The CFPB is proposing to rescind the ability-to-repay provisions of its payday loan rule and delay the provisions’ compliance date while leaving in place the rule’s troublesome payment provisions and their August 19 compliance date.  In this week’s podcast, we look at the CFPB’s rationale for rescinding the ATR provisions, what the payment provisions require and the implementation challenges they present, how industry input could improve the final outcome, the potential impact of the pending litigation challenging the rule, and possible legal challenges to the proposals.

Click here to listen to the podcast.

 

 

The CFPB’s proposal to revise its final payday/auto title/high-rate installment loan rule to rescind the rule’s ability-to-repay (ATR) provisions in their entirety and its proposal to delay the compliance date for the ATR provisions until November 19, 2020 were published in today’s Federal Register.  The CFPB’s proposals would leave unchanged the rule’s troublesome payment provisions and continue to require compliance by August 19 with those provisions.

The publication of the proposals starts the clock running on the comment periods.  Comments on the proposal to rescind the ATR provisions are due on or before May 15, 2019.  Comments on the proposal to delay the compliance date for the ATR provisions are due on or before March 18, 2019.

On February 21, 2019, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “CFPB Payday Lending Rule: Status and Prospects.”  The webinar registration form is available here.

 

 

Comptroller of the Currency Joseph Otting issued a statement today in support of the CFPB’s proposal that would rescind in their entirety the ability-to-repay (ATR) provisions in its final payday/auto title/high-rate installment loan rule.  (The CFPB has also proposed to delay the mandatory compliance date for the ATR provisions until November 19, 2020 but took no action to change the rule’s payment provisions or the August 19, 2019 compliance date for the payment provisions.)

In his statement, Comptroller Otting calls the proposal “an important and courageous step that will allow banks and other responsible lenders to again help consumers meet their short-term small-dollar needs.”  With regard to bank small-dollar loans, he observes that “[b]anks may not be able to serve all of this large market, but they can reach a significant portion of it and bring additional options and more competition to the marketplace while delivering safe, fair, and affordable products that promote the long-term financial goals of their customers.”

In May 2018, the OCC issued a bulletin encouraging the banks it supervises “to offer responsible short-term, small-dollar installment loans, typically two to 12 months in duration with equal amortizing payments, to help meet the credit needs of consumers.”  The bulletin was intended “to remind banks of the core lending principles for prudently managing the risks associated with offering short-term, small-dollar installment lending programs.”

When the OCC withdrew its prior restrictive deposit advance product guidance in October 2017, we commented that the OCC appeared to be inviting banks to consider offering the product.  The bulletin appeared to confirm that the OCC intended to invite the financial institutions it supervises to offer similar products to credit-starved consumers.  However, it suggested that such  products should be even-payment amortizing loans with terms of at least two months.  We observed that it might or might not have been a coincidence that the products the OCC described in the bulletin would not have been subject to the ATR requirements of the CFPB’s payday loan rule (or potentially to any of the rule’s requirements).

Assuming the ATR requirements are rescinded as proposed, we hope the OCC will provide additional guidance encouraging the banks it supervises to offer a wider range of small-dollar loan products.  We are aware of at least one national bank and one state member bank that currently offer short-term deposit advances to their customers.

 

The CFPB has issued highly-anticipated proposed revisions to its final payday/auto title/high-rate installment loan rule (Rule) that would rescind the Rule’s ability-to-repay provisions in their entirety (which the CFPB refers to as the “Mandatory Underwriting Provisions”).  The Bureau will take comments on the proposal for 90 days after its publication in the Federal Register.  In a separate proposal, the CFPB has proposed a 15-month delay in the Rule’s August 19, 2019 compliance date to November 19, 2020 that would apply only to the Mandatory Underwriting Provisions.  This proposal has a 30-day comment period.  Importantly, the proposals would leave unchanged the Rule’s payment provisions and the August 19 compliance date for such provisions.

On February 21, 2019, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “CFPB Payday Lending Rule: Status and Prospects.”  The webinar registration form is available here.

Rescission of Mandatory Underwriting Provisions.  The Mandatory Underwriting Provisions, which the Bureau proposes to rescind, consist of the provisions that: (1) deem it an unfair and abusive practice for a lender to make certain “covered loans” without determining the consumer’s ability to repay; (2) establish a “full payment test” and alternative “principal-payoff option;” (3) require the furnishing of information to registered information systems to be created by the CFPB; and (4) related recordkeeping requirements.  In the proposal’s Supplementary Information, the CFPB explains why it now believes that the studies on which it primarily relied do not provide “a sufficiently robust and reliable basis” to support its determination that a lender’s failure to determine a borrower’s ability to repay is an unfair and abusive practice.  It also declines to use its rulemaking discretion to consider new disclosure requirements regarding the general risks of reborrowing, observing that “there are indications that consumers potentially enter into these transactions with a general understanding of the risks entailed, including the risk of reborrowing.”  The proposal seeks comments on the various determinations that form the basis of the CFPB’s conclusion that rescission of the Mandatory Underwriting Provisions is merited.

Preservation of Payment Provisions.  The CFPB is not proposing to change the Rule’s provisions establishing certain requirements and limitations on attempts to withdraw payments from a consumer’s account (Payment Provisions) nor is it proposing to delay the August 19 compliance date for such provisions.  Rather, it has declared the Payment Provisions to be “outside the scope of” the proposal. In the Supplementary Information, however, the Bureau notes that it has received “a rulemaking petition to exempt debit payments” from the Payment Provisions and “informal requests related to various aspects of the Payment Provisions or the Rule as a whole, including requests to exempt certain types of lenders or loan products from the Rule’s coverage and to delay the compliance date for the Payment Provisions.”  The Bureau states that it intends “to examine these issues” and commence a separate rulemaking initiative (such as by issuing a request for information or notice of proposed rulemaking) if it “determines that further action is warranted.”

We are disappointed that the CFPB has excluded the Payment Provisions from its proposals since they raise numerous issues that merit reconsideration and/or clarification.  See our legal alert for a list of some of the troublesome issues we have noted.  The Supplementary Information suggests that the Bureau may be receptive to informal requests to revisit various Payment Provisions, and our Group intends to accept this invitation to comment.  In addition to addressing issues we have identified to date, we also propose to include in our comment letter subjects brought to our attention by our clients and other affected parties.

 

 

The CFPB announced that it has entered into a settlement with the owners of payday loan retail outlets that operated under the name “Cash Tyme” in seven states to resolve alleged violations of the Consumer Financial Protection Act, the Gramm-Leach-Bliley Act/ Regulation P, and the Truth in Lending Act/ Regulation Z.  The consent order requires Cash Tyme to pay a civil money penalty of $100,000.

The CFPB found that Cash Tyme had engaged in unfair acts or practices in violation of the CFPA by conduct that included:

  • Having inadequate processes to prevent ACH debits of accounts of customers who no longer owed the amounts debited or to accurately and promptly identify and refund overpayments, with such conduct having likely resulted in NSF or overdraft fees to customers whose accounts were wrongfully debited
  • Routinely making calls to third parties to collect debts, including to a customer’s employer, supervisor, and personal references (with some of such calls placed despite Cash Tyme having received do-not-call requests)

The CFPB found that Cash Tyme had engaged in deceptive acts or practices in violation of the CFPA by conduct that included:

  • Using information about third-party references provided on loan applications for marketing purposes where the “net impression of the loan applications” was that such information would only be used for verification purposes in connection with the loan being applied for
  • Advertising unavailable services, including check cashing, phone reconnections, and home telephone connections, on the storefronts’ outdoor signage

The CFPB’s conclusion that Cash Tyme violated GLBA/Reg P was based on its finding that Cash Tyme had failed to provide initial privacy notices to consumers who had paid off a loan in full and subsequently took out a new loan.  According to the CFPB, such consumers, when taking out the new loan, were establishing a new customer relationship with Cash Tyme that required a new initial privacy notice.

The Bureau’s conclusion that Cash Tyme violated TILA/Reg Z was based on its findings that Cash Tyme had failed to include a payday loan database fee charged to Kentucky customers in the APR it disclosed in loan contracts and advertisements, rounded APRs to whole numbers in advertisements, and disclosed an example APR and payment amount that was based on an example term of repayment without disclosing the corresponding repayment terms used to calculate that APR.

In addition to payment of the $100,000 civil money penalty, the consent order requires Cash Tyme to conduct an audit to identify any consumers who were overcharged or overpaid as a result of improper ACH debits and, as of the date the consent order is issued, had not received a refund from Cash Tyme in amount equal to or greater than the amount of the overcharge or overpayment.

 

 

As discussed in an earlier post, on November 6, 2018, Colorado’s voters passed Proposition 111, seeking to limit interest rates and fees charged on payday loans in Colorado to an annualized percentage rate of thirty-six percent. Effective February 1, 2019, the proposition amends Colorado’s Deferred Deposit Loan Act (C.R.S. § 5-3.1-101., et seq.), and pertains to all consumer loans originated for Colorado consumers where the lender: (1) accepts a dated instrument – typically a check or debit authorization – as sole security for a loan; (2) agrees to hold the instrument for a period of time; and then, (3) pays or credits the consumer an amount equal to the instrument, less finance charges, interest, and fees.

While payday loans originated prior to February 1, 2019 are not affected, the amendment marks significant changes for those deferred deposit loans originated for Colorado consumers on or after February 1, 2019. In addition to lowering the amount that can be charged by lenders to a thirty-six percent cap, the amendment also eliminates the prior availability of monthly maintenance fees and other charges lenders could traditionally utilize.

Lenders who originate payday loans should be mindful of the application of Colorado’s new rate cap. An overwhelming majority of the electorate favored Proposition 111, with it carrying over 77% of the vote. As a result, Colorado’s new Attorney General, Phil Weiser – about whom we released a podcast last month – is likely to take a strong interest in its enforcement. Lenders should ensure their deferred deposit loan transactions are compliant, and pay close attention to eliminate those monthly maintenance fees and other charges they may have historically employed.

The CFPB has entered into a proposed settlement with a group of corporate and individual defendants who were alleged to have engaged in unlawful conduct in connection with offering “short-term loans to consumers located in the United States through a network of affiliated companies located in Canada and Malta.”

The settlement is intended to resolve a lawsuit filed by the CFPB against the defendants in 2015 in a New York federal district court that alleged the defendants made payday loans to residents of states in which the loans were void under state law because the defendants charged interest rates that exceeded state usury limits or the defendants failed to acquire required licenses.  The CFPB claimed that the defendants engaged in unfair, deceptive, or abusive conduct in violation of the CFPA through actions that included: (1) misrepresenting that consumers were obligated to pay debts that were void under state law and that the loans were not subject to U.S. federal or state law, and (2) misrepresenting that the defendants would sue consumers who did not pay or take other actions they did not intend to take.  The complaint also alleged that the defendants violated the Credit Practices Rule by conditioning the loans on irrevocable wage assignments.

The proposed Stipulated Final Judgment and Order sets forth the CFPB’s findings that the defendants had engaged in the alleged unlawful conduct and permanently bars the defendants from engaging in the following conduct:

  •  “advertising, marketing, promoting, offering, originating, servicing, or collecting” a consumer loan made to a U.S. resident, assisting others in such activities, or receiving any remuneration or other consideration from providing service to, or working in any capacity for, anyone engaged in or assisting with such activities
  • collecting on or selling any loans made to a U.S. consumer before the date the Order is entered
  • disclosing, using, or benefitting from information regarding U.S. consumers obtained before the date the Order is entered

The proposed settlement provides for no monetary penalty, something that has not gone unnoticed by consumer advocates.

A group of 13 state attorneys general and the District of Columbia AG have sent a letter to the FDIC commenting on the agency’s request for information on small-dollar lending.  The RFI, published in November 2018, seeks input on “steps the FDIC could take to encourage FDIC-supervised institutions to offer responsible, prudently underwritten small-dollar credit products that are economically viable and address the credit needs of bank customers.”

In their letter, the AGs assert that “payday lenders are once again returning to ‘rent-a-bank’ schemes in order to evade state law.”  They recommend that “the FDIC discourage banks from entering into these relationships in any guidance it issues on small-dollar lending.”

The AGs also recommend “that the FDIC discourage banks from extending small-dollar loans without considering the consumer’s ability to repay” and “include in any guidance on small-dollar lending factors banks should consider in evaluating a consumer’s ability to repay.”  The specific factors they urge the FDIC to identify are “a consumer’s monthly expenses such as recurring debt obligations and necessary living expenses,” “a consumer’s ability to repay the entire balance of the proposed loan at the end of the term without re-borrowing,” and the “consumer’s ability to absorb an unanticipated financial event…and, nonetheless, still be able to meet the payments as they become due.”

In May 2018, the OCC issued a bulletin intended to encourage its supervised institutions to offer small-dollar loans.  With the comment period on the FDIC’s RFI having ended on January 22, the FDIC could soon follow suit.

In October 2018, the CFPB issued a statement in which it stated that it expects to issue a proposed rule this month to revisit the ability-to-repay provisions of its final payday/vehicle title/ high-rate installment loan rule but not the rule’s payments provisions.  The Bureau also stated that its proposal would address the rule’s August 19, 2019 compliance date.  On January 14, American Banker published an article indicating that the Bureau was expected to issue its proposal “within days or weeks.”  According to the article, the Bureau has concluded that the best approach is to entirely remove the rule’s ability-to-repay provisions.

 

 

 

A Minnesota federal district court recently ruled that lead generators for a payday lender could be liable for punitive damages in a class action filed on behalf of all Minnesota residents who used the lender’s website to obtain a payday loan during a specified time period.  An important takeaway from the decision is that a company receiving a letter from a regulator or state attorney general that asserts the company’s conduct violates or may violate state law should consult with outside counsel as to the applicability of such law and whether a response is required or would be beneficial.

The amended complaint names a payday lender and two lead generators as defendants and includes claims for violating Minnesota’s payday lending statute, Consumer Fraud Act, and Uniform Deceptive Trade Practices Act.  Under Minnesota law, a plaintiff may not seek punitive damages in its initial complaint but must move to amend the complaint to add a punitive damages claim.  State law provides that punitive damages are allowed in civil actions “only upon clear and convincing evidence that the acts of the defendants show deliberate disregard for the rights or safety of others.”

In support of their motion seeking leave to amend their complaint to add a punitive damages claim, the named plaintiffs relied on the following letters sent to the defendants by the Minnesota Attorney General’s office:

  • An initial letter stating that Minnesota laws regulating payday loans had been amended to clarify that such laws apply to online lenders when lending to Minnesota residents and to make clear that such laws apply to online lead generators that “arrange for” payday loans to Minnesota residents.”  The letter informed the defendants that, as a result, such laws applied to them when they arranged for payday loans extended to Minnesota residents.
  • A second letter sent two years later informing the defendants that the AG’s office had been contacted by a Minnesota resident regarding a loan she received through the defendants and that claimed she had been charged more interest on the law than permitted by Minnesota law.  The letter informed the defendants that the AG had not received a response to the first letter.
  • A third letter sent a month later following up on the second letter and requesting a response, followed by a fourth letter sent a few weeks later also following up on the second letter and requesting a response.

The district court granted plaintiffs leave to amend, finding that the court record contained “clear and convincing prima facie evidence…that Defendants know that its lead-generating activities in Minnesota with unlicensed payday lenders were harming the rights of Minnesota Plaintiffs, and that Defendants continued to engage in that conduct despite that knowledge.”  The court also ruled that for purposes of the plaintiffs’ motion, there was clear and convincing evidence that the three defendants were “sufficiently indistinguishable from each other so that a claim for punitive damages would apply to all three Defendants.”  The court found that the defendants’ receipt of the letters was “clear and convincing evidence that Defendants ‘knew or should have known’ that their conduct violated Minnesota law.”  It also found that evidence showing that despite receiving the AG’s letters, the defendants did not make any changes and “continued to engage in lead-generating activities in Minnesota with unlicensed payday lenders,” was “clear and convincing evidence that shows that Defendants acted with the “requisite disregard for the safety” of Plaintiffs.”

The court rejected the defendants’ argument that they could not be held liable for punitive damages because they had acted in good-faith when not acknowledging the AG’s letters.  In support of that argument, the defendants pointed to a Minnesota Supreme Court case that held punitive damages under the UCC were not recoverable where there was a split of authority regarding how the UCC provision at issue should be interpreted.  The district court found that case “clearly distinguishable from the present case because it involved a split in authority between multiple jurisdictions regarding the interpretation of a statute.  While this jurisdiction has not previously interpreted the applicability of [Minnesota’s payday loan laws] to lead-generators, neither has any other jurisdiction.  Thus there is no split in authority for the Defendants to rely on in good faith and [the case cited] does not apply to the present case.  Instead, only Defendants interpret [Minnesota’s payday loan laws] differently and therefore their argument fails.”

Also rejected by the court was the defendants’ argument that there was “an innocent and equally viable explanation for their decision not to respond or take other actions in response to the [AG’s] letters.”  More specifically, the defendants claimed that their decision “was based on their good faith belief and reliance on their own unilateral company policy that that they were not subject to the jurisdiction of the Minnesota Attorney General or the Minnesota payday lending laws because their company policy only required them to respond to the State of Nevada.”

The court found that the defendants’ evidence did not show either that there was an equally viable innocent explanation for their failure to respond or change their conduct after receiving the letters or that they had acted in good faith reliance on the advice of legal counsel.  The court pointed to evidence in the record indicating that the defendants were involved in lawsuits with states other than Nevada, some of which had resulted in consent judgments.  According to the court, that evidence “clearly show[ed] that Defendants were aware that they were in fact subject to the laws of states other than Nevada despite their unilateral, internal company policy.”

 

 

 

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.