On November 15, 2018, in response to a November 7, 2018 letter from Republican Senators, FDIC Chairman Jelena McWilliams announced that the FDIC has engaged outside counsel to investigate the Obama-era Operation Choke Point, under which the FDIC and other government agencies pressured banks not to do business with payday lenders. In her letter, McWilliams said that “[r]egulatory threats, undue pressure, coercion, and intimidation designed to restrict access to financial services for lawful businesses have no place at this agency.”

She appears to mean it. She went on to say that, “[w]e have placed clear limitations on the ability of any FDIC personnel to recommend the termination of account relationships, including requirements that any such recommendations be made in writing, that Regional Directors review such recommendations, and that all such recommendations are reported to the FDIC Board of Directors and Division Directors.” That internal policy is in furtherance of her deep investment in “transparency and accountability at the FDIC.”

She also backed-up the internal policy with an external check. “To ensure that the FDIC’s commitment to integrity remains unequivocally clear, I am asking an outside law firm to review the prior actions taken by the FDIC in [Operation Choke Point] so that I can better ascertain the effectiveness of our response.” “Under my leadership, the FDIC’s oversight responsibilities will be exercised based on our laws and our regulations, not personal or political beliefs,” she concluded.

As we’ve noted in earlier posts on this, litigation is currently pending in the D.C. federal court on prior FDIC administrations’ participation in Operation Choke Point.

Thirteen Republican Senators have sent a letter to FDIC Chairman Jelena McWilliams urging the FDIC to take action to ensure that lawful businesses are no longer at risk of adverse financial consequences as a result of “Operation Choke Point, and its associated culture and Choke Point-like regulatory actions.”

“Operation Choke Point” was a federal enforcement initiative involving various agencies, including the DOJ, OCC, FDIC, and Fed.  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 several payday lenders initiated a lawsuit in D.C. federal district court against the FDIC, Fed, and OCC in which they alleged that certain actions taken by the regulators as part of Operation Choke Point violated the Administrative Procedure Act and their due process rights.  In September 2018, pursuant to a joint stipulation of dismissal, the Fed was dismissed from the lawsuit.  Cross-motions for summary judgment are currently pending before the court.

In their letter, the Senators ask the FDIC if it is the agency’s official position “that lawful businesses should not be targeted by the FDIC simply for operating in an industry that a particular administration might disfavor” and “[i]f so, what [the FDIC is] doing to make sure that bank examiners and other FDIC officials are aware of this policy and have communicated it to regulated institutions?”  They also ask whether there were any communications explaining supervisory expectations of “elevated risk” or “high risk” merchants with regulated institutions that would likely qualify as a rule under the Congressional Review Act that were not properly submitted to Congress and what the FDIC is doing to ensure that its staff does not communicate policy in a matter that is inconsistent with the position of the FDIC’s Board of Directors.

The letter does not reference the FDIC’s January 2015 Financial Institution Letter (FIL) entitled “Statement on Providing Banking Services” that attempted to rectify the damage created by Operation Choke Point.  In the Statement, the FDIC “encourages institutions to take a risk-based approach in assessing individual customer relationships rather than declining to provide banking services to entire categories of customers, without regard to the risks presented by an individual customer or the financial institution’s ability to manage the risk.”  The Statement followed the FDIC’s July 2014 FIL in which the FDIC withdrew the list of “risky” merchant categories (such as payday lenders and money transfer networks) that was included in prior guidance on account relationships with third-party payment processors (TPPPs).  Consistent with the July 2014 FIL and an October 2013 FIL on TPPP relationships, the 2015 FIL advised banks that they were neither prohibited nor discouraged from providing services to customers operating lawfully, provided they could properly manage customer relationships and effectively mitigate risks.  However, unlike the prior FILs, the new FIL expressly acknowledged that “customers within broader customer categories present varying degrees of risk” and should be assessed for risk on a customer-by-customer basis.

 

 

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.”

 

 

Earlier today, the Bureau of Consumer Financial Protection released a Public Statement Regarding Payday Rule Reconsideration and Delay of Compliance Date. Echoing rumors that have been circulating in the industry for several weeks (which we had agreed not to address in our blog), the Statement reads in full as follows:

The Bureau expects to issue proposed rules in January 2019 that will reconsider the Bureau’s rule regarding Payday, Vehicle Title, and Certain High-Cost Installment Loans and address the rule’s compliance date. The Bureau will make final decisions regarding the scope of the proposal closer to the issuance of the proposed rules. However, the Bureau is currently planning to propose revisiting only the ability-to-repay provisions and not the payments provisions, in significant part because the ability-to-repay provisions have much greater consequences for both consumers and industry than the payment provisions. The proposals will be published as quickly as practicable consistent with the Administrative Procedure Act and other applicable law.

Of course, the Bureau is correct in observing that the ability-to-repay (ATR) provisions of the Rule “have much greater consequences for both consumers and industry than the payment provisions.”  That is because the ATR provisions, if allowed to go into effect, would largely kill the industry and thus deprive millions of consumers of a source of credit they deem essential.  Nevertheless, the draconian potential consequences of the ATR provisions do not justify leaving the payment provisions intact. These provisions are unduly complicated. They require hard-to-reach consumers to affirmatively reauthorize lender-initiated payment attempts after two consecutive unsuccessful attempts rather than relying on a simpler and more straightforward notice and opt-out regimen.

Also, while the payment provisions are supposedly designed to prevent excessive NSF fees, as we have pointed out in a comment letter to the Bureau and elsewhere, they treat attempts to initiate payments by debit card, where there is no chance of any NSF fee, the same as other forms of payment that can give rise to NSF fees. This treatment of card payments can only be ascribed to the hostility to high-rate lending characteristic of the former leadership of the Bureau. If the Bureau does nothing else with the Rule’s payment provisions, it should certainly correct this wholly indefensible aspect of the Rule.

We note that the Bureau requested an extension until Monday, October 29, to respond to the preliminary injunction motion by the Community Financial Services Association and Consumer Service Alliance of Texas. If the Bureau files its response Monday, we will likely have more to report.

Addressing the Mortgage Bankers Association (MBA) 2018 Annual Convention in Washington, DC on October 15, 2018, BCFP Acting Director Mick Mulvaney advised that regulation by enforcement is dead, and that he does not care much for regulation by guidance either. He noted to the members that they have a right to know what the law is.

Acting Director Mulvaney advised that if a party is doing something that is against the law, the BCFP will take action against them. However, he advised the difference between the BCFP now from its approach under the prior Director is that if someone is doing something that complies with the law and the BCFP doesn’t like it, the BCFP will not take action.

With regard to UDAAP, Acting Director Mulvaney stated that he believes the concepts of “unfair” and “deceptive” are well established in the law, but that is not so with regard to the concept of “abusive”. He noted he asked his staff to provide examples of what is abusive that is not also either unfair or deceptive. And he signaled that the BCFP will look to engage in rulemaking on abusive.

As we have reported the MBA and other trade groups recently sent a letter to the BCFB seeking reforms in connection with the BCFP’s loan originator compensation rule. When asked by MBA President and CEO Robert Broeksmit about the letter, Acting Director Mulvaney advised that he knew the letter was received and that it is being reviewed by staff, but that he had not actually seen the letter. Mr. Broeksmit then handed Mr. Mulvaney a copy of the letter, drawing laughs from the audience.

With regard to payday lending, Acting Director Mulvaney advised that it can be really dangerous for people given the high interest rates, but that people want it so it exists. He noted he has told payday lenders they exist because bank regulators forced banks out of the business. But he stated that the OCC has signaled it will allow banks back in, and that the way to fix payday lending is through competition.

 

On September 19, 2018, the Georgia based Cooperative Baptist Fellowship (the “Fellowship”) filed a motion to intervene as a defendant in a case filed by the Community Financial Services Association of America Ltd. and the Consumer Service Alliance of Texas challenging the CFPB’s Payday Rule. The lawsuit was filed in April 2018 claiming, among other things, that the CFPB did not follow proper procedure in issuing the Payday Rule; that the CFPB improperly deemed certain lending practices unfair and abusive; that the CFPB’s authority to address unfair and abusive practices is unconstitutional; and that the CFPB’s structure is unconstitutional. The motion to intervene came on the heels of the trade group plaintiffs’ request to lift the stay and motion for a preliminary injunction.  The stay was entered in June.

The Fellowship claims that it has standing to intervene because of its previous efforts to get the Payday Rule written and, once the Rule is implemented, it would be able to redirect the resources it currently devotes to combating payday and vehicle title loans. The Fellowship further argued that it would vigorously defend the lawsuit, while the CFPB might not – citing the CFPB’s plans to reconsider the Rule as well as its willingness to stay the Rule’s compliance date.

In their opposition to the intervention motion, the trade group plaintiffs argued that the Fellowship’s interest in the lawsuit was too tenuous to support intervention, likening the Fellowship’s plea to the interest of any lobbying group seeking to join a lawsuit. They also argued that the Fellowship had not met its burden of overcoming the presumption that the CFPB would not adequately defend this case.  They further noted that the Fellowship could make legal arguments through an amicus brief without intervening.

The CFPB has not yet filed an opposition to the intervention motion and it is unclear whether it will do so.

A scheduling conference is being held by the Court on October 4, 2018.

The Payday Rule is currently set to be implemented by August 19, 2019.

The CFPB is asking the Texas federal district court to give it a 45-day extension to respond to the preliminary injunction motion filed by two trade groups in their lawsuit challenging the CFPB’s final payday/auto title/high-rate installment loan rule (Payday Rule).  The motion seeks a preliminary injunction to block the CFPB from enforcing the Payday Rule and asks the court to act on the motion by November 1.  The trade groups also filed a motion to lift the stay of their lawsuit that the district court had granted despite denying their request for a stay of the Payday Rule’s August 19, 2019 compliance date.

In its motion to extend the response deadline, the CFPB states that, if the stay of the lawsuit were not in effect, its response would be due by September 21.  The 45-day extension is sought if the court grants the trade groups’ motion to lift the stay.  In support of its request, the CFPB states the following:

The relief sought by this motion will not prejudice Plaintiffs. Moreover, to the extent that Plaintiffs aver their members are suffering irreparable harm that justifies Plaintiffs’ request for a ruling from this Court by November 1, the current time constraints are largely of Plaintiffs’ own making.  Plaintiffs did not file this lawsuit challenging the Payday Rule until almost 6 months after that rule was published in the Federal Register.  Plaintiffs then waited 94 days after the Court denied the parties’ joint motion to stay the compliance date of the Payday Rule, including 38 days after the Court denied Plaintiffs’ motion for reconsideration, before submitting their Motion for a Preliminary Injunction.  The Bureau and the Court should not be unduly rushed in arguing and adjudicating these issues as a result of Plaintiffs’ own delay.  The requested extension would, if granted, give the Bureau 45 days to respond to Plaintiffs’ motion.

 

 

 

 

The two trade groups that unsuccessfully attempted to obtain a stay of the August 19, 2019 compliance date for the CFPB’s final payday/auto title/high-rate installment loan rule (Payday Rule) have now filed a Motion for Preliminary Injunction to enjoin the CFPB from enforcing the Payday Rule.  While the Texas federal district court had denied a stay of the compliance date, it had granted the trade groups’ request for a stay of the April 2018 lawsuit they had filed challenging the Payday Rule.  According, concurrently with filing the preliminary injunction motion, the trade groups also filed an Unopposed Motion to Lift the Stay of Litigation.

Early this year, the CFPB announced that it intended to engage in a rulemaking process to reconsider the Payday Rule pursuant to the Administrative Procedure Act (APA) and in its Spring 2018 rulemaking agenda, it indicated that it expects to issue a Notice of Proposed Rulemaking to revisit the Payday Rule in February 2019.  In their Unopposed Motion to Lift the Stay of Litigation, the trade groups state that the CFPB “has noted that it does not expect that rulemaking to be complete before the compliance date.  Moreover, it is impossible to know what the result of that rulemaking will be.”  They assert that because the compliance date has not been stayed, they “now have no choice but to pursue a preliminary injunction” to avoid the irreparable injuries the trade groups’ members will suffer in preparing for compliance with the Payday Rule’s requirements.  They indicate that they have conferred with the CFPB about the motion and that the CFPB has stated that it does not oppose the motion provided the trade groups agree that the CFPB does not have to file an answer in the case pending further court order.  The trade groups agreed to the CFPB’s request.

In the preliminary injunction motion, the trade groups argue that they are likely to succeed on the merits in their lawsuit challenging the Payday Rule because:

  • The Payday Rule was adopted by an unconstitutionally-structured agency.
  • The lending practices prohibited by the Payday Rule do not meet the CFPA’s standard for an act or practice to be deemed “unfair” because extending payday loans without satisfying the Bureau’s “ability to repay” determination is not likely to cause “substantial injury” to consumers, any injury caused by the prohibited practices is “reasonably avoidable,” and any injury that is not reasonably avoidable is “outweighed by countervailing benefits.”
  • The lending practices prohibited by the Payday Rule do not meet the CFPA’s standard for an act or practice to be deemed “abusive” because consumers do not lack “understanding” of the loans covered by the Payday Rule and the prohibited practices do not take “unreasonable advantage” of consumers’ inability to protect their interests.
  • The Payday Rule violates the CFPA provision prohibiting the Bureau from establishing a usury limit.
  • The account access practices prohibited by the Payday Rule do not meet the CFPA’s standards for an act or practice to be deemed “abusive” or “unfair.”

The trade groups also argue that a preliminary injunction is necessary to prevent irreparable harm to their members in the form of the “massive irreparable financial losses” they will suffer if required to comply with the Payday Rule beginning in August 2019.  They assert that these harms are not mitigated by the Bureau’s plans to reconsider the Payday Rule because “[t]he outcome of that rulemaking is uncertain and, in any event, repeal would not remedy the harms that are occurring now.”

Finally, the trade groups contend that the balance of harms and public interest favor a preliminary injunction. With regard to the balance of harms, they assert that there will be no cost to the Bureau in preserving the status quo pending an adjudication of the Payday Rule’s validity and “given its decision to reconsider the Final Rule, the Bureau will actually benefit from an injunction, which will ensure that the Bureau has sufficient time to conduct a thorough and careful reassessment of the rule.”  (emphasis included).  With regard to the public interest, the trade groups assert that the Payday Rule’s “unlawful nature” weighs heavily in favor of an injunction and a stay “will ensure that borrowers whom the rule would otherwise deprive of needed sources of credit will continue to have access to payday loans until the rule’s legality is resolved.”

The trade groups’ motion to stay the compliance date and litigation was filed jointly with the CFPB.  In the preliminary motion, the trade groups state that they conferred with the CFPB and the CFPB stated that it could not take a position on the motion before reading it.  Whether or not the CFPB opposes the motion, we expect consumer advocacy groups, in all likelihood the same groups that opposed the stay motion, will seek to file an amicus brief opposing the preliminary motion.  Should the CFPB not oppose the preliminary injunction motion, the consumer advocacy groups are likely to assert as they did in opposing the stays that their participation is necessary to provide the court with the benefit of adversarial briefing.

We were hopeful that after the district court denied the trade groups’ request for reconsideration of the court’s denial of a stay of the Payday Rule’s compliance date, the CFPB would move quickly to issue a proposal to delay the compliance date pursuant to the APA’s notice-and-comment procedures.  The filing of the preliminary injunction motion suggests that the trade groups are not optimistic that the CFPB will promptly take this course.  Perhaps the CFPB will reveal its plans in its response to the motion.

In light of the CFPB’s prior support for the trade groups’s stay motion, the CFPB might consent to the entry of a preliminary injunction.  Even if it does so, however, there is no certainty that the district court will grant a preliminary injunction.  If the district court were to deny the preliminary injunction motion, the trade groups would have the right to appeal the denial to the Fifth Circuit which already has before it another case which raises the same constitutional challenge to the CFPB that the trade groups have raised.