Hours after the CFPB released its final payday/auto title/high-rate installment loan rule on October 5, 2017, the OCC rescinded its guidance on deposit advance products.  That guidance, entitled Supervisory Concerns and Expectations Regarding Deposit Advance Products published in November 2013 (OCC Bulletin 2013-40), and substantially identical guidance issued by the FDIC on the same day, had effectively precluded banks subject to OCC and FDIC supervision from offering deposit advance products.  We were sharply critical of the prior guidance and applaud the OCC’s action.

Acting Comptroller Keith Noreika, in his statement about the OCC’s action, mentioned the CFPB and the risk of “potentially inconsistent regulatory direction and undue burden as they prepare to implement the requirements of the CFPB’s final [payday loan] rule.”  The Acting Comptroller went further, explaining that the OCC guidance “may even hurt the very consumers it is intended to help, the most marginalized, unbanked and underbanked portions of our society.”  The OCC, therefore, appears to invite banks to consider offering the product.  It remains to be seen whether the FDIC will follow suit.

We think that national banks and federal savings banks (and perhaps other financial institutions) have an opportunity to structure deposit advance products that will fall outside the new CFPB rule, meet supervisory expectations, produce substantial revenues, and provide badly needed credit to consumers whose options may be sharply constrained by the CFPB rule.

We will continue to monitor any developments as they unfold.

It will take a while to digest the CFPB’s nearly 1,700-page release on payday, title and high-rate installment lending but, naturally, I have a number of preliminary observations:

  1. It remains highly uncertain that the Rule will ever go into effect.  Once Director Cordray leaves office, his successor may have very different views on the costs and benefits of these products and may, at a minimum, want to assure himself or herself that there is a strong basis for the Rule.  The CFPB has never established, as it must, a strong empirical case that any consumer injury associated with these loans outweighs off-setting consumer benefits.  The industry will surely litigate this issue and has a good chance of succeeding.  As we have previously speculated in our blog on numerous occasions, we expect that Director Cordray soon will resign to run for governor of Ohio, and, given that his term expires in July of next year regardless, there will be a new director or acting Director at least a year before the rule becomes effective as a result.  His successor may feel that he or she has better things to do with the initial period in office than to defend a badly flawed Rule. Of course, Director Cordray will not need to defend the Rule in industry lawsuits.
  2. The CFPB’s decision to carve longer-term high-rate (>36% APR) loans out of the Rule’s ability-to-repay (ATR) requirements is a big win for the industry.  It undoubtedly reflects the CFPB’s recognition, as reflected in two comment letters we submitted on the proposal, that: (a) the CFPB’s study of installment lending, as opposed to short-term payday and title loans, was particularly weak; and (b) the combination of the Rule’s 36% rate trigger and onerous requirements for longer-term loans effectively established a usury limit, in violation of a provision of Dodd-Frank that explicitly denies the CFPB the power to set usury limits.
  3. While the CFPB made a sensible decision to exclude longer-term loans from the Rule’s ability-to-repay requirements, this prudence was not matched by its treatment of card payments in the Rule’s so-called “penalty-fee prevention” provisions. These provisions apply to both short-term and to longer-term loans with APRs exceeding 36%.  The CFPB professes to impose these requirements to protect consumers against excessive bank NSF charges and account closures yet it applies the requirements not only to ACHs and check transactions but also to debit and prepaid card payments.  This makes no sense since card transactions, by their very nature cannot give rise to bank NSF fees and/or account closures.  Either a card transaction is authorized or it is declined, and no fee is associated with a decline.  To my mind, the application of penalty-fee prevention provisions to card payments is arbitrary and capricious and, accordingly, in violation of the Administrative Procedures Act.
  4. The 21-month deferred effective date, up from 15 months in the proposal, is a win for the industry.
  5. The Rule appears to be good news for lenders focused on providing longer-term title loans, which fall entirely outside the coverage of the Rule.
  6. The Rule, coupled with the OCC’s action withdrawing its prior deposit advance guidance, also appears to be good news for banks interested in providing deposit advance products.  Notably, longer-term deposit advance products will fall entirely outside the Rule (including its penalty-fee prevention provisions, provided that the bank offering the product ensures that its borrowers are never charged overdraft or NSF fees in connection with such loans. We will have additional blog updates on this topic in the coming days.

On November 9, 2017, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “First Takes on the CFPB Small Dollar Rule: What It Means for You.” The webinar registration form is available here.

The CFPB issued its final payday loan rule yesterday in a release running 1,690 pages.  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 final rule becomes effective 21 months after publication in the Federal Register (except for certain provisions necessary to implement the rule’s consumer reporting requirements, which become effective 60 days after the rule’s publication).

On November 9, 2017, from 12 p.m. to 1 p.m. ET, we will hold a webinar, “First Takes on the CFPB Small Dollar Rule: What It Means for You.”  The webinar registration form is available here.

The final rule establishes limitations for a “covered loan,” which can be either (1) any short-term consumer credit with a term of 45 days or less, (2) any longer-term balloon-payment consumer credit, or (3) longer-term consumer credit with a term of more than 45 days and without a balloon payment where (i) the total cost of credit exceeds an annual rate of 36%, and (ii) the lender obtains a form of “leveraged payment mechanism” giving the lender a right to initiate transfers from the consumer’s account.

Among the changes from the CFPB’s proposal: vehicle security is no longer relevant to whether longer-term credit is a “covered loan” and a “leveraged payment mechanism” no longer includes payments obtained through a payroll deduction or other direct access to the consumer’s paycheck.

The final rule excludes from coverage (1) purchase-money credit secured by the car or other consumer goods purchased, (2) real property or dwelling-secured credit if the lien is recorded or perfected, (3) credit cards, (4) student loans, (5) non-recourse pawn loans, (6) overdraft services and overdraft lines of credit, (7) alternative loans that meet conditions similar to those applicable to loans made under the NCUA’s Payday Alternative Loan Program, and (8) subject to certain conditions, employer wage advance programs, no cost-advances, and accommodation loans.

The final rule contains an “ability to repay” requirement for covered short-term credit and longer-term balloon payment credit but provides an alternative.  A lender must choose between:

  • A “full payment test,” under which the lender must make a reasonable determination of the consumer’s ability to repay the loan and cover major financial obligations and living expenses over the term of the loan and the succeeding 30 days.  Under this test, the lender must take account of the consumer’s basic living expenses and obtain and verify evidence of the consumer’s income and major financial obligations  Unlike the proposed rule, the final rule does not require income verification in all instances.  In circumstances where a lender determines that a reliable income record is not reasonably available, such as when a consumer receives some income in cash and spends that money in cash, the lender can reasonably rely on the consumer’s statements alone as evidence of income.  Further new liberality allows a lender to verify housing expenses other than a payment for a debt obligation that appears on a national consumer report by reasonably relying on the consumer’s written statement.  The final rule does not include the proposal’s presumptions of unaffordability.  Among other changes from the proposal, the final rule permits lenders and consumers to rely on income from third parties, such as spouses, to which the consumer has a reasonable expectation of access as part of the ability to repay determination and permits lenders in certain circumstances to consider whether another person is regularly contributing to the payment of major financial obligations or basic living expenses.  A 30-day cooling off period applies after a sequence of three covered short-term or longer-term balloon payment loans.
  • A “principal-payoff option,” under which the lender can make up to three sequential loans in which the first has a principal amount up to $500, the second has a principal amount that is at least one-third smaller than the principal amount of the first, and the third has a principal amount that is at least two-thirds smaller than the principal amount of the first.  A lender could not use this option if (1) the consumer had in the past 30 days an outstanding covered short-term loan or an outstanding longer-term balloon payment loan, and (2) the new loan 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.  When using this option, the lender cannot take vehicle security or structure the loan as open-end credit.

In a major change from the proposal, the final rule does not include an underwriting requirement for covered longer-term credit without a balloon payment.  Instead, for such credit, lenders are subject only to the final rule’s “penalty fee prevention” provisions, which apply to all covered loans.  Under these provisions:

  • If two consecutive attempts to collect money from a consumer’s account made through any channel are returned for insufficient funds, the lender cannot make any further attempts to collect from the account unless the consumer has provided a new and specific authorization for additional payment transfers.  The final rule contains specific requirements and conditions for the authorization.
  • A lender generally must 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 must include information such as the date of the payment request, payment channel, payment amount (broken down by principal, interest, fees, and other charges), and additional information “unusual attempts,” such as when the payment is for a different amount than the regular payment or initiated on a date other than the date of a regularly scheduled payment.

The final rule also requires the CFPB’s registration of consumer reporting agencies as “registered information systems” to whom lenders must furnish information about covered short-term and longer-term balloon payment credit and from whom lenders must obtain consumer reports for use in extending such credit.  If there is no registered information system or if no registered information system has been registered for at least 180 days of the final rule’s 21-month effective date, lenders will be unable to use the “principal-payoff” option.  The CFPB expects that there will be at least one registered information system by the effective date.


Despite the various signs suggesting Director Cordray would resign before Labor Day, it now appears that he intends to remain as Director until at least a date in September.

One of those signs was the notice on the CFPB’s website of the Fall 2017 Credit Union Advisory Council Meeting in Washington, D.C. on September 7, 2017 that originally indicated that Acting Deputy Director Silberman would be giving remarks at the meeting rather than Director Cordray.  The notice has since been revised to indicate that Director Cordray will welcome attendees.

While it is still widely believed that Director Cordray will resign this fall to run for Ohio Governor, the timing of his departure is now a question mark.  Since it is also widely believed that he wants to issue a final payday loan rule before he departs, it is possible Director Cordray had expected to issue a final rule before Labor Day and is delaying his resignation until the final rule is issued.  The final rule is now expected to be narrower in scope than the CFPB’s proposed rule and only cover short-term loans.

The possibility of a connection between the timing of a final rule and Director Corday’s departure prompted a letter to Director Cordray from Rep. Jeb Hensarling, who chairs the House Financial Services Committee.  In his letter, Mr. Hensarling stated that reports which have not been rebutted by the CFPB “suggest that your personal political ambitions may be informing decisions you are making regarding what is supposed to be a nonpartisan and objective rulemaking process governed by the Administrative Procedure Act.  Simply put, there is no valid legal basis for accelerating a federal rulemaking to satisfy an arbitrary deadline necessitated by election dates established under Ohio law.”

Mr. Hensarling also asked Director Cordray, to give the House committee by August 30, his written “categorical denial that political considerations have informed any aspect of [his actions relating to the payday loan rulemaking]” and written “confirmation that [he] intends to serve [his] full statutory term as Bureau Director” or, if Director Cordray intends to leave earlier, “confirmation of the date [he] intend[s] to resign from office.”

According to a Wall Street Journal article published this past weekend, “people familiar with the matter” are reporting that the CFPB’s final payday loan rule will be narrower in its coverage than the CFPB’s proposed rule.

The CFPB’s proposal established limitations for a “covered loan” which could 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 proposal excluded 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.

According to the WSJ article, the final rule is expected to cover only short-terms loans with a term of less than 45 days (presumably subject to the same exclusions contained in the proposal).  The article indicated that the final rule is now undergoing a peer review by other agencies, including the OCC and FDIC, with an early September deadline for completion.  It also reported that a CFPB spokesman indicated that the CFPB is “nearing the end of its rule-making process.”


On July 5, 2017, the U.S. District Court for the District Columbia, in the lawsuit filed in 2014 challenging “Operation Choke Point” — a federal  enforcement initiative involving various  agencies, including the Consumer Protection Branch of the Department of Justice (DOJ), the Federal Depository Insurance Corporation (FDIC), the Federal Reserve (Fed), and the Office of the Comptroller of the Currency —  denied the  agencies’ motions to dismiss and/or for summary judgment and permitted the payday lender-plaintiffs’ due process claims to proceed.

Initiated in 2012, Operation Choke Point targeted banks serving online payday lenders and other companies that have raised regulatory or “reputational” concerns.  In June 2014, the national trade association for the payday lending industry and Advance America, a payday lender, initiated the action against the FDIC, Fed, and the OCC.  The lawsuit alleged that certain actions taken by the agencies as part of Operation Choke Point violated the Administrative Procedure Act (APA) and that Operation Choke Point violated their due process rights.  The court granted the agencies’ motion to dismiss the defendants’ APA claim and, although ruling that the due process claim could proceed, subsequently dismissed the trade association as a party for lack of standing.  Following the addition of  six new payday lenders to the complaint, the agencies moved to dismiss the new payday lenders’ due process claim for lack of standing and failure to state a claim, and moved for summary judgment as to all plaintiffs on the basis that they cannot show that they suffered a deprivation of liberty without due process.

The Court rejected the agencies’ arguments, holding that the newly-added plaintiffs had established both standing and a plausible claim for relief, and concluding that the agencies were not entitled to judgment on any of the plaintiffs’ due process claims.  First, the Court rejected the agencies’ attempt to challenge the new plaintiffs’ allegations of future harm — i.e., their potential for future loss of access to the banking system, and potential preclusion from the payday lending industry — finding that they demonstrated the requisite elements of standing, and stated a plausible claim for relief, by alleging that they previously lost bank accounts as a result of Operation Choke Point, and that they will continue to do so if the agencies’ actions continue.

The Court also held that the agencies’ were not entitled to summary judgment on any of the plaintiffs’ due process claims.  The court rejected the agencies’ argument that plaintiffs could not show a due process violation where they “continue to access the banking system and remain quite profitable.”  According to the court, the agencies had not definitively demonstrated that plaintiffs would “not be put out of business by the continued regulatory pressure from Federal Defendants.”

The Court was also unmoved by the agencies’ argument that plaintiffs “are able to pursue other lines of business.”  In support of that argument, the agencies cited cases finding no due process violation where the plaintiffs were barred from conducting business with the government, but remained free to transact with private individuals and entities.  The court held that these cases, which distinguished between a person’s ability to sell services to the government versus one’s ability to sell services at all,  did “little to support [the agencies’] argument that the Due Process Clause tolerates the destruction of an entire line of Plaintiffs’ business, so long as there are other lines of business they can pursue.” Citing to the Plaintiffs’ Opposition, the Court observed that “it would be of little consolation to an attorney, driven from his practice by improper governmental stigma, that McDonalds is still hiring.”

Despite the change to a Republican Administration, lawmakers continue to raise concerns that Operation Choke Point remains in operation.  In a letter to Attorney General Jeff Sessions dated July 6, 2017, Republican Senators Mike Crapo and Thom Tillis stated that “[w]hile many would claim that this program has ceased to operate, this does not appear to be the case as we continue to receive complaints that indicate the program is still in effect.”  The Senators asked “that DOJ review all options available to ensure lawful businesses are able to continue to operate without fear of significant financial consequences, which should include taking the additional step of issuing a Statement of Enforcement Policy that Operation Choke Point is no longer in effect and that administrative subpoenas issued pursuant to DOJ’s civil investigative authority under [FIRREA] may be issued only where there is an articulable suspicion of illegal activity being conducted or facilitated by the intended recipient of the subpoena.”

Legislation has also been proposed in the House, with Republican Congressman Blaine Leutkemeyer (R-Mo.) introducing a bill (H.R. 2706) that seeks to prevent future recurrences of Operation Choke Point by limiting the authority of banking regulators and the DOJ.

I recently blogged about the rumor I heard from a reliable source that the CFPB will issue a final arbitration rule by the end of July.  That rumor appears to be gaining traction, with a major industry trade group telling its members today that it expects the CFPB to issue a final arbitration rule “very soon.”

If and when the CFPB issues a final rule, it will have a compliance date that is the 211th day after the rule is published in the Federal Register (which is approximately seven months after publication).  The same source who told me that a final rule will be issued by the end of July also told me that Director Cordray will leave the CFPB in the fourth quarter of this year to run for Ohio governor.  If a final rule were to be issued this month and Director Cordray were to resign by year-end, that would mean compliance with a final arbitration rule would not yet be required when Director Cordray leaves.

Assuming a new CFPB Director appointed by President Trump was in place before the compliance date of a final arbitration rule, could the new Director stay the compliance date?  The decision issued earlier this week by the U.S. Court of Appeals for the D.C. Circuit in Clean Air Council v. Pruitt raises questions as to whether Director Cordray’s successor could validly issue such a stay unilaterally.  In that decision, the D.C. Circuit ruled that the EPA lacked authority to stay the compliance date of an EPA rule concerning methane and other greenhouse gas emissions and vacated the stay.

The EPA rule became effective in August 2016 and required regulated entities to conduct a monitoring survey by June 3, 2017.  After several industry associations filed a petition with the EPA seeking reconsideration of the rule and a stay of the compliance date pending reconsideration, the new EPA Administrator appointed by the Trump Administration announced that the EPA was convening a proceeding for reconsideration and issued a 90-day stay of the compliance date.  The EPA thereafter published a notice of proposed rulemaking and announced its intention to extend the stay for two years while it reconsidered the rule.  Several environmental groups then challenged the stay in the D.C. Circuit.

While agreeing with the EPA that an agency’s decision to grant a petition to reconsider a regulation is not a reviewable final agency action, the D.C. Circuit ruled that it did have authority to determine whether the stay was lawful.  According to the D.C. Circuit, by suspending the rule’s compliance date, the EPA’s stay was essentially an order delaying the rule’s effective date and therefore “tantamount to amending or revoking a rule.”  As a result, the D.C. Court concluded that it had jurisdiction to review the stay order’s validity.

The D.C. Circuit rejected the EPA’s reliance on its broad discretion to reconsider its own rules, observing that while agencies do have such broad discretion, they must comply with the Administrative Procedure Act (APA), including its notice and comment requirements.  It also rejected the EPA’s argument that it had inherent authority to stay or not enforce a final rule while it reconsidered the rule, and instead deemed it necessary for the EPA to “point to something in either the Clean Air Act or the APA” giving it authority to stay the rule.  The court then concluded that the only provision cited by the EPA, a Clean Air Act provision, did not give it the claimed authority because that provision only allowed a stay if reconsideration was mandatory and the court found reconsideration was not required.  However, the court also noted that “nothing in this opinion in any way limits the EPA’s authority to reconsider the final rule and to proceed with its June 16 NPRM.”

Based on the  D.C. Circuit’s Clean Air Council decision, it appears that while a new CFPB Director could issue a NPRM to reconsider a final arbitration rule, he or she might be unable to unilaterally stay the final rule’s compliance date.  Instead, it could be necessary for the new Director to propose a stay of the final rule pending its reconsideration that would be subject to notice and comment.

It is also possible that the CFPB will issue a final payday loan rule in the next few months.  Since the CFPB stated in its proposed rule that a final rule would generally not become effective until 15 months after its publication in the Federal Register and Director Cordray’s term expires in July 2018, even if Director Cordray stays at the CFPB until the end of his term, a new CFPB Director should be in place before a final payday loan rule becomes fully effective. However, any stay of a final payday loan rule’s effective date by a new Director could similarly be subject to notice and comment.

Other possible routes exist for overturning a final arbitration or payday loan rule.  Either rule could be invalidated through legislation eliminating the CFPB’s authority to issue such rule, a resolution of disapproval under the Congressional Review Act, or a lawsuit challenging the rule’s validity based on the CFPB’s failure to comply with Section 1028 of Dodd-Frank (which authorized the CFPB to regulate pre-dispute consumer financial services arbitration provisions) and/or the APA.


We recently reported on a bill introduced in the House of Representatives by Congressman Dan Kildee (D-Michigan) that would amend the Military Lending Act (“MLA”) to require that creditors provide additional disclosures to covered members of the armed forces and their families. The text of H.R. 2697 is now available.

Titled the “Transparency in Military Lending Act of 2017,” the bill would add the following items to the list of mandatory disclosures required under the MLA:

  • A statement that the Department of Defense (“DoD”) and each service branch offers a variety of financial counseling services.
  • A statement that other, lower interest rate loans, including potentially 0 percent interest loans, may be available through other financial institutions and military relief societies.
  • Contact information for the nearest Department of Defense financial counseling office.
  • A statement of the actual cost of the extension of credit, prepared as an amortization table showing what the cost to the member or dependent will be if the extension of credit is paid off at different points over time.

H.R. 2697 would require the disclosures to be provided on a single sheet of paper and be in a bold, 14-point font.  In addition, the bill would require creditors to (1) obtain separate, signed acknowledgments for each of the four disclosures and (2) compile and make publicly available a list of Department of Defense financial counseling offices. As the bill is drafted, the additional disclosures appear to be required for any consumer credit covered by the MLA, as currently implemented by the DoD.  Nevertheless, in a subsection titled “TRANSPARENCY FOR PAYDAY LOANS AND VEHICLE LOANS,” the bill separately provides that “the term ‘consumer credit’ shall include ‘payday loans’ and ‘vehicle title loans’ as those terms were defined” by the MLA regulations in effect on July 1, 2015.  Perhaps Congressman Kildee expects the scope of the bill to be narrowed during the negotiation process to reach only payday and vehicle title loans.  Or perhaps he was uncertain whether the new regulations, which went into effect on October 1, 2015, still cover payday and vehicle title loans (they do).

If unedited, H.R. 2697 would represent a significant expansion of the MLA’s already onerous disclosure requirements.   While the bill does not expressly call for promulgation of new rules, the DoD would likely have to prescribe additional regulations if it becomes law.  For instance, the bill is bereft of details concerning the cost of credit disclosure other than to say it must be prepared as an amortization table showing the cost of credit if the credit is paid off “at different points over time.”

The bill has been referred to the House Armed Services Committee, and we will provide updates as developments occur.

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.