Yesterday, the FDIC issued a request for information (RFI) on small-dollar lending, including “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.”  (The FDIC supervises state-chartered banks and savings institutions that are not Federal Reserve members.)  Comments must be received no later than 60 days after the date the RFI is published in the Federal Register.

In May 2018, the OCC issued a bulletin intended to encourage its supervised institutions to offer small-dollar loans.  The FDIC’s issuance of the RFI signals that the FDIC intends to follow suit.

The RFI requests input on 21 questions dealing with the following topics:

  • Consumer demand
  • Challenges
  • Product features
  • Innovation
  • Alternatives
  • Other considerations

The questions dealing with “Challenges” include one that asks whether there are “any legal, regulatory, or supervisory factors that prevent, restrict, discourage, or disincentivize banks from offering small-dollar credit products.”  A glaring regulatory impediment to small-dollar lending by FDIC-supervised institutions is the FDIC’ s November 2013 guidance on deposit advance products, which effectively precludes FDIC-supervised institutions from offering deposit advance products.  (In October 2017, just hours after the CFPB released its final rule on payday, vehicle title, and certain high-cost installment loans, the OCC rescinded substantially identical guidance on deposit advance products, applicable to national banks and federal savings associations.)

While the OCC’s encouragement of small-dollar lending was in one sense a welcome development, the OCC bulletin raised several concerns.  As discussed more fully in our blog post about the bulletin, those concerns were the bulletin’s failure to confirm that the National Bank Act authorizes national banks to charge the interest allowed by the law of the state where they are located, without regard to the law of any other state, as well as the bulletin’s unfavorable view of bank-nonbank partnerships.

Unlike the FDIC, the OCC did not issue an RFI in advance of issuing its bulletin.  The FDIC’s RFI thus serves as an opportunity for commenters to provide input that could result in the FDIC’s issuance of guidance that addresses the shortcomings in the OCC bulletin.  For example, the RFI asks: “What are the potential benefits and risks related to banks partnering with third parties to offer small-dollar credit?”  In addition, it invites comment on the structure of small-dollar credit products offered by FDIC-supervised institutions.  Thus, commenters can ask the FDIC to consider structures other than the structure suggested by the OCC bulletin–even-payment amortizing loans with terms of at least two months.

Additionally, and perhaps most significantly, this RFI could serve as a vehicle for the FDIC to confirm that, in a properly structured loan program between a bank and a nonbank marketing and servicing agent, the Federal Deposit Insurance Act authorizes state-chartered banks to charge the interest allowed by the law of the state where they are located, without regard to the law of any other state, despite “true lender” and Madden arguments to the contrary.

In August 2018, Arizona began accepting applications for its regulatory sandbox that “enables a participant to obtain limited access to Arizona’s market to test innovative financial products or services without first obtaining full state licensure or other authorization that otherwise may be required.”  The state’s Attorney General is responsible for the application process and oversight of the sandbox.  At the end of last week, the Arizona AG announced that two more participants, Grain Technology, Inc. and Sweetbridge NFP, Ltd., had been added to the state’s sandbox.

In October 2018, there was an announcement by the AG that Omni Mobile Inc. had become the first sandbox participant.  The AG’s press release described Omni as “a mobile payment platform aiming to test cheaper and faster payment transfers through its centralized wallet infrastructure.”  It indicated that the product would be tested by processing guest payments at an Arizona resort, with Arizona-resident guests to receive a disclosure agreement (regarding the company’s participation in the sandbox), an explanation of the test nature of the product, a privacy notice, and the ability to opt out of any information sharing with the resort.

The AG’s announcement regarding Omni was accompanied by an announcement that the AG’s Office had signed a cooperation agreement with Taiwan’s financial regulator, the Financial Supervisory Commission, with the goal of creating an information-sharing arrangement that might create opportunities for businesses to develop and test fintech products in both markets.

The two additional sandbox participants announced last week are described in the AG’s press release as follows:

  • Grain Technology, Inc., based in New York, will test a savings and credit product in Arizona using proprietary technology to offer consumers customized savings plans and credit opportunities. Arizona consumers participating in the program will obtain access to a small line of credit aimed primarily at providing overdraft protection for bank accounts.  APRs for loans obtained through this line of credit may be as low as 12% for consumers who agree to follow a recommended repayment plan calculated using Grain’s technology (a standard APR of 15.99% will apply for those who adopt a different repayment plan).  Grain intends for loans and payments occurring through this line of credit to be reported to major credit-reporting agencies to enable consumers to build their credit profiles.
  • Sweetbridge NFP, Ltd., a Scottsdale-based international nonprofit building blockchain protocols for supply chains and commerce, will test a lending product using proprietary blockchain technology with an APR cap of 20%.  At these rates, Sweetbridge’s product will allow consumers to obtain credit at up to 1/10th the cost allowed under Arizona law.

In September 2018, the CFPB proposed significant revisions to its “Policy to Encourage Trial Disclosure Programs,” which sets forth the Bureau’s standards and procedures for exempting individual companies, on a case-by-case basis, from applicable federal disclosure requirements to allow those companies to test trial disclosures.  The proposal followed Acting Director Mulvaney’s July 2018 appointment of Paul Watkins to serve as Director of the Bureau’s Office of Innovation.  Before joining the CFPB, Mr. Watkins was in charge of fintech initiatives in the Arizona AG’s Office and led the state’s efforts to create its regulatory sandbox.  The CFPB’s proposal includes a process for the CFPB to coordinate with sandbox programs offered by other regulators.

 

This afternoon, Pew Charitable Trusts will host an event in Washington, D.C. focusing on Ohio’s Fairness in Lending Act.  Enacted in July 2018, the Act places new limitations on payday loans including an interest rate cap, a limit on the total cost of a loan, and other structural restrictions.  The Act is viewed as a significant victory for consumer advocates with the potential to be followed through legislation in other states or through ballot initiatives.  (Last week, Colorado voters passed a ballot initiative that places a 36 percent APR cap on payday loans.)

At the event, Ohio legislators from both sides of the aisle, business leaders, advocates, and researchers will discuss the Act.  According to Pew’s description of the event, the topics will include a discussion of strategies “to advance meaningful reform in other states with payday loans.”

 

 

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.

 

 

It has been reported that, without announcement or warning, the regulations applicable to third-party debt collectors in Massachusetts may have changed.  While the state’s Division of Banks (DOB) and the state’s Attorney General (AG) have traditionally regulated, respectively, third-party debt collectors and first-party creditors, the AG is reported to have changed its website recently to include third-party debt collectors as entities that it regulates.

Such a change could have significant implications because the AG’s rules differ from the DOB’s rules.  For example, the verification requirements under the AG’s rules contain more procedures than the DOB’s rules.  We expect industry trade groups to seek clarification from the DOB and AG.

 

 

 

 

While the pace of the CFPB’s fair lending activities has slowed under its new leadership, significant fair lending developments are occurring elsewhere.  In this week’s podcast, we discuss several of those developments and their broader implications.  Our discussion focuses on New York and Connecticut fair lending developments involving auto finance, a private redlining lawsuit, and the FDIC’s recent report on the use of digital footprint data for credit underwriting.  We conclude with a discussion of a letter recently issued by the Department of Justice to a Congressman regarding the website accessibility standards that companies must follow to be compliant with the Americans with Disabilities Act.

To listen and subscribe to the podcast, click here.

 

The New York Attorney General has filed a lawsuit against a group of commonly owned and managed companies headquartered in New York that include companies operating retail jewelry stores in numerous states under the name Harris Jewelry and another company providing financing for sales made at such stores under the name Consumer Adjustment Corp.  One of such stores is located in New York near a military base, as are the defendants’ stores located in other states.  The stores sell lines of military-themed jewelry and other commemorative items.  The defendants also include individuals alleged to have substantial involvement in the companies’ operations.

The complaint alleges that:

  • Harris Jewelry marks up its merchandise between 600 and 1,000% over the wholesale price (comparing that to the standard industry jewelry markup of 200 to 300%) and the “excess purchase price,” together with warranties and protection plans offered by Consumer Adjustment as well as other fees and charges, constitutes disguised interest which is added to the financing agreement’s stated 14.99% interest rate.
  • Consumer Adjustment finances more than 90% of Harris Jewelry’s sales and the relationship between the companies is never disclosed to consumers.
  • Harris Jewelry “professes to accept credit card or cash sales, sales are almost never made in this way.”  Instead, nearly all sales are financed by Consumer Adjustment.
  • Servicemembers are enticed to enter the defendants’ stores through the use of a purported charitable program in which Harris Jewelry sells teddy bears in military uniforms with promises of charitable donations and once in a store, tells servicemembers that Harris Jewelry can provide them with an opportunity to build or improve their credit scores through the “Harris Program,” the name given to the financing provided by Consumer Adjustment.  Only after a servicemember agrees to participate in the ”Harris Program” does Harris Jewelry begin to discuss its merchandise with the servicemember in an effort to maximize the amount of credit extended to him or her.

The complaint includes additional allegations regarding the defendants’ practice of advertising an item’s retail price with its “per payday” payment amount.  The AG alleges that the two amounts “bear little resemblance to the total amount paid by a consumer at the end of the financing contract” and thereby prevents a servicemember from calculating the total cost of a purchase.

Based on these allegations and other conduct by the defendants alleged in the complaint, the NY AG makes the following claims:

  • The “inflated retail prices and add-ons included in the ‘principal’ amount of the loan” result in an effective rate that violates New York’s civil and criminal usury laws
  • The interest charged by the defendants violates the 36% rate limit New York’s General Military Law
  •  Defendants’ business practices constitute fraudulent conduct under New York’s Executive Law (which defines “fraud” or “fraudulent”  to include any device, scheme, or artifice to defraud and any deception, misrepresentation, concealment, suppression, false pretense, or unconscionable contract provisions.)  Their business practices also constitute common law fraud because they involved intentional fraudulent conduct by the defendants.
  • Defendants’ business practices constitute deceptive acts or practices under New York’s General Business Law (GBL)
  • Defendants’ business practices caused the defendants to be a “credit services business” under the GBL and constitute deceptive acts under the GBL provisions that regulate such  businesses.
  • Defendants’ practices in connection with the purported charitable program violated provisions of New York’s Executive Law relating to for-profit companies that partner with a charity to sell products for the charity’s benefit.

 

 

 

 

As part of an investigation launched earlier this year into allegations of redlining in the Philadelphia area, the Pennsylvania Attorney General Josh Shapiro recently called on mortgage borrowers and home loan applicants in the Philadelphia area to file complaints with his office “if they believe they may have been victims of redlining or experienced irregularities when looking for a mortgage or home loan.”

As examples of “redlining tactics or irregularities,” the AG’s press release lists:

  • Difficulty getting an in-person appointment with a loan officer
  • Not receiving a written pre-approval or quote promised by the loan officer
  • Not receiving return phone calls from a loan officer, and
  • Refusal to provide a loan application after the loan officer learns of the applicant’s race, the racial makeup of the neighborhood where the applicant intends to buy the home, or other information relating to the area’s racial or ethnic characteristics.

The PA AG launched the redlining investigation in response to an investigative article that identified a pattern of discrimination in which African American borrowers were 2.7 times more likely to be denied a home mortgage in Philadelphia than white borrowers.  The article found that white applicants received 10 times as many loans as black applicants, even though they made up similar proportions of the population.  Based on an analysis of publicly available HMDA data, the article concluded that black applicants were denied conventional mortgage loans at significantly higher rates than white applicants in 48 cities, including Philadelphia..

The District of Columbia’s AG as well as the AGs of other states, such as Washington, Illinois, Iowa, and Delaware, are reported to also be conducting redlining investigations.  In 2015, the New York AG entered into a settlement with Evans Bank to resolve a lawsuit filed by the NY AG alleging that the bank had engaged in redlining.  HMDA data was recently used by a Connecticut fair housing advocacy group to support redlining claims in a lawsuit filed in Connecticut federal district court alleging that Liberty Bank had engaged in discriminatory mortgage lending in violation of the federal Fair Housing Act.

We expect state AGs to continue to focus on redlining unless and until the CFPB and/or DOJ re-focus on the issue.

 

 

The New York Court of Appeals has issued an opinion in Expressions Hair Design v. Schneiderman interpreting the state’s law that prohibits merchants from imposing a surcharge on credit card purchases (Section 518 of the state’s General Business Law). The court concluded that if a merchant posts its prices and charges lower prices to cash customers, it must post the price charged to credit card customers. As a result, the court also concluded that the law prohibits a merchant from using a “single-sticker-price” scheme in which a merchant posts a single cash price for its goods and services but indicates an additional amount is added for credit card customers.

The opinion was issued in answer to the following question certified to the NY court by the U.S. Court of Appeals for the Second Circuit: “Does a merchant comply with [Section 518] so long as the merchant posts the total dollars-and-cents price charged to credit-card users?” The Second Circuit certified the question following the U.S. Supreme Court’s decision last year in Expressions Hair Design and remand of the case to the Second Circuit. The Supreme Court ruled that Section 518 regulates speech, thereby making it subject to First Amendment scrutiny. The Second Circuit had initially concluded that Section 518 did not violate the First Amendment because it regulates only pricing, not speech. The Supreme Court vacated that decision and because the Second Circuit had not considered whether, as a speech regulation, Section 518 survived First Amendment scrutiny, remanded for the Second Circuit to do so.

The parties in Expressions Hair Design agreed that Section 518 does not prohibit differential pricing in which a merchant charges more to customers who pay by credit card. However, the plaintiffs, five merchants and their owners, sought to use a “single-sticker-price” scheme in which a merchant posts a single cash price for its goods and services but indicates an additional amount is added for credit card customers rather than a “dual-price” scheme in which a merchant posts two different prices—one for credit card customers and one for cash customers. The plaintiffs alleged that by prohibiting their use of a “single-sticker-price” scheme or restricting how they describe the price differential in a “dual-price” scheme, Section 518 violates the First Amendment because it regulates how they communicate their prices. The NY Court of Appeals concluded that although Section 518 does not allow use of a “single-sticker-price” scheme, it does not prohibit a merchant from using the word “surcharge” or any other words to communicate to customers that the credit card price is higher than the cash price.

The Second Circuit will now need to determine whether Section 518, as interpreted by the NY Court of Appeals, is a valid restriction on commercial speech under Supreme Court precedent. Such precedent is discussed in the Second Circuit’s opinion certifying the Section 518 question to the NY court. The Second Circuit suggested that if Section 518 were to be understood to compel the disclosure of an item’s credit card price alongside its cash price, it might properly be analyzed under Supreme Court precedent that applies a lenient standard of review to laws that require commercial entities to make certain disclosures to prevent consumer deception or confusion.

The New York Attorney General, on October 12, 2018, filed a notice of an appeal to the Second Circuit from Judge Preska’s dismissal on September 12, 2018 of all of the NYAG’s federal and state law claims, and her subsequent September 18 order amending the September 12 order to provide that the NYAG’s claims under Dodd-Frank Section 1042 were dismissed “with prejudice.”  (Section 1042 authorizes state attorneys general to initiate lawsuits based on UDAAP violations.)

On September 14, the CFPB filed an appeal with the Second Circuit from Judge Preska’s June 21, 2018 decision, as amended by her September 12 order, in which she ruled that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional, struck the CFPA (Title X of Dodd-Frank) in its entirety, and dismissed the CFPB from the case.  That was followed on September 25 by RD Legal Funding’s filing of a cross-appeal with the Second Circuit from Judge Preska’s June 21 decision, as subsequently amended, in which Judge Preska had ruled that the NYAG had stated federal and state law claims against RD Legal Funding.  (Although Judge Preska’s various orders resulted in the dismissal of all of the CFPB’s and NYAG’s claims, RD Legal Funding may have filed the cross-appeal to preserve its ability to challenge Judge Preska’s June 21 ruling that the NYAG had stated claims against RD Legal Funding should the Second Circuit conclude that the CFPB’s structure is constitutional or that the structure is unconstitutional but that the proper remedy is to sever the Dodd-Frank for-cause removal provision rather than strike all of Title X.)

The Bureau’s constitutionality is now before two circuits, the Second and Fifth Circuits.  In April 2018, the Fifth Circuit agreed to hear All American Check Cashing’s interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality.  Also, a petition for certiorari was recently filed in the U.S. Supreme Court by State National Bank of Big Spring which, together with two D.C. area non-profit organizations that also joined in the petition, had brought one of the first lawsuits challenging the CFPB’s constitutionality.