At the meeting earlier this month of the American Bar Association’s Consumer Financial Services Committee in Carlsbad, CA, attention was given to an issue highlighted by the American Bankers Association in the comment letter it submitted on the CFPB’s proposed payday/auto title/high-rate installment loan rule.

The CFPB’s proposal provides a method to calculate the total cost of credit used to determine whether a loan would be a “covered loan.”  The CFPB has proposed to use an all-in measure of the cost of credit rather than the Regulation Z APR definition.  In its comment letter, the ABA observed that the proposal incorrectly calculates the total cost of credit for open-end credit as though a line of credit’s annual fee is paid monthly.  Specifically, the proposal would add the annual fee to the total amount of fees imposed for the billing cycle that is divided by the balance and multiply that number (which includes a fee only imposed annually) by 12 as if it were imposed monthly.  As a result, the total cost of credit would be inflated to reflect 11 fees that are not actually charged.  To illustrate, the total cost of credit in the CFPB’s example would be 13.25%, rather than the CFPB’s calculated 68.26%, if the annual fee were not multiplied by 12.

The ABA comments that the calculation is not only inaccurate but leads to an absurd result—a program charging a single annual fee would have the same cost of credit as one that charges the same fee each month, thus making the programs appear comparable.  In addition, nearly every open-end product would have an all-in APR greater than 36%, thereby subjecting the products to the proposal’s prohibitions and restrictions and, as a result, discouraging banks from offering such products.

The ABA states that the CFPB’s incorrect total cost of credit calculation copies flawed language that was contained in the Department of Defense’s final rule published in July 2015  implementing amendments to the Military Lending Act regulation.  The ABA urges the CFPB to calculate the all-in cost of credit as though the annual fee is paid in equal installments over the course of the year, so that the total finance charge for the billing cycle would consist of the monthly interest charge and the pro-rated amount of the annual fee rather than the entire annual fee.

We completely agree with the ABA’s point.

The CFPB announced that it has entered into a consent order with TMX Finance, LLC to settle allegations that the company did not provide sufficient information to consumers about the terms of auto title loans, pawns or pledges, and engaged in unfair collection practices.  The consent order requires TMX Finance to pay a $9 million civil money penalty.

The consent order involves 30-day credit transactions made by TMX Finance under the brands TitleMax and TitleBucks at storefronts in Alabama, Georgia and Tennessee.  Under the applicable laws of the three states, consumers can renew or extend a transaction by paying the finance charge at the end of each 30-day period.  According to the CFPB’s findings of fact and conclusions of law set forth in the consent order (which TMX Finance does not admit or deny), the company engaged in the following conduct in violation of the Consumer Financial Protection Act:

  • After telling a consumer the amount of credit for which he or she was eligible, a company employee would ask the consumer to indicate the number of months over which he or she would like to repay the transaction or how much the consumer would like to pay each month.  After the consumer identified a payback period or target monthly payment, the employee would show the consumer a payback guide showing the monthly payments required to repay the principal balance in full at the end of a stated period.  The payment guide did not disclose the total finance charge that a consumer would pay if he or she chose to renew a transaction multiple times but showed the amount of finance charge and principal that needed to be paid at the end of each 30-day period for the transaction to amortize over the consumer’s selected term.  The CFPB found the use of the payback guide was “abusive” in violation of the CFPA because it materially interfered with a consumer’s understanding of the terms and cost of the transactions.  More specifically, the CFPB found that the company’s sales pitch and the guide materially interfered with a consumer’s ability to understand such things as that guide was not an actual payment plan, renewing the transaction over an extended period would substantially affect the overall cost of the transaction, and the transaction would be more expensive the longer it took the consumer to it pay off.
  • Company employees were permitted to conduct “in-person” visits to a consumer’s home or places of employment if a consumer failed to make a timely payment and did not respond to communications from company employees.  The CFPB found that during such visits, employees disclosed the existence of a consumer’s debts to third parties.  It also found that employees visited places of employment even after being informed by a consumer or a consumer’s supervisor that such visits were not permitted.  The CFPB found that the company’s practice of making in-person visits was “unfair” in violation of the CFPA.

In addition to requiring payment of the civil money penalty, the consent order contains various restrictions on the company’s conduct.  Such restrictions include a prohibition on in-person visits unless they are for the purpose of locating and repossessing vehicles and using a payback guide or similar document.

As TMX Finance noted in a press release issued in connection with the settlement, the consent order does not require TMX Finance to pay any restitution to consumers.  The press release included a statement from the company’s president in which he affirmed the company’s continuing commitment to remaining a reliable source of credit for customers facing short-term financial setbacks like medical emergencies or home repairs.  The press release noted that the payback guide was designed to assist customers in understanding the ramifications of renewing or extending their 30-day credit transactions.

Last week, the CFPB announced that it had filed administrative enforcement actions against five Arizona auto title lenders for alleged violations of Truth in Lending Act advertising requirements.

 

The CFPB announced that it has filed administrative enforcement actions against five Arizona auto title lenders for alleged violations of Truth in Lending Act advertising requirements.  According to the CFPB, the lenders violated TILA by advertising a periodic interest rate for their loans on their websites without advertising a corresponding annual percentage rate.  As examples, the CFPB alleges that one lender advertised a monthly interest rate but did not include the APR and another lender asked consumers to take its advertised rate and multiply it by 12 without informing consumers that the resulting number was the APR.

In its press release, the CFPB states that its Rules of Practice for Adjudication Proceedings allow it to publish the Notice of Charges ten days after the company is served and, if allowed by the hearing officer, to publish the charges on its website.

In June 2016, the CFPB issued its proposed payday lending rule which, in addition to payday loans, covers auto title loans, deposit advance products, and certain high-rate installment and open-end loans.  Comments on the proposal are due by October 7, 2016.

 

The House Appropriations Committee has approved by a vote of 30-17 the FY17 Financial Services and General Government Appropriations bill.  The Committee also adopted a bipartisan amendment to the bill that would block the CFPB from finalizing or enforcing a rule regulating payday lending until the CFPB submits a detailed report on the consumer impact to Congress and identifies existing credit products available to replace the current sources of short-term, small dollar credit.  The amendment, which was sponsored by Republican Congressman Steven Palazzo and Democratic Congressman Henry Cuellar, was adopted by the Committee in a 30-18 vote.

On June 2, 2016, the CFPB issued a proposed rule covering payday and auto title loans, deposit advance products, and certain high-rate installment and open-end loans.  On June 15, 2016, from 12 p.m. to 1 p.m. ET, we will hold a webinar on the proposal: The CFPB’s Proposed Payday/Auto Title/High-Rate Installment Loan Rule: Can Industry Adapt to the New World Order?  Information about the webinar and a link to register are available here.

The FY 2017 appropriations bill already included several provisions intended to curb the CFPB’s authority, including a provision that would block the CFPB from enforcing a rule regulating pre-dispute arbitration agreements until it has submitted to Congress a study that meets criteria specified in the bill.  On May 5, 2016, the CFPB issued a proposed rule that would prohibit covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action with respect to the covered consumer financial product or service.  The proposed rule would also require a covered provider that is involved in an individual arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the CFPB.

 

As expected, the CFPB issued its proposed payday loan rule, in a release running 1,334 pages.  The CFPB also issued a fact sheet summarizing the proposal.  On June 15, 2016, from 12 p.m. to 1 p.m. ET, we will hold a webinar on the proposal: The CFPB’s Proposed Payday/Auto Title/High-Rate Installment Loan Rule: Can Industry Adapt to the New World Order?  Information about the webinar and a link to register are available here.

Like the proposals under consideration that the CFPB outlined last year in preparation for convening a SBREFA panel, the proposed rule is broad in terms of the products it covers and the limitations it imposes.  Lenders covered by the rule include nonbank entities as well as banks and credit unions.  In addition to payday loans, the rule covers auto title loans, deposit advance products, and certain high-rate installment and open-end loans.

The proposed rule establishes limitations for a “covered loan” which can be either (1) any short-term consumer loan with a term of 45 days or less; or (2) a longer-term loan with a term of more than 45 days where (i) the total cost of credit exceeds an annual rate of 36%, and (ii) the lender obtains either a lien or other security interest in the consumer’s vehicle or a form of “leveraged payment mechanism” giving the lender a right to initiate transfers from the consumer’s account or obtain payment through a payroll deduction or other direct access to the consumer’s paycheck.  The rule excludes from coverage purchase-money credit secured solely by the car or other consumer goods purchased, real property or dwelling-secured credit if the lien is recorded or perfected, credit cards, student loans, non-recourse pawn loans, overdraft services and overdraft lines of credit, and apparently credit sale contracts.

The proposed rule is very restrictive for covered short-term credit, requiring a lender to choose between:

  • Making a reasonable determination of the consumer’s ability to repay, which would require the lender to take account of the consumer’s basic living expenses and obtain and verify the consumer’s income and major financial obligations.  Some additional liberality is provided, however, insofar as lenders are permitted to verify housing expenses by records of expense payments, a lease or a “reliable method of estimating” housing expenses in the borrower’s locality.  The rule includes certain presumptions, such as a presumption that a consumer cannot afford a new loan when the consumer is seeking a covered short-term loan within 30 days of repayment of a prior covered short-term loan or a covered balloon payment longer-term loan.  To overcome the presumption, a lender would have to document sufficient improvement in the consumer’s financial capacity.  A lender would be prohibited from making a covered short-term loan to a consumer who has already taken out three covered short-term loans within 30 days of each other.
  • Making up to three sequential loans in which the first loan has a principal amount up to $500, the second loan has a principal amount that is at least one-third smaller than the principal amount of the first loan, and the third loan has a principal amount that is at least two-thirds smaller than the principal amount of the first loan.  A lender could not use this option if it would result in the consumer having more than six covered short-term loans during a consecutive 12-month period or being in debt for more than 90 days on covered short-term loans during a consecutive 12-month period.  A lender using this option cannot take vehicle security.

For covered longer-term credit, the rule requires a lender to choose between:

  • Making a reasonable determination of the consumer’s ability to repay, with the requirements for making such a determination similar to those that apply to short-term loans.
  • Using one of two options (both of which limit the number of loans a lender can make to a consumer under the option in a 180-day period and, in any event, seem of limited utility at best to “traditional” high-rate lenders):
    • An option modeled on the National Credit Union Administration’s program for payday alternative loans.  Requirements include a principal amount of not less than $200 and not more than $1,000, repayment in two or more fully amortizing, substantially equal payments due no less frequently than monthly and in substantially equal intervals, a term of at least 46 days and not more than six months, an annualized interest rate of not more than 28%, and an application fee of not more than $20, reflecting the actual cost of processing the application.
    • An option under which the total cost of credit does not exceed an annual rate of 36% (excluding a single origination fee of up to $50 or one that is a “reasonable proportion” of the lender’s underwriting costs), the loan term is at least 46 days and not more than 24 months, the loan is repayable in two or more payments that are fully amortizing, substantially equal, and due no less frequently than monthly and in substantially equal intervals, and the lender’s projected default rate on all loans made using this option does not exceed 5%.  If the default rate in any year exceeds 5%, the lender would be required to refund all origination fees paid by all borrowers whose loans were included in the default rate calculation.

For all covered short-term and longer-term credit, the rule would make a lender subject to the following collection restrictions:

  • A lender would generally have to give the consumer at least three business days advance notice before attempting to collect payment by accessing a consumer’s checking, savings, or prepaid account. The notice would have to include information such as the date of the payment request, payment channel, payment amount (broken down by principal, interest and fees), and additional information would be required for “unusual attempts” such as when the payment would be for a different amount than the regular payment or initiated on a date other than the date of a regularly scheduled payment.
  • If two consecutive attempts to collect money from a consumer’s account made through any channel are returned for insufficient funds, the lender could not make any further attempts to collect from the account unless the consumer provided a new authorization.

The rule also contemplates the CFPB’s registration of consumer reporting agencies as “registered information systems” to whom lenders would be required to furnish information about certain covered loans and from whom lenders would be required to obtain consumer reports for use in making ability to repay determinations.

Comments on the proposal are due by September 14, 2016 and the CFPB will undoubtedly require considerable time to address the comments it receives.  The CFPB has proposed that, in general, a final rule would become effective 15 months after publication in the Federal Register.

 

Tomorrow, in conjunction with a field hearing on small dollar loans, the CFPB is expected to issue its proposed rule addressing single-payment payday and auto title loans, deposit advance products, and certain “high cost” installment and open-end loans.  On May 18, 2016, as its final step before issuing the proposal, the CFPB released a report summarizing data on single-payment auto title loans.  The report appeared designed to supply the empirical data that the CFPB believes it needs to justify the limits on auto title loans that it intends to propose.  According to a recent American Banker article, several academics are challenging the CFPB’s data and characterization of auto title loan borrowers.

The report was based on the CFPB’s analysis of about 3.5 million single-payment auto title loans made to over 400,000 borrowers in ten states from 2010 through 2013.  Among the report’s most significant CFPB findings was that about one-fifth of  borrowers who obtain a single-payment auto title loan lose their cars through repossession.  In its press release about the report, the CFPB referred to auto title loan borrowers as “swamped in a cycle of debt.”

In its article, the American Banker reports that Jim Hawkins, an associate law professor at the University of Houston Law Center, found that some states report far lower repossession rates than those used by the CFPB.  Based on an analysis of repossession rates in seven of the 25 states that allow single-payment auto title loans, Professor Hawkins is reported to have found that Texas had the highest repossession rate of 9.94% in 2013.  The article notes that some states such as Oregon and California have very low repossession rates and the CFPB would not release the list of the ten states that it used in its report.

The article also includes comments from Todd Zywicki, a law professor at George Mason University, challenging the  CFPB’s claim that auto title loan borrowers fall into a “cycle of debt” and implicit assumption that an auto title loan default evidences a consumer’s inability to repay and not a choice to default.  Similar to our observations in our blog post about the report, Professor Zywicki is reported to have commented that there are often explanations for default other than inability to repay, such as the condition of the vehicle and the need for repairs.

 

The CFPB has issued a new report entitled “Single-Payment Vehicle Title Lending,” summarizing data on single-payment auto title loans.  The latest report is the fourth report issued by the CFPB in connection with its anticipated rulemaking addressing single-payment payday and auto title loans, deposit advance products, and certain “high cost” installment and open-end loans.  The previous reports were issued in April 2013 (features and usage of payday and deposit advance loans), March 2014 (payday loan sequences and usage), and April 2016 (use of ACH payments to repay online payday loans).

In March 2015, the CFPB outlined the proposals then under consideration and, in April 2015, convened a SBREFA panel to review its contemplated rule.  Since the contemplated rule addressed title loans but the previous reports did not, the new report appears designed to supply the empirical data that the CFPB believes it needs to justify the limits on auto title loans it intends to include in its proposed rule.  With the CFPB’s announcement that it will hold a field hearing on small dollar lending on June 2, the new report appears to be the CFPB’s final step before issuing a proposed rule.

The new report is based on the CFPB’s analysis of about 3.5 million single-payment auto title loans made to over 400,000 borrowers in ten states from 2010 through 2013.  The loans were originated in storefronts by nonbank lenders.  The data was obtained through civil investigative demands and requests for information pursuant to the CFPB’s authority under Dodd-Frank Section 1022.

The most significant CFPB finding is that about a third of borrowers who obtain a single-payment title loan default, with about one-fifth losing their car.  Additional findings include the following:

  • 83% of loans were reborrowed on the same day a previous loan was paid off.
  • Over half of “loan sequences” (which include refinancings and loans taken within 14, 30 or 60 days after repayment of a prior loan) are for more than three loans, and more than a third of loan sequences are for seven or more loans.  One-in-eight new loans are repaid without reborrowing.
  • About 50% of all loans are in sequences of 10 or more loans.

The CFPB’s press release accompanying the report commented: “With auto title loans, consumers risk their car or truck and a resulting loss of mobility, or becoming swamped in a cycle of debt.”  Director Cordray added in prepared remarks that title loans “often just make a bad situation even worse.”  These comments leave little doubt that the CFPB believes its study justifies tight restrictions on auto title loans.

Implicit in the new report is an assumption that an auto title loan default evidences a consumer’s inability to repay and not a choice to default.  While ability to repay is undoubtedly a factor in many defaults, this is not always the case.  Title loans are frequently non-recourse, leaving little incentive for a borrower to make payments if the lender has overvalued the car or a post-origination event has devalued the auto.  Additionally, the new report does not address whether and when any benefits of auto title loans outweigh the costs.  Our clients advise that auto title loans are frequently used to keep a borrower in a car that would otherwise need to be sold or abandoned.

 

The CFPB has announced that it will hold a field hearing on small dollar lending in Kansas City, Missouri on June 2, 2016.  We anticipate the field hearing will coincide with the CFPB’s release of its proposed rule which is expected to cover single-payment payday and auto title loans, deposit advance products, and certain high-rate installment and open-end loans.

On June 15, 2016, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar on the CFPB’s expected proposal: The CFPB’s Proposed Payday/Auto Title/High-Rate Installment Loan Rule: Can Industry Adapt to the New World Order?  The webinar registration form is available here.