The Ninth Circuit recently issued its opinion in CFPB v. Great Plains Lending, LLC, et al., in which three tribal-affiliated, for-profit lending companies (“Tribal Lenders”) challenged the authority of the CFPB to issue civil investigative demands (CIDs) against Native American tribes.

In 2012, the CFPB issued CIDs against the Tribal Lenders regarding their advertising, marketing, origination, and collection of small-dollar loan products. In response, the Tribal Lenders claimed that the CFPB lacked jurisdiction to investigate them and, after their offer of cooperation was rejected by the Bureau, challenged the CIDs in a California federal court. The district court granted the CFPB’s petition to enforce the CIDs and the Tribal Lenders appealed.

Summarizing precedent, the Ninth Circuit concluded that Dodd-Frank—a “law of general applicability”—applies to tribes unless: 1) the law touches on exclusive rights of tribal self-governance; 2) the application of the law to tribes would violate treaties; or 3) Congress expressed its intent that the law should not apply to tribes. The Tribal Lenders did not argue that the CIDs violated a treaty and their lending involved non-tribal customers. Accordingly, the panel’s decision scrutinized whether Congress intended the Act’s investigative authority to include tribes.

Dodd-Frank provides that the Bureau may issue a CID whenever it has reason to believe that a “person” may have information relevant to a violation. The Act defines “person” as “an individual, partnership, company, corporation, association (incorporated or unincorporated), trust, estate, cooperative, organization, or other entity.” In contrast, the Act defines “States” to include, in part, “any federally recognized Indian tribe as defined by the Secretary of the Interior.” The Tribal Lenders argued that the definitions were mutually exclusive. In other words, Congress intended to exempt tribes from the CFPB’s investigative authority by way of excluding tribes from the definition of “person.”

The Ninth Circuit was not persuaded. The panel emphasized that Dodd-Frank created a list of exempt entities with “great specificity” and this list of exemptions did not included tribal entities.  In the court’s view, the Tribal Lenders’ “definitional” argument only established “attenuated references” that did not amount to an express or implied intent to exempt tribes. Notably, however, the Ninth Circuit’s inquiry was limited to whether the CFPB’s authority was “plainly lacking” because courts apply less scrutiny to jurisdictional challenges in pre-complaint investigations.

While this decision addresses the powers of the CFPB under Dodd-Frank, and not the powers of state authorities or private litigants, it nevertheless creates a significant gap in the protection that Tribes and their partners perceived they had in providing consumer financial services to the public.

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’s Fall 2016 rulemaking agenda has been published as part of the Fall 2016 Unified Agenda of Federal Regulatory and Deregulatory Actions.  The preamble indicates that the information in the agenda is current as of October 19, 2016.  Accordingly, given the results of the Presidential election, including its potential impact on the CFPB’s leadership, there is likely to be a post-election reevaluation by the CFPB of its agenda.  The agenda sets the following timetables for key rulemaking initiatives:

Arbitration.  The CFPB released its proposed arbitration rule in May 2016 and the comment period ended on August 22, 2016.  The Fall 2016 agenda indicates that the CFPB “is reviewing and considering comments on the proposed rule” as it “considers development of a final rule for early 2017.”  The agenda gives a February 2017 estimated date for a final rule.  In recent days, we have heard speculation that the CFPB will issue a final rule before Donald Trump’s inauguration as President on January 20.  As we discussed in a recent blog post, a final arbitration rule or other new final rules issued by the CFPB (and potentially any final rules issued since late May 2016) could be nullified by Congress under the Congressional Review Act (CRA).  The CRA establishes a special set of procedures that allow Congress to pass a joint resolution disapproving a rule which cannot be filibustered in the Senate and can be passed by only a simple majority vote.

Payday, title, and deposit advance loans.  The CFPB released its proposed rule on payday, title, and high-cost installment loans in June 2016 and the comment period ended on October 22, 2016.  While there has also been speculation that the CFPB will attempt to finalize a rule by January 20, that possibility seems more remote given the unprecedented level of comments (approximately one million) received by the CFPB and the complexity of the proposed rule.  The Fall 2016 agenda does not give an estimated date for a final rule.

Debt collection.  In November 2013, the CFPB issued an Advance Notice of Proposed Rulemaking concerning debt collection.  In July 2016, it issued an outline of the proposals it is considering in anticipation of convening a SBREFA panel.  It has been reported that the SBREFA panel for the CFPB’s debt collection rulemaking met with small entity representatives (SER) at the end of August 2016.  Within 60 days from the date it is considered to have “convened,” the panel must submit a report to the CFPB on the input received from the SERs.  However, the report will not become public until the CFPB issues its proposed rule.

The CFPB’s proposals only cover “debt collectors” that are subject to the FDCPA.  They are not intended to apply to a first-party creditor collecting its own debts or to a servicer when collecting debts that were current when servicing began to the extent the creditor or servicer would not be a “debt collector” under the FDCPA.  When it issued the proposals, the CFPB stated that it “expects to convene a second proceeding in the next several months” for creditors and others engaged in debt collection not covered by the proposals, noting that it believes a separate SBREFA process “is the most efficient way to proceed, particularly because it will allow participants to provide more focused and specific insights.”

In the Fall 2016 agenda, the CFPB states that it “expects to convene a separate SBREFA proceeding focusing on companies that collect their own debts in 2017.”  The agenda gives a February 2017 estimated date for further prerule activities.

Overdrafts.  The CFPB issued a June 2013 white paper and a July 2014 report on checking account overdraft services.  In the Fall 2016 agenda, as it did in its Fall 2015 and Spring 2016 agendas, the CFPB states that it “is continuing to engage in additional research and has begun consumer testing initiatives related to the opt-in process.”  Although the Spring 2016 agenda estimated an August 2016 date for further prerule activities, the new agenda moves that date to January 2017.  As we have previously noted, the extended timeline may reflect that the CFPB feels less urgency to promulgate a rule prohibiting the use of a high-to-low dollar amount order to process electronic debits because most of the banks subject to its supervisory jurisdiction have already changed their processing order.

Larger participants.  As it did in its Fall 2015 and Spring 2015 agendas, the CFPB states in the Fall 2016 agenda that it is considering “larger participant” rules “in markets for consumer installment loans and vehicle title loans for purposes of supervision.”  It also repeats its previous statement that the CFPB is “also considering whether rules to require registration of these or other non-depository lenders would facilitate supervision, as has been suggested to the Bureau by both consumer advocates and industry groups.”  (Pursuant to Dodd-Frank Section 1022, the CFPB is authorized to “prescribe rules regarding registration requirements applicable to a covered person, other than an insured depository institution, insured credit union, or related person.”)  While the Spring 2016 agenda estimated a December 2016 date for prerule activities, the new agenda estimates a May 2017 date.

Small business lending data.  Dodd-Frank Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.  Such data include the race, sex, and ethnicity of the principal owners of the business.  While the Spring 2016 agenda estimated a December 2016 date for prerule activities, the new agenda estimates a March 2017 date.  The CFPB states in the Fall 2016 agenda that it “is focusing on outreach and research to develop its understanding of the players, products, and practices in business lending markets and of the potential ways to implement section 1071.  The CFPB then expects to begin developing proposed regulations concerning the data to be collected and determining the appropriate procedures and privacy protections needed for information-gathering and public disclosure under this section.”

Mortgage rules.  In July 2016, the CFPB issued a proposed rule containing both substantive amendments and technical corrections to the final TILA-RESPA Integrated Disclosure rule.  The comment period on the proposal ended on October 18, 2016 and the Fall 2016 agenda gives a March 2017 estimated date for issuance of a final rule.  The Fall 2016 agenda gives a March 2017 estimated date for a proposed rule “to amend certain provisions of Regulation C to make technical corrections and to clarify certain requirements under Regulation C” and a proposed rule “to amend Regulation B to reconcile how creditors may collect information about the ethnicity and race of applicants to clarify how financial institutions and creditors subject to Regulation C and Regulation B may comply with both regulations.”

Student Loan Servicing and Consumer Reporting.  As they were in the Fall 2015 and Spring 2016 agendas, both of these topics continue to be listed in the Fall 2016 agenda as “long-term action” items with no estimated dates for further action.  The Office of Management and Budget defines “long-term action” items as “items under development but for which an agency does not expect to have a regulatory action within 12 months after publication of this edition of the Unified Agenda.”

The court-appointed receiver for a group of interrelated companies sued by the CFPB in September 2014 for engaging in allegedly unlawful online payday lending activities has filed a malpractice lawsuit against the law firm that assisted in drafting the loan documents used by the companies.

The companies sued by the CFPB included entities that were directly involved in either making payday loans to consumers or providing loan servicing and processing for those loans.  The CFPB alleged that the defendants engaged in deceptive and unfair acts or practices in violation of the Consumer Financial Protection Act as well as violations of the Truth in Lending Act and the Electronic Fund Transfer Act.  According to the CFPB’s complaint, the defendants’ unlawful actions included providing TILA disclosures that did not reflect the automatic renewal feature and conditioning the loans on the consumer’s repayment through preauthorized electronic funds transfers.

According to the receiver’s complaint, the companies’ payday lending was initially done through entities incorporated in Nevis and subsequently done through entities incorporated in New Zealand.  The companies’ loan servicing and processing (including customer service) was done through two entities that were incorporated in Missouri and maintained offices, employees, and mailing addresses in Missouri.

The receiver alleges that the law firm assisted in drafting the loan documents which, on their face, violated the TILA, EFTA and CFPA.  He claims that the law firm committed attorney malpractice and breached its fiduciary obligations to the companies by failing to advise them that because of the U.S. locations of the servicing and processing entities, the loan documents used by the companies had to comply with the TILA and EFTA, and that once the CFPA went into effect, the servicing and processing entities could also be liable for such violations as “covered persons” under the CFPA.

The Small Business Administration’s Office of Advocacy has submitted a comment letter on the CFPB’s proposed payday loan rule that raises concerns about the proposal’s economic impact on small businesses and encourages the CFPB to make various changes to reduce the burden on small businesses.  The letter notes that because Advocacy is an independent office within the U.S. Small Business Administration, the views expressed by Advocacy do not necessarily reflect the views of the SBA or the Administration.

Prior to issuing its proposed payday loan rule, the CFPB convened a SBREFA panel that met with small entity representatives (SERs) to provide input on the proposals under consideration by the CFPB.  The Chief Counsel for Advocacy was a member of the SBREFA panel.  Following the issuance of the proposal, Advocacy held three roundtables to provide an opportunity for all small businesses (such as those that did not serve as SERs) to provide input on the CFPB’s proposal.  According to the comment letter, the roundtable attendees included storefront payday lenders, online lenders, banks, credit unions, tribal representatives, trade associations representing small businesses, and government representatives.  Some of the attendees had served as SERs and the CFPB attended all three roundtables.

In its comment letter, Advocacy raises concerns with various aspects of the proposal based on the input received from roundtable attendees, including the following:

  • The CFPB has underestimated the potential impact of its proposal on small entities, having limited its Regulatory Flexibility Act analysis to the costs of the new recordkeeping system, the costs of obtaining verification evidence, and the costs of making an ability to pay (ATR) determination consistent with that evidence.  The CFPB has not provided an adequate estimate of the aggregate impact that the ATR requirements may have on the revenues of small entities if their customers no longer qualify for loans.  Advocacy encourages the CFPB to include these additional costs in its analysis of the proposal’s economic impact.
  • Advocacy encourages the CFPB to eliminate some of the ATR requirements such as the credit check requirement which will be costly to small lenders.
  • Advocacy encourages the CFPB to eliminate a cooling-off period because of the reduction in revenues that will result or, at a minimum, to provide a cooling off period that is less than 30 days
  • Advocacy encourages the CFPB to provide an emergency exception to the presumption of unaffordability and provide clear guidance on the circumstances that would qualify for the exception.
  • Advocacy seeks an exemption for small businesses operating in states that currently have payday loan rules and for small credit unions.
  • Advocacy encourages the CFPB to allow at least 24 months after publication of a final rule for small businesses to comply.

In addition, because the CFPB’s proposal “may deprive consumers of a means of addressing their financial situation,” Advocacy encourages the CFPB “to reconsider its proposal and develop requirements that protect consumers without jeopardizing their access to legitimate credit in states that do not currently regulate payday lending.”  Advocacy also states that “[i]f the CFPB believes that it is necessary to move forward at this juncture…Advocacy further encourages the CFPB to perform additional research to determine the impact of the changes on small entities and consumers in those states prior to implementing permanent regulations.”

 

 

The comment period for the CFPB’s proposed rule on Payday, Title and High-Cost Installment Loans ended Friday, October 7, 2016.  The CFPB has its work cut out for it in analyzing and responding to the comments it has received.

We have submitted comments on behalf of several clients, including comments arguing that: (1) the 36% all-in APR “rate trigger” for defining covered longer-term loans functions as an unlawful usury limit; (2) multiple provisions of the proposed rule are unduly restrictive; and (3) the coverage exemption for certain purchase-money loans should be expanded to cover unsecured loans and loans financing sales of services.  In addition to our comments and those of other industry members opposing the proposal, borrowers in danger of losing access to covered loans submitted over 1,000,000 largely individualized comments opposing the restrictions of the proposed rule and individuals opposed to covered loans submitted 400,000 comments.  So far as we know, this level of commentary is unprecedented.  It is unclear how the CFPB will manage the process of reviewing, analyzing and responding to the comments, what resources the CFPB will bring to bear on the project or how long it will take.

Like other commentators, we have made the point that the CFPB has failed to conduct a serious cost-benefit analysis of covered loans and the consequences of its proposal, as required by the Dodd-Frank Act.  Rather, it has assumed that long-term or repeated use of payday loans is harmful to consumers.

Gaps in the CFPB’s research and analysis include the following:

  • The CFPB has reported no internal research showing that, on balance, the consumer injury and costs of payday and high-rate installment loans exceed the benefits to consumers.  It finds only “mixed” evidentiary support for any rulemaking and reports only a handful of negative studies that measure any indicia of overall consumer well-being.
  • The Bureau concedes it is unaware of any borrower surveys in the markets for covered longer-term payday loans.  None of the studies cited by the Bureau focuses on the welfare impacts of such loans.  Thus, the Bureau has proposed to regulate and potentially destroy a product it has not studied.
  • No study cited by the Bureau finds a causal connection between long-term or repeated use of covered loans and resulting consumer injury, and no study supports the Bureau’s arbitrary decision to cap the aggregate duration of most short-term payday loans to less than 90 days in any 12-month period.
  • All of the research conducted or cited by the Bureau addresses covered loans at an APR in the 300% range, not the 36% level used by the Bureau to trigger coverage of longer-term loans under the proposed rule.
  • The Bureau fails to explain why it is applying more vigorous verification and ability to repay requirements to payday loans than to mortgages and credit card loans—products that typically involve far greater dollar amounts and a lien on the borrower’s home in the case of a mortgage loan—and accordingly pose much greater risks to consumers.

We hope that the comments submitted to the CFPB, including the 1,000,000 comments from borrowers, who know best the impact of covered loans on their lives and what loss of access to such loans will mean, will encourage the CFPB to withdraw its proposal and conduct serious additional research.

 

The Consumer Financial Services Association of America (CFSA) issued a statement in which it reported that documents it received from the CFPB in response to a Freedom of Information (FOIA) request filed on December 31, 2015 “reveal for the first time more than 12,000 positive testimonials that payday loan customers submitted to the [CFPB] as part of the Bureau’s “Tell Your Story” initiative.”

According to the CFSA, during the five-year period covered by the FOIA request, 12,308 comments (or more than 98%) of the 12,546 comments submitted on short-term loans praised the industry and its products and services, or otherwise indicated positive experiences.  The CFSA reported that the FOIA documents revealed that only an extremely small number of critical payday lending comments were submitted to the CFPB – just 240 or less than 2%.  (According to the CFSA, of the 240 negative comments, 84 comments were mistakenly categorized as payday lending comments.)

The CFSA observed that this data is consistent with complaint data from the CFPB and FTC.  It stated that “[s]ince the CFPB’s complaint portal came online in 2011, complaints regarding payday loans have been miniscule – just 1.5% of all complaints.  Meanwhile, these complaints continue to decline.”  The CFSA also stated that “[i]n its summary of 2015 consumer complaints, the FTC found that just 0.003% of more than three million complaints related to payday lending.”

The CFPB issued its payday loan proposal in June 2016 and comments are due by October 7, 2016.  The CFSA asserted that, by pursuing this proposal, the CFPB is “ignoring the positive experiences shared by consumers.”

 

The Small Business Administration’s Office of Advocacy will host a roundtable in London, Kentucky on September 14, 2016 on the CFPB’s proposed payday loan rule.  As the Office of Advocacy is an independent office within the U.S. Small Business Administration, the views expressed by the Office of Advocacy do not necessarily reflect the views of the SBA or the Administration.  According to the Office, the roundtable will focus on the proposal’s potential economic impact on small entities and rural communities and feasible alternatives that might be available that would achieve the regulatory objectives in a less costly way.  The tentative agenda indicates that a CFPB representative has been invited to attend.

Prior to issuing its proposed payday loan rule, the CFPB convened a SBREFA panel that met with small entity representatives (SERs) to provide input on the proposals under consideration by the CFPB.  The Chief Counsel for Advocacy was a member of the SBREFA panel.  We understand that the Office of Advocacy views the roundtables as an opportunity for all small businesses (such as those that did not serve as SERs) to provide input on the CFPB’s proposal.  The Office of Advocacy has indicated that it is planning to hold additional roundtables on the CFPB’s payday loan proposal in Madison, WI and Washington, D.C. and submit a comment letter to the CFPB based on the input received at the roundtables.

We understand that the Office of Advocacy expects to post information about the roundtables on its website.

 

The CFPB is publishing a notice in tomorrow’s Federal Register to correct the comment deadline for its payday loan Request for Information (RFI).  The corrected deadline will be November 7, 2016.

The RFI seeks feedback regarding consumer protection concerns pertaining to (1) loan products outside the scope of the CFPB’s proposed payday loan rule, and (2) “risky” credit practices not covered by the proposed rule.

Last Friday, the CFPB’s proposed payday loan rule and RFI were published in the Federal Register.  When they were issued in June, the proposal and RFI had comment deadlines of, respectively, September 14, 2016 and October 14, 2016.  In the version published in the Federal Register, the comment deadline for the payday loan proposal was extended to October 7.  However, October 14 remained the comment deadline for the RFI in the published version.

 

 

 

 

 

The CFPB’s proposed payday loan rule and related Request for Information (RFI) were published in this past Friday’s Federal Register.  The RFI seeks feedback regarding consumer protection concerns pertaining to (1) loan products outside the scope of the proposed payday loan rule, and (2) “risky” credit practices not covered by the proposed rule.

When they were issued in June, the proposal and RFI had comment deadlines of, respectively, September 14, 2016 and October 14, 2016.  In the version published in the Federal Register, the comment deadline for the payday loan proposal is extended to October 7.  However, October 14 remains the comment deadline for the RFI in the published version.