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CFPB updates payday section of the Supervision and Examinations Manual
In March, the CFPB updated its examination procedures for short-term, small-dollar lending (payday lending) in its Supervision and Examinations Manual. The procedures are comprised of modules and each examination will cover one more module. Prior to using the procedures, examiners will complete a risk assessment and examination scope memorandum, which will assist in determining which of the five modules the exam will cover: (i) marketing; (ii) application and origination; (iii) payment processing and sustained use; (iv) collections, accounts in default, and consumer reporting; and (v) service provider relationships. The examinations will review for potential violations of TILA, EFTA, FDCPA, FCRA, ECOA, UDAAP, and Gramm-Leach-Bliley Act (GLBA), all of which apply to payday lending.
Democratic AGs threaten legal action over proposed Payday Rule compliance delay
On March 18, a coalition of 25 Democratic state Attorneys General urged the CFPB not to delay the August 19, 2019 compliance date for any aspect of the Payday, Vehicle Title, and Certain High-Cost Installment Loans rule (Rule) and warned that they would consider taking legal action if the Bureau does so. (CFPB’s Notice of Proposed Rulemaking, which announced the proposed delay in the effective date, was covered by InfoBytes here.) The AGs assert that the Bureau did not provide enough legal justification for delaying the underwriting provisions until November 2020 because the 2017 Rule already provided affected lenders ample time to comply. Moreover, the AGs emphasize that the Bureau cannot use the related proposal of future rescission of the underwriting requirements as a justification for the compliance delay; the delay “must be justified on its own merits.” As for the merits of the Bureau’s justification, among other things, the AGs reject the Bureau’s conclusion that “it should not assign the weight that it did in the 2017 [Rule] to ‘the interest of enacting protections for consumers as soon as possible,’” arguing that diminishing the weight assigned to consumer protection is in opposition to the Bureau’s statutory mandate. The AGs also raise concern about the ambiguity in the compliance date for the payment-related provisions of the Rule and stress that the August 19, 2019 date should stay in effect because “lenders will have had 21 months to prepare.” The AGs conclude that they “will closely examine whether to take action to address any unlawful action by CFPB” should the proposed delay be finalized.
CFPB announces settlement with payday lending operation
On February 6, the CFPB announced a settlement with an Indiana-based payday retail lender and affiliates (companies) in seven states to resolve alleged violations of the Consumer Financial Protection Act (CFPA), Truth in Lending Act (TILA), and Gramm-Leach-Bliley Act (GLBA) privacy protections. The CFPB alleges that the companies engaged in unfair acts or practices, failed to properly disclose annual percentage rates, and failed to provide consumers with required initial privacy notices.
Specifically, the Bureau alleges that the companies violated CFPA’s UDAAP provisions by, among other things, (i) failing to implement processes to prevent unauthorized charges, including those resulting from unauthorized draws on borrowers’ bank accounts; (ii) requiring loan applicants to provide contact information for their employers, supervisors, and four personal references, and then repeatedly calling employers to seek payments when borrowers became delinquent; (iii) disclosing the borrower’s financial information during those calls and, in certain instances, asking the third party to make payments on the loan; (iv) misusing personal references for marketing purposes; and (v) advertising check-cashing and telephone reconnection services they were no longer providing.
The Bureau also asserts that the companies violated the GLBA by only providing initial privacy notices when consumers opened their first loan. GLBA requires financial services firms to provide borrowers a privacy policy each time a new customer relationship is established, which in this instance the CFPB claims, occurred each time a borrower paid off an outstanding loan and subsequently took out a new loan. Finally, the Bureau alleges that because the payday loans extended by the companies constitute as closed-end credit under TILA and Regulation Z, the companies were required to disclose a payday loan database fee charged to Kentucky customers in the APR but failed to do so. This resulted in, among other things, inaccurate APR disclosures in advertisements.
While the companies have not admitted to the allegations, they have agreed to pay a $100,000 civil money penalty and are prohibited from continuing the illegal behavior.
CFPB proposes to rescind ability-to-repay standards in payday rule
On February 6, the CFPB released two notices of proposed rulemaking (NPRM) related to certain payday lending requirements under the agency’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (the Rule). As previously covered by InfoBytes, last October the Bureau announced plans to reconsider the Rule’s mandatory underwriting requirements and address the Rule’s compliance date.
The first NPRM proposed will rescind certain provisions of the Rule related to underwriting standards for payday loans and related products scheduled to take effect later this year. Specifically, the CFPB proposes to rescind the portion of the Rule that would make 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 proposed changes would also rescind prescribed mandatory underwriting requirements for making the ability-to-repay determination, provisions exempting certain loans from the mandatory underwriting requirements, as well as related definitions, reporting, and recordkeeping requirements. The CFPB explains that it now initially determines that the evidence underlying the identification of the unfair and abusive practice in the Rule “is not sufficiently robust and reliable to support that determination, in light of the impact those provisions will have on the market for covered short-term and longer-term balloon-payment loans, and the ability of consumers to obtain such loans, among other things.” If finalized, the proposals represent a significant change to the Rule as finalized during the tenure of former Bureau Director Richard Cordray in October 2017. (See Buckley Special Alert for more detailed coverage on the Rule.) Comments will be accepted for 90 days following publication in the Federal Register.
The second NPRM seeks to delay the Rule’s compliance date for mandatory underwriting provisions from August 19, 2019 to November 19, 2020. Notably, the Bureau states in a press release announcing the NPRMs that the proposal to delay the effective date does not extend to the Rule’s provisions governing payments, which “prohibit payday and certain other lenders from making a new attempt to withdraw funds from an account where two consecutive attempts have failed unless consumers consent to further withdrawals.” Lenders also will still be required to provide written notice to consumers both before the first attempt to withdraw payment from their accounts, as well as prior to subsequent attempts involving different dates, amounts, or payment channels. These provisions are not under reconsideration and will take effect August 19, 2019. Comments will be accepted for 30 days following publication in the Federal Register.
CFPB files proposed consent order banning certain Canadian and Maltese payday lenders from U.S. consumer lending
On February 1, the CFPB and a group of payday lenders, including individuals and corporate officials based in Canada and Malta (collectively, “defendants”), filed a proposed consent order with the U.S. District Court for the Southern District of New York that would resolve allegations that the defendants violated the Consumer Financial Protection Act. According to the Bureau’s press release, the defendants allegedly (i) misrepresented to consumers an obligation to repay loan amounts that were voided because the loan violated state licensing or usury laws; (ii) misrepresented that loan agreements were not subject to federal or state laws; (iii) misrepresented that non-payment would result in lawsuits, arrests, imprisonment, or wage garnishment; and (iv) conditioned loan agreements upon irrevocable wage assignment clauses. Under the terms of the proposed order, the defendants would be, among other things, (i) permanently banned from consumer lending in the U.S.; (ii) permanently restrained from the collection or sale of existing U.S. consumer debts; and (iii) subject to certain reporting and recordkeeping requirements. The proposed order does not impose a fine on the defendants.
California small-dollar lender reaches settlement resolving interest rate allegations
On January 22, the California Department of Business Oversight (DBO) announced a $900,000 settlement with a California-based lender for allegedly steering borrowers into high-interest loans to avoid statutory interest rate caps. According to the DBO, the lender’s practice of overcharging interest and administrative fees violated the California Financing Law, which caps interest on small-dollar loans up to $2,499 at rates between 20 percent and 30 percent, but does not provide a cap for loans of $2,500 and higher. The DBO also asserts that the lender’s brochures, which advertised loans of “‘up to $5,000’ without stating that the minimum loan amount offered by [the lender] was $2,501,” were false, misleading, or deceptive. Moreover, the lender allegedly failed to allow certain borrowers the opportunity to make advance payments “in any amount on any loan contract at any time.”
Additionally, the DBO alleges that the lender overcharged roughly $700,000 in payday loan transactions by (i) collecting charges twice; (ii) allowing borrowers to take out a new loan before paying off the old one; and (iii) depositing some borrowers’ checks prior to the specified date in the loan agreement without their written authorization.
Under the terms of the consent order, the lender will, among other things, provide $800,000 in refunds to qualifying borrowers, pay $105,000 in penalties and other costs, and provide accurate verbal disclosures to borrowers concerning loan amounts and interest rate caps.
CFPB releases annual report on servicemember complaint issues
On January 24, the CFPB’s Office of Servicemember Affairs (OSA) released an annual report, which highlights issues facing military consumers based on complaints submitted by servicemembers, veterans, and their families (collectively “servicemembers”). The OSA report covers the period between April 1, 2017 and August 31, 2018, during which the Bureau received approximately 48,800 military complaints. Some key takeaways from the OSA report are as follows:
- The largest category of servicemember complaints focused on credit reporting, with 37 percent of total servicemember complaints in this area. The report notes that the Department of Defense’s new security clearance process increases the likelihood that a servicemember’s poor credit score could result in losing a security clearance, and by extension being separated from the military.
- After credit reporting, debt collection was the next most complained about issue. Most servicemembers’ debt collection complaints alleged that the servicemember did not owe the debt or that the debt collector failed to respond to written requests for information. In particular, the report states that some debt collectors have inappropriately contacted servicemembers’ chains of command in an attempt to obtain payment.
- For mortgage debt, the largest category of complaints arose from challenges in the payment process—in particular issues related to loan modifications, collections, communicating with the servicemember’s “single point of contact,” escrow, and servicing transfers. These process-focused complaints were closely followed by overall difficulties in being able to afford mortgage payments.
- For credit cards, the greatest concentration of complaints were around problems with purchases on statements (i.e. fraudulent/unauthorized charges, billing frustrations, and difficulties in challenging charges directly with the credit card issuer). Notably, while the report acknowledges the October 2017 Military Lending Act compliance date for credit card issuers, it does not specifically break out MLA-related complaints; rather, the report notes that the Bureau has received “some complaints from servicemembers demonstrating confusion with respect to how and when creditors are applying the MLA’s protections to credit card accounts.”
- For auto lending, the leading category of complaints arose from managing the loan or lease, including application of payments and late fees. Unique to servicemembers, the report highlights that products like GAP can become void if a servicemember takes a car overseas (for example, to use while on deployment).
- For student lending, two-thirds of complaints arose from challenges in making payments and enrolling in payment plans, in particular issues with enrolling and recertifying eligibility for income-driven repayment.
- Finally, in the payday loan space, since 2016 servicemember complaints have decreased drastically and are now equal with non-servicemember complaints (as a percentage of total complaint volume); previously, servicemembers were almost twice as likely to complain about payday loan products.
District Court certifies class action against lead generator’s payday lending practices
On January 11, the U.S. District Court for the District of Minnesota granted a motion for class certification in a case challenging a company’s payday lending practices under several Minnesota consumer protection statutes and common law. The plaintiffs filed the proposed class action alleging, among other things, that the company, which generates leads for payday lenders, failed to disclose that it was not licensed in the state, and that the loans may not be legal in Minnesota. The Minnesota Attorney General had notified the company in 2010 and 2012 that it was subject to Minnesota law restricting payday loans and that it was “aiding and abetting lenders that violate Minnesota law.” The court found that the plaintiffs identified “questions of law or fact common to the class that are capable of class-wide resolution,” which “predominate over any questions affecting only individual members.” The court noted that a class action would fairly promote the interests of the class and ensure judicial economy, and that even though the plaintiffs’ proposed method for measuring the amount of damages would require individual inquiry, “it is less consuming than issues requiring individual testimony and will not overwhelm the liability and damages issues capable of class-wide resolution.”
Colorado UCCC administrator issues guidance on alternative loan changes
On January 4, the administrator of the Colorado Uniform Consumer Credit Code issued a memo providing introductory guidance on alternative charge loans in response to Proposition 111, which amends the state’s Deferred Deposit Loan Act (DDLA) and takes effect February 1. (See previous InfoBytes coverage here.) Among other things, Proposition 111 reduces the maximum annual percentage rate that may be charged on deferred deposits or payday loans to 36 percent, eliminates an alternative APR formula based on loan amount, prohibits lenders from charging origination and monthly maintenance fees, and amends the definition of an unfair or deceptive practice.
The memo—issued in response to creditors currently offering loans under the DDLA who have expressed an interest in offering loans imposing the alternative charges allowed by Colo. Rev. Stat. § 5-2-214—explains that such alternative charges may only be charged if (i) the financed amount is $1000 or less; (ii) the minimum loan term is at least 90 days but no more than 12 months; (iii) installment payments are scheduled in substantially equal periodic intervals; (iv) Truth-In-Lending disclosures show the loan is unsecured; (v) a creditor has not taken any collateral as security for the loan, including a post-dated check or certain ACH authorization; (vi) an ACH agreement reached with a consumer is voluntary and not required by the loan; and (vii) the loan has not been refinanced more than three times in one year.
Fifteen states urge the 4th Circuit against allowing non-tribal payday lenders to receive tribal immunity
On December 27, 2018, fifteen state Attorneys General filed an amici brief with the U.S. Court of Appeals for the 4th Circuit opposing the use of structures in which non-tribal payday lenders affiliate with tribal lenders to benefit from their tribal immunity and avoid state usury caps. The brief was filed in an appeal from a district court ruling, which held that a Michigan-based payday lender could not claim tribal immunity in a consumer class action because it could not prove it was an actual tribal entity. The Attorneys General argue that granting tribal immunity to non-tribal lenders would “bar enforcement of state consumer protection laws as well as, potentially, investigations into their activities.” The brief rejects the payday lender’s arguments that the plaintiff should bear the burden of negating “arm-of-the-tribe immunity” and instead urges the court to place the burden on the entity seeking the immunity. Allowing a non-tribal entity to benefit from sovereign immunity without “rigorous demonstration”, the Attorneys General argue, “may well undermine the purpose for tribal immunity” and “would have serious consequences for States’ ability to protect consumers.”
The brief was filed by the District of Columbia and the States of Connecticut, Hawaii, Iowa, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, North Carolina, Pennsylvania, Vermont, and Virginia.