The Minnesota Attorney General announced that she has filed a lawsuit in state court against two pension advance companies.

According to the AG’s press release, the companies often solicited borrowers through their own websites or websites of “lead generators” who marketed “pension loans” or “loans that can fit your needs.”  The press release states that the transactions required military veterans and senior citizens to assign portions of their monthly pension payments for up to ten years in exchange for much smaller cash amounts (usually less than $5,000) on which the AG claimed the companies typically charged annual percentage rates of 200 percent.

The lawsuit is reported to allege that the companies violated Minnesota lending laws by making loans to Minnesota borrowers without being licensed as a lender and sought to evade Minnesota law by falsely characterizing the transactions as pension “purchase agreements” rather than loans.

In February 2017, the CFPB and the New York Attorney General filed a lawsuit in which they alleged that a litigation settlement advance product offered by the defendant was a usurious loan that was deceptively marketed as an assignment.  In August 2015, the CFPB and the New York Department of Financial Services filed a lawsuit against two pension advance companies in which the CFPB and NYDFS made similar allegations regarding the advances made by the companies.

The Minnesota AG’s lawsuit and the CFPB/NY lawsuits not only indicate that pension advance companies and litigation funding companies have become targets of regulatory enforcement actions, but also suggest that merchant cash advance providers and other finance companies whose products are structured as purchases rather than loans could face heightened scrutiny from state and federal regulators.

 

The CFPB has created a new online form for obtaining informal staff guidance on questions about CFPB regulations.  A link to the new form appears on the CFPB’s website on the “Compliance and guidance” page.

It is unclear whether the new form is intended to replace the email address and phone number previously given by the CFPB for regulatory questions (CFPB_reginquiries@cfpb.gov; (202) 435-7700) since the website’s eRegulations page still invites questions at that email address and phone number.

With regard to the new online form, the CFPB states: ” You can expect to hear back from us in 10-15 business days.  If we need more time to answer your question or cannot answer your question, we will tell you.  Response times and formats vary depending on the current volume of questions, the amount of time needed to research your question, and staff availability.”

The CFPB has issued two new reports concerning student loans.  The first report, “CFPB Data Point: Student Loan Repayment,” examines how the payment patterns of student loan borrowers have changed over the last 14 years.  The second report, “Innovation highlights: Emerging student loan repayment assistance programs,” discusses assistance programs offered by employers and other third parties and makes recommendations to student loan companies, student loan servicers, policy makers, and third-party assistance program providers and administrators for improving the operation of such programs.

Report on repayment data. The CFPB states that although researchers have started to document the share of borrowed amounts that are repaid within a few years of entering repayment and trends in outstanding balances, a “more dynamic analysis of repayment behavior over time is necessary.”  According to the CFPB, such analysis is needed “to understand how recent changes in the student loan market—including increased use of alternate repayment plans and increased student loan indebtedness among older consumers—are affecting the repayment behavior of student loan borrowers and their usage of and performance on other consumer credit products.”

To conduct its analysis, the CFPB looked at a subsample from its Consumer Credit Panel data of more than 1 million consumers consisting of all consumers with at least one student loan that first entered repayment between 2002 and 2014 and analyzed those consumers’ repayment experience through 2016.

The CFPB’s key findings include:

  • The percentage of borrowers owing $20,000 or more at the start of repayment more than doubled since 2002, from 20 percent to more than 40 percent. The slower repayment speed of large dollar borrowers has resulted in longer average repayment periods for the overall student loan portfolio over this time span.  (For example, borrowers with loan amounts of less than $5,000 are 2.5 to 4 times more likely than borrowers with loan amounts of $50,000 or more to fully repay their loans within 8 years of entering repayment.)
  • Since 2002, the percentage of borrowers who are age 35 or older has almost doubled.  However, there is little variation in repayment speed by consumer age and the repayment progress of recent older borrowers is not noticeably different from older borrowers in the early or mid-2000s.
  • The share of borrowers not making payments large enough to reduce their balances has increased, particularly among borrowers with loans less than $20,000.  23% of these small dollar borrowers entering repayment most recently are not making payments large enough to reduce their balances.  While some of this trend likely reflects the growth of income-driven repayment (IDR) repayment plans, more than half of this group consists of borrowers who are delinquent or in default on their student loans.

The CFPB’s third finding above was also the focus of a CFPB blog post, “Too many student loan borrowers struggling, not enough benefiting from affordable repayment plans.”  In the blog post, the CFPB states that because IDR plans were first made widely available in 2009, it expected to see, over the period it analyzed, growth in the share of borrowers who were not making progress toward repaying their debt five years into repayment but still remained in good standing.  According to the CFPB, it found the opposite, thus suggesting “that borrowers with higher balances—including many of the most sophisticated borrowers—may be better-able to invoke their rights to these protections.”  The CFPB comments that “IDR should be a financial lifeline accessible to borrowers, regardless of the amount of debt they owe or level of education they attain.”

Report on repayment assistance programs. The CFPB observes that to help borrowers manage student loan debt, private-sector employees, state and local governments, financial institutions, and colleges and universities (“providers”) have launched various programs.  For example, an increasing number of employers are offering such programs designed for recruitment or retention, including programs under which the employer makes a monthly fixed payment towards an employee’s student loans.  The CFPB notes that fintech companies have been involved in the development of software platforms that enable employers to contribute to their employees’ student loan repayment via a customizable online platform.

The CFPB reviews common approaches to providing student loan repayment assistance through third-party programs and feedback from borrowers, providers, and program administrators, such as difficulties they have encountered in establishing relationships between providers and student loan servicers and transmitting payments to servicers.  The report also includes a section on policy considerations in which the CFPB makes recommendations to student loan companies and servicers and policymakers regarding steps to improve the processing of third-party payments and to providers and program administrators regarding steps to maximize borrowers’ ability to access and benefit from such programs.

Regulators from the states of Connecticut, Idaho, Massachusetts, Minnesota and North Dakota (“Participating States”) have entered into a settlement agreement with three affiliated debt collection companies to settle allegations that the companies engaged in collection activities that violated the Fair Debt Collection Practices Act, the FTC Act, and state laws and regulations.  The settlement requires the companies to pay $500,000 to be divided equally among the Participating States.

The agreement indicates that the companies were licensed as collection agencies under the laws of the Participating States.  It also indicates that the Participating States began a multi-state examination of the companies that was conducted concurrently with a targeted review by the CFPB of one of the companies’ federal student loan debt collection activity.  The initial examination review period covered collection activity from February 11, 2013 to February 27, 2015, with consideration also given to activity outside of that period.

In addition to alleging that all of the companies failed to provide access to collection records and submit timely and complete responses to requested information in violation of state statutes and regulations, the agreement alleges that one of the companies engaged in the following unlawful conduct:

  • To meet revenue goals, the company’s agents were directed to make calls to telephone numbers that previously had been designated as “do not call” and to mark the accounts with a special identifier to avoid disciplinary action for violations of law and company policy.  The agreement alleges that such calls violated various FDCPA provisions, such as those limiting third party calls and calls to a consumer at his or her place of employment.  It further alleges that the calls constituted unfair conduct in violation of the Consumer Financial Protection Act’s UDAAP prohibition and also violated specified state statutes and regulations.
  • The company failed to credit payments made by check on the day the check was received and instead delayed credit until the check cleared, which typically took four to five days.  The agreement alleges that such conduct violated the FDCPA prohibition on collecting amounts that are not expressly authorized by the agreement creating the debt or permitted by law, was an unfair or abusive practice in violation of Section 5 of the FTC Act, was unfair, deceptive, or abusive behavior in violation of the CFPA’s UDAAP prohibition, and violated specified state statutes and regulations.

State regulators do not have authority to directly enforce the FDCPA or Section 5 of the FTC Act.  However, many state debt collection statutes (such as the Connecticut statute) require debt collectors to comply with the FDCPA.  Under Section 1042 of the CFPA, state regulators are authorized to bring a civil action to enforce the CFPA’s UDAAP prohibition against state-licensed entities.

In addition to making the $500,000 payment, the settlement agreement requires the companies to establish a compliance management system that meets specified standards for oversight, monitoring, training, and audits.  It also prohibits the companies from continuing to engage in the alleged unlawful conduct, to reimburse consumers for any interest or fees that resulted from not crediting a payment made by check on the date the check was received, and to comply with specified state requirements.

Last week, the CFPB published a blog post with tips for consumers facing a cash flow emergency.

We were glad to see that the blog post included a warning to consumers about debt relief or settlement companies.  The CFPB advised consumers to beware of for-profit debt relief or settlement companies that promise to pay off consumers’ debts for “pennies on the dollar” or charge fees before settling debts, guarantee to eliminate unsecured debt, or tell consumers to stop communicating with creditors.

On November 9, 2017 from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr attorneys will hold a webinar: Effective Strategies for Dealing With Debt Settlement Companies.  Click here to register.

We hope consumers will heed the helpful advice in the CFPB’s blog post.

 

On July 28, 2017, California Governor Jerry Brown’s Office of Business and Economic Development recognized the California Department of Business Oversight for a successful Lean Six Sigma project that dramatically reduced the processing time for applications to amend financial services licenses.  Through the project, the Department cut the processing time from an average of 100 days to only 1.9 days!

We have previously commented that the time it takes state authorities to process license applications can be a significant factor for FinTech and other financial services companies to consider when determining how to structure their business.  State regulators who want to improve the business climate in their states would be well-advised to follow California’s lead in tackling this important issue.

On July 20, we reported that Director Cordray is scheduled to give a speech at the September 4 Cincinnati AFL-CIO Labor Day picnic.  Assuming the speculation that Director Cordray plans to run for Ohio governor is accurate, that event seemed to be an ideal venue for him to announce his candidacy.

Yesterday, the Ohio Democratic Party announced that the first in a series of six gubernatorial debates will be held on September 12 at Martins Ferry High School in Belmont County.  All of the announced candidates (former U.S. Rep. Betty Sutton, Dayton Mayor Dan Whaley, former state Senate Minority Leader Joe Schiavoni and former State Senator Connie Pillich) have agreed to participate.

As of now, Director Cordray is not slated to participate in the debate.  Party Chairman David Pepper was quoted by Cleveland.com: “I think anyone looking to run for statewide office, there aren’t that many months left before you really have to get going…As you can see, we’re moving forward.”

So far, Director Cordray has not indicated whether he is planning to enter the Ohio gubernatorial race and, if so, when that will happen.  If he decides to run, he must first resign as CFPB Director.  That could happen in early September so that he can launch his campaign on Labor Day at the Cincinnati AFL-CIO picnic, and/or participate in the first Democratic Party gubernatorial debate on September 12.

As we reported previously, on July 7, 2017 the Consumer Financial Protection Bureau (CFPB) posted on its website long awaited amendments to the TILA/RESPA Integrated Disclosure (TRID) rule, and a proposal to address the so-called “black hole” issue (regarding limits on the ability of a credit to reset tolerances with a Closing Disclosure).

Both the amendments and the proposal were published in Federal Register on August 11, 2017.  As a result, the amendments become effective on October 10, 2017, with a mandatory compliance date of October 1, 2018, and the comment deadline for the proposal is also October 10, 2017.

The Minnesota Supreme Court recently ruled that two for-profit postsecondary education schools had charged usurious interest rates on student loans and could not charge rates greater than 8% without obtaining a lending license.

Minnesota’s general usury law caps interest rates at 8% for written contracts but allows a lender to charge up to 18% on a “consumer credit sale pursuant to an open end credit plan.”  In State of Minnesota v. Minnesota School of Business, et al., the Minnesota Attorney General sought to enjoin the schools from making private student loans that typically had interest rates between 12% and 18%, alleging that the loans were subject to the 8% cap.  The schools did not pay out money to the student and instead credited the loan amount against the student’s outstanding tuition balance.  The credit was not available to the student for any other purpose.  The student repaid the loan through monthly payments pursuant to a schedule that had a fixed date by which the entire loan and accrued interest had to be paid in full, and no additional funds were available if the student paid off the loan early.

At issue was whether the loans qualified as a “consumer credit sale pursuant to an open end credit plan” on which Minnesota allowed up to 18 percent interest to be charged.  (The decision states that the parties agreed that the loans “were consumer credit sales.”)   Although the Supreme Court found that the definition of “open end credit plan” under Minnesota law only incorporated the Truth in Lending Act and Regulation Z definition of “open-end credit plan” in effect in 1971 and not as subsequently amended to expressly require revolving credit, it found that revolving credit was nevertheless an essential part of the 1971 definition.

Reversing the Minnesota Court of Appeals, the Supreme Court concluded that the loans were not made pursuant to an open-end plan.   It found that the repayment schedule on the schools’ loans, which provided for a fixed end date, was consistent with a closed-end plan and also observed that the schools had required students to sign a form containing an acknowledgment that a loan was not an “extension of credit under an open-end consumer credit plan.”  According to the Supreme Court, the schools had “structured their loans to give themselves the benefit of open-end credit plans, charging interest in excess of 8 percent-without providing their students the benefit of revolving credit.”

Having found that the schools had charged usurious interest rates, the Supreme Court concluded that to charge rates higher than 8 percent on loans that were not made pursuant to an open-end credit plan, the schools needed to obtain a Minnesota lending license.

The opinion states that the schools did not contest “that they were [engaged] in the business of making loans” for purposes of the lending license statute.  Thus, it appears that the schools did not attempt to argue that, in extending credit to students to finance tuition, they were not acting as lenders making “loans” subject to Minnesota’s general usury law but instead were acting as sellers of goods or services extending credit to buyers to which the time-price doctrine applies.  Sellers making closed-end credit sales should consult with counsel as to how they can avoid the 8 percent rate cap by taking advantage of the time-price doctrine under Minnesota law.

 

 

 

As we’ve discussed before, the CFPB sued Navient over its student loan servicing practices in the Middle District of Pennsylvania. In doing so, the CFPB followed its strategy of announcing new legal standards by enforcement action and then applying them retroactively. The chief allegation in the complaint is that Navient wrongly “steered” consumers into using loan forbearance rather than income-based repayment plans to cure or avoid defaults on their student loans. On March 24, 2017, Navient moved to dismiss the complaint on a number of grounds. While, on Friday, August 4, 2017, the district court declined to dismiss the case, the motion raised several arguments that a court of appeals should not be so quick to gloss over. We’ll focus here on two of them: fair notice, and the constitutionality of the CFPB’s structure.

Fair Notice

Navient argued in its briefs that the CFPB was pursuing them for alleged conduct when Navient was not given fair notice that the conduct, if it occurred, violated the law. The court used a technicality to decline to consider Navient’s fair notice argument at all. The court stated that: “[Under the relevant authorities,] Navient’s fair notice argument fails if it was reasonably foreseeable to Navient that a court could construe their alleged conduct as unfair, deceptive, or abusive under the CFP Act. Navient, however, has only advanced arguments as to why it did not have fair notice of the Bureau’s interpretation of the CFP Act (emphasis added).” Thus, the court found that it need not consider the fair notice argument.

In doing so, the court ignored authorities Navient cited that held that, as Navient paraphrased, “[a]n agency cannot base an enforcement action on law created or changed after the conduct occurred.” The court also ignored the obvious and clearly-implied corollary to Navient’s argument: The only way for Navient to be liable for the claims alleged in the complaint would be for a court, namely, the Middle District of Pennsylvania, to adopt the Bureau’s position. Thus, with all due respect for the court, Navient’s fair notice argument was fairly before it and should not have been so lightly cast aside.

This is especially so given how well-founded the argument seems to have been. How could Navient have known that the CFP Act required it to provide over-the-phone individualized financial counseling to borrowers as a result of a statement on its website indicating that “Our representatives can help you by identifying options and solutions, so you can make the right decision for your situation (emphasis added).” The statement was both conditional, and placed the duty for making the right decision squarely on consumers. The court completely ignored the fact that the CFP Act’s prohibition on unfair, deceptive, or abusive conduct would not have alerted anyone that the CFPB or a court would make the inferential leap between that statement and the duty that the CFPB says Navient undertook by making it.

Constitutionality of CFPB Structure

The court also rejected the argument that the CFPB’s structure was unconstitutional. We’ve argued before why we believe that such a view is incorrect and even dangerous to our constitution. But a few of those arguments bear repeating in light of the Navient court’s ruling. The first problem with the Navient court’s holding is that it applies Humphrey’s Executor in a way that ignores the fundamental holding of the case. In Humphrey’s Executor, the Supreme Court held that for-cause removal, staggered terms, and a combination of enforcement and law-making powers was acceptable in a multi-member commission. Its rationale: because of the commission structure, the FTC would operate as a quasi-legislative and quasi-judicial body, not a quasi-executive one. Not to state the obvious, but the CFPB is not a multi-member commission; its unitary director is like the President, a unitary executive. Thus, the Supreme Court’s indulgence of these accountability-limiting features in Humphrey’s Executor does not apply to the CFPB.

Second, the retort to this argument, that the CFPB Director is somehow more accountable to the President, is a legal fiction at best. If the President has no power to remove the Director without cause, the Director is not accountable to him. Period. The President can approach the Director, ask him to implement a certain policy, and the Director can ignore the President with impunity. That is not accountability, however one may measure it. It is true that the five FTC Commissioners, the entire board of the Federal Reserve, or the SEC Commissioners could do the same. But, those interactions are more like the ones the President faces in dealing with Congress or the Judiciary, interactions that the Constitution contemplated and intended. With the CFPB Director, the President stands powerless before the unitary executive of a federal agency whose will can stand in direct contrast to his own. If that is not an affront to the Constitution’s notion of the President as a unitary executive, what is?

Third, the Supreme Court also indulged accountability-limiting features in Morrison v. Olsen, because, among other reasons, the inferior officer at issue in the case “lack[ed] policymaking or significant administrative authority.” Such is not the case with the CFPB Director. The Director is not an inferior officer. More importantly, he has substantial policymaking authority. The Director has the authority to approve and enforce regulations relating to any consumer financial product or service, companies and individuals involved in providing such services, and service-providers to those companies and individuals. The CFPB has interpreted its authority to extend not just to banks, lenders, and debt collectors, but to mobile phone companies, homebuilders, payment processors, and law firms. The court in this case ignored these substantial differences between the CFPB Director and the inferior officer approved in Morrison v. Olsen.

Finally, the court ignored the implications of its ruling. Before long, if the CFPB structure is replicated elsewhere in government, we’ll have a government where Congress, the President, and even the Courts are relegated to the sidelines while powerful bureaucrats make law, interpret the law, and enforce it with virtually no political oversight.

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As the case progresses, Navient will continue to defend itself. We will keep a close eye on the case and, as always, keep you posted.