In August 2018, Arizona began accepting applications for its regulatory sandbox that “enables a participant to obtain limited access to Arizona’s market to test innovative financial products or services without first obtaining full state licensure or other authorization that otherwise may be required.”  The state’s Attorney General is responsible for the application process and oversight of the sandbox.  At the end of last week, the Arizona AG announced that two more participants, Grain Technology, Inc. and Sweetbridge NFP, Ltd., had been added to the state’s sandbox.

In October 2018, there was an announcement by the AG that Omni Mobile Inc. had become the first sandbox participant.  The AG’s press release described Omni as “a mobile payment platform aiming to test cheaper and faster payment transfers through its centralized wallet infrastructure.”  It indicated that the product would be tested by processing guest payments at an Arizona resort, with Arizona-resident guests to receive a disclosure agreement (regarding the company’s participation in the sandbox), an explanation of the test nature of the product, a privacy notice, and the ability to opt out of any information sharing with the resort.

The AG’s announcement regarding Omni was accompanied by an announcement that the AG’s Office had signed a cooperation agreement with Taiwan’s financial regulator, the Financial Supervisory Commission, with the goal of creating an information-sharing arrangement that might create opportunities for businesses to develop and test fintech products in both markets.

The two additional sandbox participants announced last week are described in the AG’s press release as follows:

  • Grain Technology, Inc., based in New York, will test a savings and credit product in Arizona using proprietary technology to offer consumers customized savings plans and credit opportunities. Arizona consumers participating in the program will obtain access to a small line of credit aimed primarily at providing overdraft protection for bank accounts.  APRs for loans obtained through this line of credit may be as low as 12% for consumers who agree to follow a recommended repayment plan calculated using Grain’s technology (a standard APR of 15.99% will apply for those who adopt a different repayment plan).  Grain intends for loans and payments occurring through this line of credit to be reported to major credit-reporting agencies to enable consumers to build their credit profiles.
  • Sweetbridge NFP, Ltd., a Scottsdale-based international nonprofit building blockchain protocols for supply chains and commerce, will test a lending product using proprietary blockchain technology with an APR cap of 20%.  At these rates, Sweetbridge’s product will allow consumers to obtain credit at up to 1/10th the cost allowed under Arizona law.

In September 2018, the CFPB 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.  The proposal followed Acting Director Mulvaney’s July 2018 appointment of Paul Watkins to serve as Director of the Bureau’s Office of Innovation.  Before joining the CFPB, Mr. Watkins was in charge of fintech initiatives in the Arizona AG’s Office and led the state’s efforts to create its regulatory sandbox.  The CFPB’s proposal includes a process for the CFPB to coordinate with sandbox programs offered by other regulators.

 

The American Bankers Association and the Bank Policy Institute have sent a letter to the Board of Governors of the Federal Reserve System (Fed) to petition the Fed to engage in rulemaking to clarify the Fed’s September 2018 “Interagency Statement Clarifying the Role of Supervisory Guidance” (the “Interagency Statement”).  The Interagency Statement was issued jointly by the Fed, FDIC, NCUA, OCC and CFPB with the stated purpose of “explain[ing] the role of supervisory guidance and to describe the agencies’ approach to supervisory guidance.”

The letter states that the petition is made pursuant to section 553(e) of the Administrative Procedure Act.  That provision provides that each agency “shall give an interested person the right to petition for the issuance, amendment, or repeal of a rule.”  An agency must provide the grounds for the denial of a petition and a denial can be appealed to a court.

In their letter, the trade groups express concern that the Interagency Statement “may leave room for examiners to continue to base examination criticisms on matters not based in law.”  An example given is that “some examiners may continue to retain existing [matters requiring attention (MRAs) and matters requiring immediate attention (MRIAs)] based on agency guidance, on the theory that the Interagency Statement is not retroactive.”  They state that there is also “a concern that examiners might defeat the purpose of the Statement by replacing guidance-based examination criticisms with MRAs and MRIAs grounded in generic and conclusory assertions about ‘safety and soundness’ (as opposed to those that identify specific, demonstrably unsafe and unsound practices-the actual legal standard).

Finally, they observe that “the Interagency Statement’s general reference to a ‘criticism’ or ‘citation’ has engendered some confusion about whether MRAs, MRIAs, and other adverse supervisory actions are covered by the Statement.” (The Statement provided that ‘[e]xaminers will not criticize a supervised financial institution for a ‘violation’ of supervisory guidance.  Rather, any citations will be for violations of law, regulation, or non-compliance with enforcement orders or other enforceable conditions.”)

To address these concerns, the trade groups petition the Fed to take the following two specific rulemaking actions:

  • To propose and adopt, through notice and comment rulemaking, the content of the Agency Statement “as a formal expression and acknowledgment of the proper legal status of the guidance.”
  • To include in such a rulemaking “a clear statement that MRAs, MRIAs, examination rating downgrades, MOUs, and any other formal examination mandate or sanction will be based only on a violation of a statute, regulation or order—that is, that they are the types of ‘criticisms’ or ‘citations’ at which the guidance is directed.”  For this purpose, a “violation of a statute” would include the identification of a demonstrably unsafe and unsound practice pursuant to 12 U.S.C. Section 1818(b)(1) but would not include a generic or conclusory reference to “safety and soundness.”  (The groups call this “a critical distinction,” observing that “[i]t is essential that any examination criticisms adhere to the relevant legal standard: the statutory bar on ‘unsafe and unsound’ conduct, as interpreted and binding on the agencies under governing case law.”)

The Department of Justice recently entered into a settlement with Hudson Valley Federal Credit Union to resolve allegations that it violated the Servicemembers Civil Relief Act (SCRA) by repossessing vehicles owned by servicemembers without first obtaining the required court orders.  The settlement agreement  requires Hudson Valley to pay $65,000 to compensate seven servicemembers whose vehicles were alleged to have been unlawfully repossessed and to pay a $30,000 civil penalty to the United States.  The DOJ’s press release describes Hudson Valley as one of the largest credit unions in the country and the DOJ alleged in the complaint that as of year-end 2016, Hudson Valley had total assets of $4.445 billion, total deposits of $3.99 billion, and more than 275,000 individual and business members.

The SCRA, in 50 U.S.C. § 3952(a)(1), generally requires a court order to be obtained before the vehicle of an active duty servicemember can be repossessed based on a default under a retail installment sales contract for the vehicle’s purchase as to which the servicemember made at least one deposit or installment payment before being called to active duty.

The DOJ’s complaint alleged that it launched an investigation into Hudson Valley’s repossession practices after learning of two private lawsuits filed in the Southern District of New York by servicemembers who claimed that Hudson Valley repossessed their vehicles in violation of the SCRA.  The investigation revealed seven additional SCRA violations by Hudson Valley resulting from repossessions and that, prior to August 2014, Hudson Valley did not have any written policies or procedures that addressed the SCRA’s requirements for vehicle repossessions.

The settlement agreement describes updates made by Hudson Valley in February 2018 to its collection guidelines to address such requirements and prohibits Hudson Valley from making any material changes to those guidelines without providing a copy of the proposed changes to the DOJ and giving the DOJ an opportunity to object.  It also requires Hudson Valley to provide SCRA compliance training to all of its collections and lending employees.

Based on the DOJ’s determination that seven of Hudson Valley’s vehicle repossessions between 2008 and 2014 did not comply with the SCRA, the settlement agreement requires Hudson Valley to pay $10,000 in compensation to each of six servicemembers, plus any lost equity in their vehicles with interest.  Hudson Valley must also pay $5,000 to a seventh servicemember  whose vehicle was repossessed but returned within 24 hours.  It also agrees not to pursue or assign any deficiencies associated with the repossessions and must refund any amounts paid by the servicemember or a co-borrower toward any deficiency that was remaining after a repossession.

The settlement with Hudson Valley follows several other lawsuits filed by the DOJ earlier this year and in 2017 alleging SCRA violations related to vehicle repossession and disposition.

 

 

This afternoon, Pew Charitable Trusts will host an event in Washington, D.C. focusing on Ohio’s Fairness in Lending Act.  Enacted in July 2018, the Act places new limitations on payday loans including an interest rate cap, a limit on the total cost of a loan, and other structural restrictions.  The Act is viewed as a significant victory for consumer advocates with the potential to be followed through legislation in other states or through ballot initiatives.  (Last week, Colorado voters passed a ballot initiative that places a 36 percent APR cap on payday loans.)

At the event, Ohio legislators from both sides of the aisle, business leaders, advocates, and researchers will discuss the Act.  According to Pew’s description of the event, the topics will include a discussion of strategies “to advance meaningful reform in other states with payday loans.”

 

 

The CFPB and Federal Housing Finance Agency (FHFA) have released the first public use file containing data from the National Survey of Mortgage Originations. The NSMO is a component of the National Mortgage Database (NMDB®) program, which we reported on previously.

Since 2014, the CFPB and FHFA have sent approximately 6,000 surveys each quarter to consumers who recently obtained mortgage loans to obtain feedback on their experiences during the origination process, their perception of the mortgage market and their future expectations. The recently issued public use file reflects data from the first 15 quarterly waves of surveys, and covers nearly 25,000 loans originated from 2013 to 2016.

Letters are sent to consumers randomly selected for the survey in both English and Spanish, and consumers who elect to complete a survey may do so in English or Spanish. The current version of the survey contains 94 questions. Topics addressed by the questions include the shopping process, factors regarding the consumer’s selection of the mortgage lender and mortgage loan, the application process, satisfaction with the lender and origination process, whether the consumer experienced certain issues at the loan closing (such as whether the loan documents were not ready or whether the consumer felt rushed or was not given time to read documents), information regarding the consumer (including demographic and income data), whether the consumer expects changes in household income or expenses, whether the consumer expects any changes in employment status, and transaction details (such as purpose for the loan, down payment amount, sources of funds for down payment, factors influencing decision to refinance, interest rate and whether rate is fixed or adjustable, parties who contributed to the payment of closing costs, the type of property and other property details).

FHFA Deputy Director Sandra Thompson stated that “The goal of the survey is to obtain information to help improve lending practices and the mortgage process for future borrowers.” CFPB Acting Director Mick Mulvaney stated that “These data will allow greater transparency, accountability, and effectiveness around borrowers’ mortgage experiences.” The surveys are intended to address the FHFA obligation under the Housing and Economic Recovery Act to conduct monthly mortgage surveys of all residential mortgages, and the CFPB obligation under Dodd-Frank to monitor the primary mortgage market, including through the use of survey data.

With the August 19, 2019 compliance date for the CFPB’s small dollar lending rule drawing nearer, industry anxiety is growing as to the CFPB’s plans for delaying the compliance date and what changes will be proposed.  In this episode, we review what the rule’s ability to pay and repayment provisions would require and why those provisions are problematic.  We also discuss changes we expect the CFPB to propose, developments in the pending industry lawsuit challenging the rule, and steps companies can take in advance of the compliance date.

To listen and subscribe to the podcast, click here.

 

By an overwhelming vote (approximately 1,4270,000 million to 433,000), Colorado voters passed Proposition 111, a ballot initiative that places a 36 percent APR cap on payday loans.  The question presented to voters was:

Shall there be an amendment to the Colorado Revised Statutes concerning limitations on payday lenders, and, in connection therewith, reducing allowable charges on payday loans to an annual percentage rate of no more than thirty-six percent?

As described on the Colorado Secretary of State’s website, Proposition 111 “would restrict the charges on payday loans to a yearly rate of 36 percent and would eliminate all other finance charges and fees associated with payday lending.”

Colorado’s Attorney General has indicated that at least half of all retail lenders closed their doors following the enactment of legislation in 2010 that restricted payday loan fees to an average APR of about 120%.  We suspect that Proposition 111 will have a similar effect, with only the most efficient operators remaining that can rely on sheer volume, sophisticated underwriting, and other product structures available under the Colorado Consumer Credit Code.

According to American Banker, the passage of Proposition 111 makes Colorado the fifth state to impose rate caps on payday loans through a voter referendum.  The other states to have done so are South Dakota, Ohio, Arizona, and Montana.

 

 

Yesterday, the court reversed course in the lawsuit filed by two industry trade groups challenging the CFPB’s final payday/auto title/high-rate installment loan rule (Payday Rule).  On its own initiative, the Texas federal district court granted a stay of the Payday Rule’s August 19, 2019 compliance date and continued in force its stay of the lawsuit.  Unfortunately, the court did not specify a termination date for the stay of the compliance date, as the trade groups and CFPB originally requested.  Instead, the compliance date is stayed “pending further order of the court.”

To my mind, the court’s failure to specify how long the stay of the compliance date will remain in effect leaves the Rule’s status hopelessly muddled.  The CFPB has stated that its current plan is to revisit the Payday Rule’s ability-to-repay (ATR) provisions but not its payment provisions.  CFPB officials have indicated that the Bureau intends to propose a delay of the Payday Rule’s ATR provisions but not the payment provisions.  What happens if the CFPB follows through with that plan?  When the parties report that development to the court, might the court just lift its stay of the compliance date, without affording lenders additional time to address the payment provisions?

My guess is that the court intends its stay to function like the tolling of a statute of limitations—meaning that, for each day the stay remains in effect, the August 19 compliance deadline is extended for an additional day.  But alas, the court’s order does not specify this intent.  I hope the parties in the case ask for clarification that the compliance date will be extended day-for-day so long as the stay remains in effect.  Alternatively, the CFPB could announce that it will propose a delay in the compliance date for the payment provisions when it moves forward with its rule-making next January.

Unless and until the court and/or the CFPB clarify their intentions, prudent lenders will continue to prepare for the advent of the payment provisions of the Payday Rule.  As Ned Stark from The Game of Thrones might say (if he were alive):  “August 19 is coming.”

 

 

It has been reported that, without announcement or warning, the regulations applicable to third-party debt collectors in Massachusetts may have changed.  While the state’s Division of Banks (DOB) and the state’s Attorney General (AG) have traditionally regulated, respectively, third-party debt collectors and first-party creditors, the AG is reported to have changed its website recently to include third-party debt collectors as entities that it regulates.

Such a change could have significant implications because the AG’s rules differ from the DOB’s rules.  For example, the verification requirements under the AG’s rules contain more procedures than the DOB’s rules.  We expect industry trade groups to seek clarification from the DOB and AG.

 

 

 

 

While the pace of the CFPB’s fair lending activities has slowed under its new leadership, significant fair lending developments are occurring elsewhere.  In this week’s podcast, we discuss several of those developments and their broader implications.  Our discussion focuses on New York and Connecticut fair lending developments involving auto finance, a private redlining lawsuit, and the FDIC’s recent report on the use of digital footprint data for credit underwriting.  We conclude with a discussion of a letter recently issued by the Department of Justice to a Congressman regarding the website accessibility standards that companies must follow to be compliant with the Americans with Disabilities Act.

To listen and subscribe to the podcast, click here.