We’ve taken a look at the CFPB’s just-issued Short-Term, Small-Dollar Lending Examination Procedures, the latest update to the CFPB’s larger Supervision and Examination Manual, and think there are several noteworthy highlights.
The procedures apply broadly to both closed-end and open-end loans that involve small dollar amounts, short-term repayment periods and lender access to the borrower’s deposit account for repayment. This means certain bank line of credit products are affirmatively included.
The procedures walk examiners through the life cycle of a payday loan, from marketing to collection. In connection with marketing, examiners are directed to identify any practices and products that qualify for incentive compensation and assess whether the lender is encouraging any behaviors that increase risks for consumers. The CFPB also wants its examiners to look at various issues related to a lender’s role as a lead generator and its relationships with any lead generators it uses and to review advertising by those lead generators as well as the lender’s advertising when acting as a lead generator. When looking at a lender’s relationship with lead generators, examiners are told to consider whether the lender makes sure the lead generators it uses are properly licensed or registered.
In the section of the procedures directed to the application process, the CFPB observes that payday lenders typically don’t obtain conventional credit reports. However, examiners are told that the alternative third-party data providers whom payday lenders typically do use may be “consumer reporting agencies” under the Fair Credit Reporting Act, which would trigger the need for lenders to comply with various FCRA requirements.
The procedures devote considerable attention to compliance with the Electronic Fund Transfer Act/Reg E, including whether a lender is complying with the EFTA prohibition on compulsory use of EFTs. Some of the language used in the manual suggests a tighter interpretation of this prohibition than the language of Reg E requires.
And as part of the sections on both marketing and origination, examiners are directed to assess whether a lender is clearly and prominently disclosing the material terms and costs of any additional products or services it offers, regardless of whether those products or services are related or unrelated to the payday loan. Examiners are also told to be alert to the possibility that the cost of any required products or services must be reflected in TILA disclosures and to determine whether all fees to access loan funds are clearly and prominently disclosed, including a fee to cash a check used to disburse funds or an ATM fee to access funds disbursed by prepaid card.
Payday lenders –and others –should pay close attention to the section of the procedures addressing sustained use of payday loans. Consistent with yesterday’s remarks by CFPB Director Richard Cordray that the CFPB plans to focus on “repeated, long-term use” of payday loans, the procedures contain a section highlighting “sustained use.” Examiners are directed to look at the availability of options for a “roll over,” “back-to-back transaction” or conversion from a balloon payment to an installment plan. If those options are offered, examiners must make a series of determinations that include whether the lender has policies and procedures related to sustained use to which it is adhering, whether the lender monitors or limits borrower use of payday loans on an ongoing basis, and whether the lender looks at income or other financial information to determine whether an applicant has the ability to repay a loan without a modification or refinancing.
Finally, with regard to collections, examiners are told that while lenders collecting their own debts are not subject to the Fair Debt Collection Practices Act, practices that violate the FDCPA could be considered “unfair, deceptive or abusive.”
Perhaps the most novel item in the procedures is its suggestion that examiners “may also consider using customer surveys” in connection with examinations. We’re curious about exactly what the CFPB has in mind.