A bill introduced last week in the California State Assembly could change the consumer lending landscape in California considerably. The bill, AB 539, would change several aspects of the California Financing Law (CFL), including setting new interest rate caps, imposing new rules governing loan duration, and prohibiting prepayment penalties. Additionally, AB 539 would change the CFL to make clear that a loan’s rate cannot be used as the sole factor in determining whether a loan is unconscionable. According to the bill’s authors, these changes are necessary because of the “looming threat of a potential ballot initiative,” and due to the uncertainty caused by the California Supreme Court’s recent De La Torre decision which opened the door for borrowers to claim that high-rate consumer loans are unconscionable.

AB 539 would make these changes to the CFL:

  • At present, the CFL does not set a maximum interest rate on loans of $2,500 or more. AB 539 would cap the interest rate at 36% plus the federal funds rate (2.4% as of today) on loans of $2,500 or more but less than $10,000.
  • The CFL provides certain factors to determine whether a loan is of a “bona fide principal amount” or if there has been some artifice to evade regulation under the CFL. AB 539 would apply these factors to loans of $2,500 or more but less than $10,000.
  • At present, the CFL prohibits loans of at least $3,000 but less than $5,000 from having a term greater than 60 months and 15 days. AB 539 would increase this upper limit from $5,000 to $10,000.
  • At least for loans in excess of $2,500 up to $10,000, AB 539 would prohibit CFL licensees from issuing a loan with a term of less than 12 months.
  • AB 539 would add a section to the CFL providing that no licensee may impose a prepayment penalty for any loan not secured by real property.

California’s unconscionability doctrine is incorporated into the CFL. Although it was once widely thought that loans with no interest rate cap under the CFL could not be unconscionable, in De La Torre the California Supreme Court held that consumers could use California’s Unfair Competition Law to claim that high-rate loans were unconscionable and therefore violated the CFL. AB 539 expressly provides that a CFL-regulated loan cannot be found unconscionable based on the interest rate alone. In our view, this provision is theoretically unnecessary. In De La Torre, the California Supreme Court held that courts must consider all the circumstances of the loan before declaring that a loan’s rate is unconscionable. Specifically, courts must consider “the bargaining process and prevailing market conditions,” which is “highly dependent on context” and “flexible” according to the Court. In other words, courts properly following De La Torre could not solely consider a loan’s rate to determine unconscionability in any event. That said, the bill would be helpful in that it would foreclose unconscionability arguments based on the rate alone.

Earlier this week, the U.S. Supreme Court ruled in Timbs v. Indiana that the prohibition on excessive fines in the Eighth Amendment of the U.S. Constitution is incorporated against the States by the Fourteenth Amendment.  Although it involved a civil asset forfeiture of a vehicle arising from the petitioner’s criminal conviction, the decision could provide a new weapon for consumer financial services providers facing fines and penalties sought by State attorneys general and regulators.

The Eighth Amendment provides: “Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.”  In its decision, the Supreme Court cited  language from its 1998 decision which held that in rem forfeitures are fines for purposes of the Eighth Amendment.  In that decision, the Court wrote that the phrase “nor excessive fines imposed” in the Eighth Amendment prohibition “limits the government’s power to extract payments, whether in cash or in kind, ‘as punishment for some offense.’”

Since the Supreme Court did not reach the question of whether the forfeiture resulted in an excessive fine that violated the Eighth Amendment, the decision does not discuss the standards for determining whether a particular fine is unconstitutionally excessive.  It should be noted, as the Supreme Court did in its opinion, that “all 50 states have a constitutional provision prohibiting the imposition of excessive fines either directly or by requiring proportionality.”  While such state provisions would be available to a consumer financial services provider, they might not be interpreted in a manner that is as protective as the Eighth Amendment prohibition.  (Perhaps that is the reason that the petitioner in Timbs did not challenge the forfeiture under the Indiana Constitution.)  Accordingly, the Supreme Court’s decision now gives providers a potential second line of attack when facing fines and penalties sought by State attorneys general and regulators.

The CFPB is proposing to rescind the ability-to-repay provisions of its payday loan rule and delay the provisions’ compliance date while leaving in place the rule’s troublesome payment provisions and their August 19 compliance date.  In this week’s podcast, we look at the CFPB’s rationale for rescinding the ATR provisions, what the payment provisions require and the implementation challenges they present, how industry input could improve the final outcome, the potential impact of the pending litigation challenging the rule, and possible legal challenges to the proposals.

Click here to listen to the podcast.

 

 

The Conference of State Bank Supervisors (CSBS) announced last week that it has agreed to implement 14 recommendations made by its Fintech Industry Advisory Panel (Advisory Panel).

The Advisory Panel was formed in 2017 to identify actionable steps for improving state licensing, regulation, and non-depository supervision and for supporting innovation in financial services.  It has 33 fintech company members that engage with the CSBS Emerging Payments and Innovation Task Force and other state regulators.  The Advisory Panel has a subgroup focused on lending and another focused on payments.  Both subgroups submitted reports that formed the basis of the recommendations CSBS has agreed to implement.

Those recommendations primarily address creating uniform definitions and practices, increasing transparency, and expanding the use of common technology among all state regulators.  Among the actions CSBS has agreed to take to implement the recommendations are:

  • Developing a 50-state model law to license money services businesses
  • Creating a standardized call report for consumer finance businesses
  • Building an online database of state licensing and fintech guidance, while encouraging a common standard
  • Developing a new technology offering, a State Examination System, to simplify examinations of nonbanks operating in more than one state
  • Expanding the use of the Nationwide Multistate Licensing System (NMLS) among all state regulators and to all nonbank industries supervised at the state level

At the annual NMLS conference in Orlando, CSBS and the Advisory Panel’s payments subgroup reported that in connection with efforts to harmonize state licensing regimes and ultimately to draft a model state law for licensing money services businesses, CSBS is conducting state surveys relating to existing state definitions and exemptions from licensure and will publish  such surveys when complete.

The CSBS initiative is undoubtedly in part a reaction to the OCC’s decision to grant special purpose national bank charters to fintech companies.  Such charters would eliminate the need for fintech companies to obtain multi-state licenses.  In October 2018, CSBS filed a second lawsuit in D.C. federal district court to stop the OCC from issuing such charters.

 

 

 

 

H.J. Res. 31, the appropriations bill signed into law by President Trump on February 15 that ended the partial government shutdown and provides funding for fiscal year 2019 through September 30, 2019, includes a provision dealing with CFPB funding requests.

Pursuant to Section 1017(a)(1) of the Dodd-Frank Act, subject to the Act’s funding cap, the Fed is required to transfer to the CFPB on a quarterly basis “the amount determined by the [CFPB] Director to be reasonably necessary to carry out the authorities of the Bureau under Federal consumer financial law, taking into account such other sums made available to the Bureau from the preceding year (or quarter of such year.)”  During former Director Cordray’s tenure, numerous bills were introduced by Republican lawmakers that sought to make the CFPB subject to the regular appropriations process.  The CFPB’s insulation from that process has been one of the grounds used to challenge the Bureau’s constitutionality.

Section 746 of H.J. Res. 31 provides that during FY 2109, when the CFPB Director requests a funds transfer from the Fed, the CFPB “shall notify the Committees on Appropriations of the House of Representatives and the Senate, the Committee on Financial Services of the House of Representatives, and the Committee on Banking, Housing, and Urban Affairs of the Senate of such request.”  Such notification must also be posted on the CFPB’s website.

In addition, the Conference Report includes the following statement:

Given the need for transparency and accountability in the Federal budgeting process, the CFPB is directed to provide an informal, nonpublic full briefing at least annually before the relevant Appropriations subcommittee on the CFPB’s finances and expenditures.

 

 

The Second Circuit recently upheld a decision finding two individual co-owners personally liable for nearly $11 million for their companies’ violations of the Federal Trade Commission Act (FTCA) and Fair Debt Collection Practices Act (FDCPA). The companies’ business consisted largely of collecting payday loan debts they had purchased.

In FTC v. Federal Check Processing, Inc., et al., on summary judgment, the U.S. District Court for the Western District of New York found that the corporate defendants misrepresented that they were with the government, falsely accused consumers of committing check fraud, threatened consumers with arrest if they did not pay their debts, and sometimes called friends, family, co-workers, or employers of debtors, “telling them that the debtors owed a debt, had committed a crime in failing to pay it, and faced possible legal repercussions.” The district court held that the two individual co-owners and co-directors were personally liable for $10,852,396, the FTC’s calculation of the total amounts received by the corporate defendants from consumers as a result of their unlawful acts.

On appeal one co-owner did not challenge the district court’s conclusion that the companies violated the FTCA and FDCPA but argued that (1) he was erroneously held personally liable and (2) the court erred in setting the equitable monetary relief at $10,852,396. (The other co-owner failed to submit a timely brief and his appeal was therefore dismissed pursuant to local rules.)

The Second Circuit agreed with the district court that the defendant had both authority to control the corporate entities and sufficient knowledge of their practices to be held individually liable for their misconduct as a matter of law. He had a 50 percent ownership stake in the corporate defendants, had signature authority over their bank accounts, served as their co-director and general manager, and had the power to hire and reprimand employees, and therefore had the authority to control the companies’ unlawful actions. As co-director and general manager he was also “intimately involved with the unlawful activities at issue: the collection calls.” He maintained a desk in the collection call center which he visited at least daily, spending up to half of the day there, and “made some of the more offensive collection calls himself.”

The Second Circuit also affirmed the disgorgement amount ordered. The defendant asserted that the FTC relied on “approximately 45 calls where it claimed that fraudulent calls were made” which was insufficient to establish that “the entire operation was ‘permeated with fraud.’” The Second Circuit noted the FTC had submitted more than 500 consumer complaints regarding the defendants’ debt collection practices, aggressive collection scripts recovered from collectors’ cubicles, and audio recordings of twenty-one of the twenty-five collectors falsely telling consumers that the collectors were law enforcement personnel or “processors.” Given this evidence and the defendant’s decision not to submit any proof that the companies earned some or all of their revenue through lawful means, the Second Circuit concluded that the amount of disgorgement for the companies’ gross receipts was appropriate.

The CFPB recently issued its Fall 2018 Semi-Annual Report to Congress covering the period April 1, 2018 through September 30, 2018.

The report represents the CFPB’s first semi-annual report under the leadership of Director Kathy Kraninger.  At 43 pages, the new report is only two pages longer than the last semi-annual report issued under the leadership of former Acting Director Mick Mulvaney and continues what appeared to be the goal under Mr. Mulvaney’s leadership of issuing semi-annual reports that were substantially shorter than those issued under the leadership of former Director Cordray.  Also like the semi-annual reports issued under Mr. Mulvaney’s leadership, and also in contrast to those issued under Mr. Cordray’s leadership, the new report does not contain any aggregate numbers for how much consumers obtained in consumer relief and how much was assessed in civil money penalties in supervisory and enforcement actions during the period covered by the report.

The new report indicates that the Bureau had 1,510 employees as of September 30, 2018, representing a decrease of 161 employees from the number of employees as of March 31, 2018 (which was 1,671 employees).

In addition to discussing ongoing or past developments that we have covered in previous blog posts, the report includes the following noteworthy information:

  • During the period October 1, 2017 through September 30, 2018 the Bureau received approximately 329,000 complaints.  The prior semi-annual report indicated that the number of complaints received during the period April 1, 2017 through March 31, 2018 was approximately 326,200.  This suggests there has been no spike in the number of complaints since former Director Cordray left the Bureau at the end of November 2017.
  • It appears that any pending federal court actions were filed under Mr. Cordray’s leadership, with no new enforcement actions having been filed by the Bureau in federal court since Mr. Cordray’s departure.
  • During the period covered by the report, the CFPB initiated a “higher number of fair lending supervisory events,” and issued a greater number of matters requiring attention or memoranda of understanding than in the prior period.  The Bureau also found that entities satisfied (i.e. resolved) a lower number of MRAs or MOU items from past supervisory events than in the prior period.
  • Over the past year (presumably from October 1, 2017 through September 30, 2018), the Bureau did not initiate any fair lending public enforcement actions and did not refer any matters to the DOJ with regard to discrimination.

 

 

The CFPB has published its 2019 final lists of Rural and Rural or Underserved Counties on its website. The CFPB has previously posted lists of such counties for calendar years 2011-2018. The CFPB has also updated the rural and underserved areas website tool for 2019.

The lists and tool are relevant to exemptions from certain regulatory requirements of the Truth in Lending Act, including the following CFPB mortgage rules:

  • Escrows Rule, which requires a creditor to establish an escrow account for certain first-lien higher-priced mortgage loans (HPMLs), but exempts HPMLs consummated during a calendar year (or next-to-last calendar year for loans where the application was received before April 1 of the current calendar year) if the creditor extended a first-lien covered transaction in the preceding calendar year secured by a property located in a rural-or-underserved area, and meets certain additional conditions.
  • Ability to Repay and Qualified Mortgage Standards Rule, which treats certain balloon-payment mortgages as qualified mortgages if they are originated and held in portfolio by small creditors that meet the rural-or-underserved test above and certain additional conditions
  • Home Ownership and Equity Protections Act of 1994 (HOEPA) rule, which generally bans balloon payments for mortgages that fall within HOEPA’s high-cost mortgage coverage test, unless they meet the rural-or-underserved test and certain additional conditions
  • Appraisals for HPMLs rule, which exempts HPMLs made in “rural” counties from its additional appraisal requirement

Note that if a creditor makes a first-lien mortgage loan secured by a property located in a rural or underserved area during 2019, the creditor will satisfy the rural and underserved test for the rules noted above during all of 2020 and for loan applications received before April 1, 2021.

“Disclosure Sandbox.”  In September 2018, the Bureau proposed significant revisions to its “Policy to Encourage Trial Disclosure Programs” which sets forth the Bureau’s standards and procedures for exempting individual companies, on a case-by-case basis, from applicable federal disclosure requirements to allow those companies to test trial disclosures.

Last week, the CFPB added the following update to its blog post about the proposal:

The original headline [which referred to “companies”] suggested that the proposed Disclosure Sandbox would be open only to “fintech companies.”  In fact, as the body of the post indicates, any covered entity, regardless of its categorization as“FinTech, “bank,” “credit union” or otherwise, could apply to test a trial disclosure with the Sandbox.

Among the issues raised by the proposal that we noted was whether waivers would only be granted in connection with financial products or services that involve technological or other innovations and will not be granted in connection with conventional products or services.  While the CFPB’s update indicates that non-fintech companies would be eligible for a waiver, it continues to be uncertain whether waivers would be granted in connection with conventional products or services.

NAL Policy and New “Product Sandbox.”  In December 2018, the CFPB issued proposed revisions to its 2016 final policy on issuing “no-action” letters (NAL), together with a proposal to create a new “product sandbox.”  The comment period on the proposals ended earlier this week.  As might be expected, like its “disclosure sandbox” proposal, the CFPB’s proposed revisions to the NAL policy and proposal to create a new “product sandbox” has drawn criticism from consumer and public interest groups.

Among the arguments made in a comment letter from 77 “consumer, civil rights, legal services, labor and community groups” are claims that the proposals could violate the Administrative Procedure Act, exceed the Bureau’s authority, and would expose consumers to risk of harm.  The objections to the proposals set forth in another comment letter filed by 9 consumer and public interest groups that include the Center for Responsible Lending and the National Consumer Law Center also include claims that the creation of a “product sandbox” exceeds the CFPB’s authority and the proposals violate rulemaking requirements.  In addition, the letter includes suggestions for how the proposals might be modified.

 

 

 

Last month, after more than three years of urging by the industry to provide written guidance, the CFPB issued four FAQs on its TILA/RESPA Integrated Disclosure (TRID) Rule.  In this week’s podcast, we take a close look at the FAQs and what they tell creditors, particularly its guidance on when a corrected Closing Disclosure and new three-day waiting period are required (with a caution for those selling to investors) and the safe harbor for using a model form.

Click here to listen to the podcast.