintiff asked the court to overturn the repeal and order the Bureau to implement the 2017 Payday Lending Rule. Motions to dismiss for lack of standing were filed by the Bureau as well as an intervenor-defendant association.

    In dismissing the action, the court determined that the plaintiff failed to establish a “concrete and demonstrable injury to its activities” attributable to the 2020 final rule’s impact. The plaintiff contended that it suffered injury because the 2020 final rule made its work more difficult due to member organizations needing more assistance and resources from the plaintiff in order to “help families avoid or address unaffordable payday and title loans.” The court reasoned, however, that “[e]xpenditure of resources in response to agency action alone is not enough to establish a cognizable injury because it leaves step one of the inquiry unanswered.” Rather, “there must be a separate perceptible impairment of the organization's ability to provide services—something that makes it more difficult for the organization to conduct its activities”—an impairment, the court stated, for which the plaintiff has not plausibly alleged.

    Courts CFPB Payday Lending Payday Rule Agency Rule-Making & Guidance

  • CFPB supervisory highlights cover wide range of violations

    Federal Issues

    On December 8, the CFPB released its fall 2021 Supervisory Highlights, which details its supervisory and enforcement actions in the areas of credit card account management, debt collection, deposits, fair lending, mortgage servicing, payday lending, prepaid accounts, and remittance transfers. The report’s findings cover examinations that were completed between January and June of 2021 in addition to prior supervisory findings that led to public enforcement actions in the first half of 2021. Highlights of the examination findings include:

    • Credit Card Account Management. Bureau examiners identified violations of Regulation Z related to billing error resolution, including instances where creditors failed to (i) resolve disputes within two complete billing cycles after receiving a billing error notice; (ii) reimburse late fees after determining a missed payment was not credited to a consumer’s account; and (iii) conduct reasonable investigations into billing error notices concerning missed payments and unauthorized transactions. Examiners also identified deceptive acts or practices related to credit card issuers’ advertising practices.
    • Debt Collection. The Bureau found instances of FDCPA violations where debt collectors represented to consumers that their creditworthiness would improve upon final payment under a repayment plan and the deletion of the tradeline. Because credit worthiness is impacted by numerous factors, examiners found “that such representations could lead the least sophisticated consumer to conclude that deleting derogatory information would result in improved creditworthiness, thereby creating the risk of a false representation or deceptive means to collect or attempt to collect a debt in violation of Section 807(10).”
    • Deposits. The Bureau discussed violations related to Regulation E, including error resolution violations related to misdirected payment transfers and failure to investigate error notices where consumers alleged funds were sent via a person-to-person payment network but the intended recipient did not receive the funds.
    • Fair Lending. The report noted instances where examiners cited violations of ECOA and Regulation B by lenders "discriminating against African American and female borrowers in the granting of pricing exceptions based upon competitive offers from other institutions,” which led to observed pricing disparities, specifically as compared to similarly situated non-Hispanic white and male borrowers. Among other things, examiners also observed that lenders’ policies and procedures contributed to pricing discrimination, and that lenders improperly inquired about small business applicants’ religion and considered religion in the credit decision process.
    • Mortgage Servicing. The Bureau noted that it is prioritizing mortgage servicing supervision attributed to the increase in borrowers needing loss mitigation assistance due to the Covid-19 pandemic. Examiners found violations of Regulations Z and X, as well as unfair and deceptive acts and practices. Unfair acts or practices included those related to (i) charging delinquency-related fees to borrowers in CARES Act forbearances; (ii) failing to terminate preauthorized EFTs; and (iii) assessing fees for services exceeding the actual cost of the performed services. Deceptive acts or practices found by examiners related to mortgage servicers included incorrectly disclosed transaction and payment information in a borrower’s online mortgage loan account. Mortgage servicers also allegedly failed to evaluate complete loss mitigation applications within 30 days, incorrectly handled partial payments, and failed to automatically terminate PMI in a timely manner. The Bureau noted in its press release that it is “actively working to support an inclusive and equitable economic recovery, which means ensuring all mortgage servicers meet their homeowner protection obligations under applicable consumer protection laws,” and will continue to work with the Federal Reserve Board, FDIC, NCUA, OCC, and state financial regulators to address any compliance failures (covered by InfoBytes here). 
    • Payday Lending. The report identified unfair and deceptive acts or practices related to payday lenders erroneously debiting consumers’ loan balances after a consumer applied and received confirmation for a loan extension, misrepresenting that consumers would only pay extension fees on the original due dates of their loans, and failing to honor loan extensions. Examiners also found instances where lenders debited or attempted one or more duplicate unauthorized debits from a consumer’s bank account. Lenders also violated Regulation E by failing “to retain, for a period of not less than two years, evidence of compliance with the requirements imposed by EFTA.”
    • Prepaid Accounts. Bureau examiners found violations of Regulation E and EFTA related to stop-payment waivers at financial institutions, which, among other things, failed to honor stop-payment requests received at least three business days before the scheduled date of the transfer. Examiners also observed instances where service providers improperly required consumers to contact the merchant before processing a stop-payment request or failed to process stop-payment requests due to system limitations even if a consumer had contacted the merchant. The report cited additional findings where financial institutions failed to properly conduct error investigations.
    • Remittance Transfers. Bureau examiners identified violations of Regulation E related to the Remittance Rule, in which providers “received notices of errors alleging that remitted funds had not been made available to the designated recipient by the disclosed date of availability” and then failed to “investigate whether a deduction imposed by a foreign recipient bank constituted a fee that the institutions were required to refund to the sender, and subsequently did not refund that fee to the sender.”

    The report also highlights recent supervisory program developments and enforcement actions.

    Federal Issues CFPB Supervision Enforcement Consumer Finance Examination Credit Cards Debt Collection Regulation Z FDCPA Deposits Regulation E Fair Lending ECOA Regulation B Mortgages Mortgage Servicing Regulation X Covid-19 CARES Act Electronic Fund Transfer Payday Lending EFTA Prepaid Accounts Remittance Transfer Rule

  • Illinois AG, IDFPR settle with three payday lenders

    State Issues

    On November 5, the Illinois attorney general and the Illinois Department of Financial and Professional Regulation (IDFPR) announced a settlement resolving allegations that three companies violated Illinois lending laws by generating payday loan leads without a license and arranging high-cost payday loans for out-of-state payday unlicensed lenders. The AG and IDFPR further alleged that the companies falsely represented their loan network as being “trustworthy,” although the loan terms and conditions did not comply with Illinois law, which violated the Illinois’ Consumer Fraud and Deceptive Business Practices Act. The AG sued the companies in 2014 after the companies refused to comply with a cease and desist order issued by IDFPR, which required them to become licensed. According to the announcement, under the terms of the settlement, the companies are prohibited from: (i) arranging or offering small-dollar loans, online or otherwise, without being licensed by IDFPR; (ii) advertising or offering any small consumer loan arrangements or lead generation services in Illinois, unless they are licensed by IDFPR; and (iii) providing services associated with arranging or offering small dollar loans to Illinois consumers without being licensed by IDFPR.

    State Issues Licensing Illinois Payday Lending State Attorney General State Regulators Consumer Finance

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