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We have previously blogged about the industry challenge to the CFPB’s rule on payday/vehicle title/high rate installment loans.  The Plaintiffs’ have now filed an Unopposed Motion for Reconsideration and have advised that the CFPB intends to file a separate supporting memorandum.  In their Motion for Reconsideration, the Plaintiffs’ argue that a combined stay of litigation (previously approved by the Court) and stay of the Rules’ compliance dates (previously denied by the Court) –

would relieve the parties and the Court of the burdens of litigation that might not be needed, while at the same time protecting Plaintiffs’ members from having to comply with, and prepare for compliance with, an allegedly invalid rule….

But rather than grant or deny the motion in full, the Court’s order severed these two inextricably intertwined proposals. The order thereby granted a combination of relief that was not requested by the parties, and which undermines, rather than furthers, their agreed-upon solution to the dilemma discussed above. Staying the litigation while denying a stay of the Rule relieves the parties and the Court of the burdens of litigation, but it does so without relieving Plaintiffs of the need for litigation….  Thus, absent a stay of the compliance date, Plaintiffs will have no tenable option other than to file a motion for preliminary injunction (and a lift of the litigation stay).

(emphasis in original)

We fully subscribe to the views expressed in the Motion for Reconsideration.  However, we hope the CFPB is not putting all of its eggs in one basket and counting on the court to change its mind.  A second fallback approach—which we strongly recommend—is for the CFPB to engage in formal notice and comment rulemaking to extend the compliance deadline and provide breathing space for ensuing notice and comment rulemaking on the substance of the Rule.  We think the justification for such rulemaking, should it prove necessary, is compelling.

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 Procedure 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.

On September 5, 2017, the CFPB entered into a consent order with Zero Parallel, LLC (“Zero Parallel”), an online lead aggregator based in Glendale, California. At the same time, it submitted a proposed order in the U.S. District Court for the Central District of California, where it is litigating with Zero Parallel’s CEO, Davit Gasparyan. Zero Parallel and Gasparyan agreed to pay a total of $350,000 in civil money penalties to settle claims brought by the CFPB.

In the two actions, the CFPB claimed that Zero Parallel, with Gasparyan’s substantial assistance, helped provide loans to consumers which would be void under the laws of the states in which the consumers lived. Zero Parallel allegedly facilitated the loans by acting as a lead aggregator. In that role, Zero Parallel collected information that consumers entered into various websites indicating that they were interested in taking out payday or installment loans. Zero Parallel then transmitted consumers’ information to various online lenders which evaluated the consumers’ information. The lenders then decided whether they wished to make the loans. If they did, the lenders purchased the leads from Zero Parallel and interacted directly with consumers to complete the loan transactions. (More on the lead generation process in our previous blog postings.)

In some cases, the lenders who purchased the leads offered loans on terms that were prohibited in the states where the consumers resided. The CFPB claims that such loans were therefore void. Because Zero Parallel allegedly knew that the leads it sold were likely to result in void loans, the CFPB alleged that Zero Parallel engaged in abusive acts and practices. Under the consent order, and the proposed order, if it is entered, Zero Parallel will be prohibited from selling leads that would facilitate such loans. To prevent this from happening, the orders require Zero Parallel to take reasonable steps to filter the leads it receives so as to steer consumers away from these allegedly void loans.

The CFPB also faulted Zero Parallel for failing to ensure that consumers were adequately informed about the lead generation process. This allegedly caused consumers to get bad deals on the loans they took out.

Consistent with our earlier blog posts about regulatory interest in lead generation, we see two takeaways from the Zero Parallel case.  First, the CFPB remains willing to hold service providers liable for the alleged bad acts of financial services companies to which they provide services. This requires service providers to engage in “reverse vendor oversight” to protect themselves from claims like the ones the CFPB made here.  Second, the issue of disclosure on websites used to generate leads remains a topic of heightened regulatory interest. Financial institutions and lead generators alike should remain focused such disclosures.

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.

In addition to the proposed payday loan rule released yesterday, the CFPB has issued (1) a “Request for Information on Payday Loans, Vehicle Title Loans, Installment Loans, and Open-End Lines of Credit,” and (2) a report titled “Supplemental findings on payday, payday installment, and vehicle title loans, and deposit advance products.”

The Request for Information (RFI) seeks general feedback regarding consumer protection concerns pertaining to (1) loan products outside the scope of the proposed payday loan rule, and (2) “risky” credit practices not covered by the proposed rule. Specifically, the RFI mentions installment loans and open-end credit lines with durations exceeding 45 days with no vehicle title security or account access (“leveraged payment mechanism” features) as products falling outside the scope of the proposed rule. According to the RFI, the CFPB is “seeking to learn more about the scope, use, underwriting, and impact” of products not expressly covered by the proposed rule in “determining what types of Bureau action may be appropriate.” In other words, “the Bureau is seeking information about certain consumer lending practices to increase the Bureau’s understanding of whether there is a need and basis for potential future efforts, including but not limited to future rulemakings, supervisory examinations, or enforcement investigations.”  The RFI also asks for input regarding business practices relating to loans that fall within the CFPB’s proposed payday loan rule but “raise potential consumer protection concerns that are not addressed” in the proposed rule “in order to determine whether additional Bureau actions are warranted.”

Some of the particular points of interest raised by the CFPB about which the Bureau seeks comment are as follows:

  • Forms of credit not covered by the proposed rule that are offered to the types of consumers who use loans to deal with cash shortfalls, including the types and volume of installment and open-end credit products that would not be covered by the proposed rule.
  • Potential consumer harm resulting from garnishment orders, judgment liens, or other forms of enhanced collection. While the proposed rule does not cover collection practices, the Bureau has expressed concern that there may be certain collection practices that are “more prevalent with respect to high-cost loans made to consumers facing cash shortfalls that pose serious risks to consumers.”
  • Loan churning, prepayment penalties, and slowly amortizing credit.
  • Issues relating to default interest rates, late fees, teaser rates, and other  so-called “back-end” pricing practices.
  • Potential consumer harm resulting from ancillary or “add-on” products.
  • The comment period runs through October 14, 2016.

In prepared remarks delivered yesterday at a field hearing on small-dollar lending in Kansas City, Director Cordray characterized this RFI process as an “inquiry into other situations that may harm consumers,” and noted that what the Bureau learns “may affect future rulemaking, and it will clearly help guide…continuing efforts to supervise companies and take enforcement actions against unfair, deceptive, or abusive acts or practices.” This new inquiry will likely inform the Bureau’s upcoming installment lending larger participant rulemaking, and sends a signal to the industry that shifting over to certain products not covered by the proposed rule is at best a temporary solution.

Also, in conjunction with its new rule proposal, the CFPB released a supplemental report on small-dollar lending. This report is cited many times throughout the proposed payday loan rule in support of the Bureau’s assertions about the current state of the market and the likely effects of the proposed regulations. Key topics covered in the report include:

Consumer usage and default patterns for vehicle title installment loans and payday installment loans;

  • An analysis of the substitutability among deposit advance products, bank overdraft services, and payday loans;
  • The impact of certain state laws on storefront payday lending, looking at examples from Colorado, Texas, Virginia, and Washington;
  • Comparisons  of the share of payday loans reborrowed across states with varying limits on renewals and cooling-off periods between loans;
  • Findings on borrowing and default patterns for storefront payday loans for loans; and
  • Simulations intended to estimate the impact of certain lending and collection restrictions on the payday, payday installment, and vehicle title loan markets.

This supplemental research report is the fifth report issued by the CFPB in the last three years addressing the family of credit products covered in the Bureau’s proposed payday loan  rule. The previous reports were issued in April 2013 (features and usage of payday and deposit advance loans), March 2014 (payday loan sequences and usage), April 2016 (use of ACH payments to repay online payday loans), and May 2016 (single payment title lending).

A blog post about payday lending, “Reframing the Debate about Payday Lending,” posted on the New York Fed’s website takes issue with several “elements of the payday lending critique” and argues that more research is needed before “wholesale reforms” are implemented.  The authors are Robert DeYoung, Ronald J. Mann, Donald P. Morgan, and Michael R. Strain.  Mr. Young is a Professor in Financial Institutions and Markets at the University of Kansas School of Business, Mr. Mann is a Professor of Law at Columbia University, Mr. Morgan is an Assistant Vice President in the New York Fed’s Research and Statistics Group, and Mr. Strain was formerly with the NY Fed and is currently Deputy Director of Economic Policy Studies and a resident scholar at the American Enterprise Institute.

The authors assert that complaints that payday lenders charge excessive fees or target minorities do not hold up to scrutiny and are not valid reasons for objecting to payday loans.  With regard to fees, the authors point to studies indicating that payday lending is very competitive, with competition appearing to limit the fees and profits of payday lenders.  In particular, they cite studies finding that risk-adjusted returns at publicly traded payday loan companies were comparable to other financial firms.  They also note that an FDIC study using payday store-level data concluded “that fixed operating costs and loan loss rates do justify a large part of the high APRs charged.”

With regard to the 36 percent rate cap advocated by some consumer groups, the authors note there is evidence showing that payday lenders would lose money if they were subject to a 36 percent cap.  They also note that the Pew Charitable Trusts found no storefront payday lenders exist in states with a 36 percent cap, and that researchers treat a 36 percent cap as an outright ban.  According to the authors, advocates of a 36 percent cap “may want to reconsider their position, unless of course their goal is to eliminate payday loans altogether.”

In response to arguments that payday lenders target minorities, the authors note that evidence suggests that the tendency of payday lenders to locate in lower income, minority communities is not driven by the racial composition of such communities but rather by their financial characteristics.  They point out that a study using zip code-level data found that the racial composition of a zip code area had little influence on payday lender locations, given financial and demographic conditions.  They also point to findings using individual-level data showing that African American and Hispanic consumers were no more likely to use payday loans than white consumers who were experiencing the same financial problems (such as having missed a loan payment or having been rejected for credit elsewhere).

Commenting that the tendency of some borrowers to roll over loans repeatedly might serve as valid grounds for criticism of payday lending, they observe that researchers have only begun to investigate the cause of rollovers.  According to the authors, the evidence so far is mixed as to whether chronic rollovers reflect behavioral problems (i.e. systematic overoptimism about how quickly a borrower will repay a loan) such that a limit on rollovers would benefit borrowers prone to such problems.  They argue that “more research on the causes and consequences of rollovers should come before any wholesale reforms of payday credit.”

The authors note that because there are states that already limit rollovers, such states constitute “a useful laboratory” for determining how borrowers in such states have fared compared with their counterparts in states without rollover limits.  While observing that rollover limits “might benefit the minority of borrowers prone to behavioral problems,” they argue that, to determine if reform “will do more harm than good,” it is necessary to consider what such limits will cost borrowers who “fully expected to rollover their loans but can’t because of a cap.”

On March 26, the CFPB held a public hearing on payday and auto title lending, the same day that it released proposed regulations for short-term small-dollar loans. Virginia Attorney General, Mark Herring gave opening remarks, during which he asserted that Virginia is perceived as the “predatory lending capital of the East Coast,” suggesting that payday and auto title lenders were a large part of the problem. He said that his office would target these lenders in its efforts to curb alleged abuses. He also announced several initiatives aimed at the industry, including enforcement actions, education and prevention, legislative proposals, a state run small-dollar loan program, and an expanded partnership with the CFPB. The Commissioner of Virginia’s Bureau of Financial Institutions, E. Joseph Face, also gave brief remarks echoing those of the Attorney General.

Richard Cordray, director of the CFPB, then gave lengthy remarks, which were published online the morning before the hearing took place and are available here. His remarks outlined the CFPB’s new “Proposal to End Payday Debt Traps.” Cordray explained and defended the CFPB’s proposed new regulations. While most of what he said was repetitive of the lengthier documents that the CFPB published on the topic, a few lines of his speech revealed the impetus behind the CFPB’s proposed regulations and one reason why they are fundamentally flawed.

In discussing the history of consumer credit, he stated that “[t]he advantage[, singular] of consumer credit is that it lets people spread the cost of repayment over time.” This, of course, ignores other advantages of consumer credit, such as closing time gaps between consumers’ income and their financial needs. The CFPB’s failure to recognize this “other” advantage of consumer credit is a driving force behind several flaws in the proposed regulations, which we have been and will be blogging about.

Following the opening remarks, the CFPB moderated a panel discussion during which participants from industry and consumer advocacy groups had the opportunity to comment on the proposed regulations and answer questions. The CFPB panel included:

  • Richard Cordray, Director, CFPB
  • Steven Antonakes, Deputy Director, CFPB
  • Zixta Martinez, Assistant Director of Community Affairs, CFPB
  • Kelly Cochran, Assistant Director for Regulations, CFPB.

On the consumer advocate panel were:

  • Paulina Gonzales, Executive Director, California Reinvestment Coalition
  • Michael Calhoun, President, Center for Responsible Lending
  • Dana Wiggins, Director of Outreach, Virginia Poverty Law Center
  • Wade Henderson, President and CEO, The Leadership Conference on Civil Rights and Human Rights

The industry panel included:

  • Lisa McGreevy, President & CEO, Online Lenders Alliance
  • Edward D’Alessio, General Counsel (former), Financial Service Centers of America
  • Lynn DeVault, Board Member, Community Financial Services Association of America
  • Stanley P. Leicester, II, Senior Vice President and CFO, BayPort Credit Union

After the panelists’ opening remarks, they answered questions posed by the CFPB such as: (i) What should the role of “ability to repay” standards be in the payday loan market?; (ii) How do payday loans’ rollover feature impact the ability to repay?; and (iii) “What is the appropriate balance between protecting consumers and ensuring that they have access to credit?”

Not surprisingly, in answering these questions, the consumer advocate panel took every opportunity to condemn payday and auto title products. They generally cited anecdotal evidence of consumers who became financially and emotionally distressed when they found themselves unable to repay their loans. One panelist purported to cite “data” compiled by his own organization in support of the proposed regulations. Unfortunately, these consumer advocates offered no viable alternatives to payday and auto title products to help consumers who find themselves in need of money and with nowhere else to turn.

The industry panelists generally expressed concern over the CFPB’s proposed regulations. Ms. McGreevy, speaking for online lenders, stated that any new regulations should not stifle innovation, rely on outdated underwriting methods, or dictate when consumers would be allowed to take out a loan. All of the industry panelists, in some way or another, expressed concern that new regulations not be implemented in a way that defeats the purposes of payday and auto title products. If, for example, the new regulations dramatically increase the time it takes to get a loan, they may strip away the value that these loans provide to consumers who need them.

After the panel concluded, the CFPB entertained comments from approximately 40 members of the public who had registered in advance. The speakers were each afforded one minute to comment. Employees of payday and auto title loan stores made up the largest group of speakers, followed closely clergy and consumer advocacy groups. A fair number of consumers also made remarks. One consumer claims to have taken out a $300 loan on which she now owes more than $5,000. Others expressed gratitude towards the payday and auto title lenders whose loans allowed them to stay out of financial peril or to respond to an emergency situation.

On March 26th, the Community Financial Services Association (“CFSA”) held a press call to address the CFPB’s rulemaking process for developing payday loan regulations.  CFSA Chief Executive Officer Dennis Shaul offered brief opening remarks before answering questions from the press immediately prior to a CFPB field hearing on payday loans being held in Richmond, VA.

In a statement released prior to the call, Shaul emphasized that, “CFSA welcomes the CFPB’s consideration of the payday loan industry and we are prepared to entertain reforms to payday lending that are focused on customers’ welfare and supported by real data.”  Shaul called on the CFPB to develop data indicating what percentage of customers benefit from their use of payday loans and use this number as a basis for comparison against the percentage of customers that experience the “payday debt traps” as described by CFPB Director Richard Cordray.  Shaul expressed concerns about the impact of any CFPB regulations that could negatively impact customers that are well-served by payday loans.

Shaul also called on the CFPB to serve as an “honest umpire” between the payday loan industry and consumer advocates.  Shaul noted that the rulemaking process should not become, “a contest between those who favor and those who oppose payday loans, but what is best for customers.”

The CFPB’s outline of proposals for the upcoming Small Business Advisory Review Panel acknowledges that the CFPB’s proposals will result in lost volume, principal, and revenue for lenders and will likely drive some lenders out of the market or cause substantial consolidation among existing market participants.  Shaul stated that driving choices out of the market does not serve business or customers.

Earlier this month, the CFPB and FTC filed lawsuits against different groups of interrelated companies and their individual principals for engaging in allegedly unlawful online payday lending schemes.

The CFPB’s lawsuit, which the CFPB made public yesterday, was filed under seal on
September 8, 2014 in a Missouri federal court contemporaneously with an ex parte application for a temporary restraining order to halt the defendants’ operation and freeze its assets (which was granted).  (We found it flattering that, in support of its request to file the action under seal, the CFPB referenced our blog’s extensive coverage of CFPB enforcement actions and the possibility that our blog would cover the CFPB’s filing if it were not sealed.) 

The CFPB’s complaint alleges that the defendants purchased consumers’ sensitive personal and financial information directly from lead generators or data brokers to whom lead generators had sold such information to make payday loans, many of which were unauthorized by the consumers to whom they were made, and to make unlawful withdrawals from those consumers’ accounts.  The complaint alleges the defendants engaged in deceptive and unfair acts or practices in violation of the Consumer Financial Protection Act as well as violations of the Truth in Lending Act and the Electronic Fund Transfer Act.  According to the complaint, the defendants’ unlawful actions included:  

  • After depositing loan proceeds into consumers’ accounts without authorization, withdrawing a finance charge from such accounts every two weeks indefinitely and, after consumers reported such unauthorized deposits and withdrawals to their banks, misrepresenting to such banks that the transactions were authorized and providing such banks with bogus documentation
  • Not providing TILA disclosures before consummation or providing TILA disclosures that did not reflect the terms of the loans as actually structured
  • Not obtaining authorization for preauthorized electronic funds transfers and requiring repayment by such transfers 

The FTC’s complaint was also filed on September 8, 2014, also initially under seal in the same Missouri federal court in which the CFPB’s complaint was filed.  (As in the CFPB’s lawsuit, the court immediately entered a restraining order stopping the defendants’ operation and freezing its assets.)  The FTC defendants’ alleged unlawful conduct is substantially similar to the conduct in which the CFPB defendants are alleged to have engaged.  Like the CFPB, the FTC alleges that the defendants’ conduct violated TILA and the EFTA.  However, instead of alleging that such conduct also violated the CFPA, the FTC alleges that it constituted deceptive or unfair acts or practices in violation of Section 5 of the FTC Act.

In an unexpected move earlier this week, the FDIC issued a Financial Institution Letter announcing that it was withdrawing the list of “risky” merchant categories that was included in prior guidance on account relationships with third-party payment processors.  Among the listed categories were payday loans and money transfer networks.

At the House Financial Services Committee hearing last week on “Operation Choke Point,” committee members voiced industry charges that FDIC examiners have been using the list to intimidate banks into terminating relationships with companies in the listed categories regardless of whether such companies were engaged in legitimate activities and operating lawfully.

For more on the FDIC’s action, see our legal alert.