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Four consumer advocacy groups have filed a motion seeking leave to file an amicus memorandum opposing the joint motion filed by the CFPB and two trade groups that seeks a stay of the compliance date for the CFPB’s final payday/auto title/high-rate installment loan rule (Payday Rule).  The joint motion, which was filed in the trade groups’ April 2018 lawsuit challenging the Payday Rule, also seeks a stay of the litigation for the duration of the CFPB’s rulemaking to reconsider the Payday Rule.

The four consumer advocacy groups are Public Citizen, Inc., Americans for Financial Reform Education Fund, Center for Responsible Lending, and National Consumer Law Center.  They assert in their motion that because the stay was sought jointly by the parties to the lawsuit, “the Court lacks the benefit of adversarial briefing on the parties’ request.”

The joint motion filed by the CFPB and trade groups seeks a stay of the Payday Rule’s compliance date pursuant to Section 10(d) of the Administrative Procedure Act, 5 U.S.C. section 705, which provides:

When an agency finds that justice so requires, it may postpone the effective date of action taken by it, pending judicial review.  On such conditions as may be required and to the extent necessary to prevent irreparable injury, the reviewing court … may issue all necessary and appropriate process to postpone the effective date of an agency action or to preserve status or rights pending conclusion of the review proceedings.

In the proposed amicus memorandum accompanying their motion, the consumer advocacy groups argue that Section 705 cannot be properly invoked by the CFPB and trade groups to stay the Payday Rule’s compliance date for the following reasons:

  • For the court to stay the compliance date while also staying the litigation is at odds with the purpose of Section 705 “to stay agency action for the purpose of maintaining the status quo during judicial review.”  The CFPB and trade groups are not seeking to maintain the status quo to protect against litigation uncertainties but rather to address uncertainties created by the CFPB’s decision to engage in rulemaking to reconsider the Payday Rule.  Section 705 “cannot properly be used as the basis for a stay where the parties are not litigating and have no intention to do so.”
  • The joint motion is an “attempt to jerry rig non-adversarial litigation to effect an end-run around the [Administrative Procedure Act’s] statutory requirements.”  An agency ordinarily can only delay a rule’s compliance date through the APA’s notice-and-comment rulemaking procedures.
  • The same four-part test used to assess requests for stays pending appeal applies to Section 705 stays.  The joint motion does not satisfy this test because:
    • Little effort was made to show any likelihood of plaintiffs’ success on the merits in their challenge to the Payday Rule
    • No showing was made that the plaintiffs would suffer irreparable injury absent a stay pending review, with no actual information provided “as to whether any individual member of the plaintiff associations intends to spend money on compliance with the Payday Rule before the date when this lawsuit—if it were litigated—could reasonably be expected to end.”
    • No consideration was given to the impact of their request on the CFPB, which would include “bind[ing] the agency and its next director, based on the request of an acting director, who only serves temporarily and at the pleasure of the president.” (emphasis included).
    • No analysis was provided of how a stay would impact the public interest, such as “the impact of a stay on the consumers who the Payday Rule intends to protect.”

The consumer advocacy groups’ motion states that the trade groups have indicated that they oppose the filing of the amicus brief and that the CFPB has indicated that it takes no position on whether the amicus brief should be filed.  We would therefore expect the trade groups to file a response opposing the motion.  Once the court rules on the consumer advocacy groups’ motion, the next step would be for the court to decide the joint motion for a stay either after a hearing or without holding a hearing.

 

The National Credit Union Administration has published a notice in the Federal Register proposing to amend the NCUA’s general lending rule to provide federal credit unions (FCU) with a second option for offering “payday alternative loans” (PALs).  Comments on the proposal are due by August 3, 2018.

In 2010, the NCUA amended its general lending rule to allow FCUs to offer PALs as an alternative to other payday loans.  For PALs currently allowed under the NCUA rule (PALs I), an FCU can charge an interest rate that is 1000 basis points above the general interest rate set by the NCUA for non-PALs loans, provided the FCU is making a closed-end loan that meets certain conditions.  Such conditions include that the loan principal is not less than $200 or more than $1,000, the loan has a minimum term of one month and a maximum term of six months, the FCU does not make more than three PALs in any rolling six-month period to one borrower and not more than one PAL at a time to a borrower, and the FCU requires a minimum length of membership of at least one month.

The proposal is a reaction to NCUA data showing a significant increase in the total dollar amount of outstanding PALs but only a modest increase in the number of FCUs offering PALs.  In the proposal’s supplementary information, the NCUA states that it “wants to ensure that all FCUs that are interested in offering PALs loans are able to do so.”  Accordingly, the NCUA seeks to increase interest among FCUs in making PALs by giving them the ability to offer PALs with more flexible terms and that would potentially be more profitable (PALs II).

PALs II would not replace PALs I but would be an additional option for FCUs.  As proposed, PALs II would incorporate many of the features of PALs I while making four changes:

  • The loan could have a maximum principal amount of $2,000 and there would be no minimum amount
  • The maximum loan term would be 12 months
  • No minimum length of credit union membership would be required
  • There would be no restriction on the number of loans an FCU could make to a borrower in a rolling six-month period, but a borrower could only have one outstanding PAL II loan at a time.

In the proposal, the NCUA states that it is considering creating an additional kind of PALs (PALs III) that would have even more flexibility than PALs II.  It seeks comment on whether there is demand for such a product as well as what features and loan structures could be included in PALs III.  The proposal lists a series of questions regarding a potential PALs III rule on which the NCUA seeks input.

The NCUA’s proposal follows closely on the heels of the bulletin issued by the OCC setting forth core lending principles and policies and practices for short-term, small-dollar installment lending by national banks, federal savings banks, and federal branches and agencies of foreign banks.  In issuing the bulletin, the OCC stated that it “encourages banks 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 CFPB and the two trade groups that filed a lawsuit in April 2018 in a Texas federal district court challenging the CFPB’s final payday/auto title/high-rate installment loan rule (Payday Rule) have filed a joint motion seeking a stay of the litigation for the duration of the CFPB’s rulemaking to reconsider the Payday Rule. The motion also seeks a stay of the Payday Rule’s compliance date and a waiver of the CFPB’s obligation to file an answer.  The two trade groups are the Consumer Financial Service Association of America, Ltd. and the Consumer Service Alliance of Texas.

In January 2018, the CFPB announced that it intended to engage in a rulemaking process to reconsider the Payday Rule pursuant to the Administrative Procedure Act.  Although the Payday Rule became “effective” on January 16, 2018, the compliance date for the rule’s substantive requirements and limits (Sections 1041.2 through 1041.10), compliance program/documentation requirements (Section 1041.12), and prohibition against evasion (Section 1041.13) is August 19, 2019.

In the joint motion, the CFPB and trade groups assert that the rulemaking “may result in repeal or revision of the Payday Rule and thereby moot or otherwise resolve this litigation or require amendments to Plaintiffs’ complaint.”  They also assert that a stay of the Payday Rule’s compliance date during the litigation’s pendency is necessary to prevent  irreparable injury, claiming that none of the expenditures necessary to comply with the Payday Rule would be compensable by money damages should the Payday Rule be invalidated or repealed.  The CFPB and trade groups ask the court to stay the compliance date until 445 days from the date of final judgment in the litigation to ensure sufficient time for compliance should the plaintiffs’ claims be unsuccessful.

On December 1, 2017, three Democrat and three Republican members of the House of Representatives introduced a joint resolution under the Congressional Review Act (H.J. Res. 122) to override the CFPB’s final payday/auto title/high-rate installment loan rule.  The CRA is the vehicle used by Congress to overturn the CFPB’s arbitration rule in a party-line vote.

In a new blog post entitled “7 Reasons to Oppose the Federal Payday Loan Rule,” a policy analyst at the Competitive Enterprise Institute supports use of the CRA to overturn the payday loan rule.  Among the seven reasons discussed in the blog are that the rule leaves low-to-middle income consumers without access to credit, payday loan users overwhelmingly approve of the product, and the rule is built on a flawed theory of consumer harm.

The CFPB’s final payday became “effective” this past Tuesday, January 16, 2018.  However, the compliance date for the rule’s substantive requirements and limits (Sections 1041.2 through 1041.10), compliance program/documentation requirements (Section 1041.12), and prohibition against evasion (Section 1041.13) is August 19, 2019.  While the CFPB announced yesterday that it intends to engage in a rulemaking process to reconsider the final rule, it normally cannot do so without following the time-consuming notice and comment procedures of the Administrative Procedure Act.  In addition, since any changes made by the CFPB are likely to be challenged in litigation, the CFPB will need to successfully defend a revised rule or its withdrawal of the existing rule.

Given the hurdles created by the rulemaking process, the CRA provides a “cleaner” and quicker vehicle for overturning the final rule.  Republican Congressman Dennis Ross, one of the CRA resolution’s sponsors, is reported to have said that despite the CFPB’s announcement, he intends to continue to seek passage of the resolution by Congress.

Both high-rate loans covered by the final rule and the final rule itself are highly controversial.  Accordingly, there can be no assurance that the majorities needed to override the rule under the CRA can be assembled in both the House and the Senate.  Nevertheless, whether through the CRA, new rulemaking, or litigation, we continue to expect that the final rule adopted under former CFPB Director Richard Cordray will not be implemented in anything approaching its current form.

Richard Moseley Sr., the operator of a group of interrelated payday lenders, was convicted by a federal jury on all criminal counts in an indictment filed by the Department of Justice, including violating the Racketeer Influenced and Corrupt Organizations Act (RICO) and the Truth in Lending Act (TILA).  The criminal case is reported to have resulted from a referral to the DOJ by the CFPB. The conviction is part of an aggressive attack by the DOJ, CFPB, and FTC on high-rate loan programs.

In 2014, the CFPB and FTC sued Mr. Mosley, together with various companies and other individuals.  The companies sued by the CFPB and FTC included entities that were directly involved in making payday loans to consumers and entities that provided loan servicing and processing for such loans.  The CFPB alleged that the defendants had engaged in deceptive and unfair acts or practices in violation of the Consumer Financial Protection Act (CFPA) as well as violations of TILA and the Electronic Fund Transfer Act (EFTA).  According to the CFPB’s complaint, the defendants’ unlawful actions included providing TILA disclosures that did not reflect the loans’ automatic renewal feature and conditioning the loans on the consumer’s repayment through preauthorized electronic funds transfers.

In its complaint, the FTC also alleged that the defendants’ conduct violated the TILA and EFTA.  However, instead of alleging that such conduct violated the CFPA, the FTC alleged that it constituted deceptive or unfair acts or practices in violation of Section 5 of the FTC Act.  A receiver was subsequently appointed for the companies.

In November 2016, the receiver filed a lawsuit against the law firm that assisted in drafting the loan documents used by the companies.  The lawsuit alleges that although the payday lending was initially done through entities incorporated in Nevis and subsequently done through entities incorporated in New Zealand, the law firm committed malpractice and breached its fiduciary obligations to the companies by failing to advise them that because of the U.S. locations of the servicing and processing entities, the lenders’ documents had to comply with the TILA and EFTA.  A motion to dismiss the lawsuit filed by the law firm was denied.

In its indictment of Mr. Moseley, the DOJ claimed that the loans made by the lenders controlled by Mr. Moseley violated the usury laws of various states that effectively prohibit payday lending and also violated the usury laws of other states that permit payday lending by licensed (but not unlicensed) lenders.  The indictment charged that Mr. Moseley was part of a criminal organization under RICO engaged in crimes that included the collection of unlawful debts.

In addition to aggravated identity theft, the indictment charged Mr. Moseley with wire fraud and conspiracy to commit wire fraud by making loans to consumers who had not authorized such loans and thereafter withdrawing payments from the consumers’ accounts without their authorization.  Mr. Moseley was also charged with committing a criminal violation of TILA by “willfully and knowingly” giving false and inaccurate information and failing to provide information required to be disclosed under TILA.  The DOJ’s TILA count is particularly noteworthy because criminal prosecutions for alleged TILA violations are very rare.

This is not the only recent prosecution of payday lenders and their principals. The DOJ has launched at least three other criminal payday lending prosecutions since June 2015, including one against the same individual operator of several payday lenders against whom the FTC obtained a $1.3 billion judgment.   It remains to be seen whether the DOJ will limit prosecutions to cases where it perceives fraud and not just a good-faith disclosure violation or disagreement on the legality of the lending model.  Certainly, the offenses charged by the DOJ were not limited to fraud.

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.

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

The CFPB’s proposal established limitations for a “covered loan” which could be either (1) any short-term consumer loan with a term of 45 days or less; or (2) a longer-term loan with a term of more than 45 days where (i) the total cost of credit exceeds an annual rate of 36%, and (ii) the lender obtains either a lien or other security interest in the consumer’s vehicle or a form of “leveraged payment mechanism” giving the lender a right to initiate transfers from the consumer’s account or obtain payment through a payroll deduction or other direct access to the consumer’s paycheck.  The proposal excluded from coverage purchase-money credit secured solely by the car or other consumer goods purchased, real property or dwelling-secured credit if the lien is recorded or perfected, credit cards, student loans, non-recourse pawn loans, overdraft services and overdraft lines of credit, and apparently credit sale contracts.

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

 

At the meeting earlier this month of the American Bar Association’s Consumer Financial Services Committee in Carlsbad, CA, attention was given to an issue highlighted by the American Bankers Association in the comment letter it submitted on the CFPB’s proposed payday/auto title/high-rate installment loan rule.

The CFPB’s proposal provides a method to calculate the total cost of credit used to determine whether a loan would be a “covered loan.”  The CFPB has proposed to use an all-in measure of the cost of credit rather than the Regulation Z APR definition.  In its comment letter, the ABA observed that the proposal incorrectly calculates the total cost of credit for open-end credit as though a line of credit’s annual fee is paid monthly.  Specifically, the proposal would add the annual fee to the total amount of fees imposed for the billing cycle that is divided by the balance and multiply that number (which includes a fee only imposed annually) by 12 as if it were imposed monthly.  As a result, the total cost of credit would be inflated to reflect 11 fees that are not actually charged.  To illustrate, the total cost of credit in the CFPB’s example would be 13.25%, rather than the CFPB’s calculated 68.26%, if the annual fee were not multiplied by 12.

The ABA comments that the calculation is not only inaccurate but leads to an absurd result—a program charging a single annual fee would have the same cost of credit as one that charges the same fee each month, thus making the programs appear comparable.  In addition, nearly every open-end product would have an all-in APR greater than 36%, thereby subjecting the products to the proposal’s prohibitions and restrictions and, as a result, discouraging banks from offering such products.

The ABA states that the CFPB’s incorrect total cost of credit calculation copies flawed language that was contained in the Department of Defense’s final rule published in July 2015  implementing amendments to the Military Lending Act regulation.  The ABA urges the CFPB to calculate the all-in cost of credit as though the annual fee is paid in equal installments over the course of the year, so that the total finance charge for the billing cycle would consist of the monthly interest charge and the pro-rated amount of the annual fee rather than the entire annual fee.

We completely agree with the ABA’s point.

The court-appointed receiver for a group of interrelated companies sued by the CFPB in September 2014 for engaging in allegedly unlawful online payday lending activities has filed a malpractice lawsuit against the law firm that assisted in drafting the loan documents used by the companies.

The companies sued by the CFPB included entities that were directly involved in either making payday loans to consumers or providing loan servicing and processing for those loans.  The CFPB alleged that 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 CFPB’s complaint, the defendants’ unlawful actions included providing TILA disclosures that did not reflect the automatic renewal feature and conditioning the loans on the consumer’s repayment through preauthorized electronic funds transfers.

According to the receiver’s complaint, the companies’ payday lending was initially done through entities incorporated in Nevis and subsequently done through entities incorporated in New Zealand.  The companies’ loan servicing and processing (including customer service) was done through two entities that were incorporated in Missouri and maintained offices, employees, and mailing addresses in Missouri.

The receiver alleges that the law firm assisted in drafting the loan documents which, on their face, violated the TILA, EFTA and CFPA.  He claims that the law firm committed attorney malpractice and breached its fiduciary obligations to the companies by failing to advise them that because of the U.S. locations of the servicing and processing entities, the loan documents used by the companies had to comply with the TILA and EFTA, and that once the CFPA went into effect, the servicing and processing entities could also be liable for such violations as “covered persons” under the CFPA.

The Small Business Administration’s Office of Advocacy has submitted a comment letter on the CFPB’s proposed payday loan rule that raises concerns about the proposal’s economic impact on small businesses and encourages the CFPB to make various changes to reduce the burden on small businesses.  The letter notes that because Advocacy is an independent office within the U.S. Small Business Administration, the views expressed by Advocacy do not necessarily reflect the views of the SBA or the Administration.

Prior to issuing its proposed payday loan rule, the CFPB convened a SBREFA panel that met with small entity representatives (SERs) to provide input on the proposals under consideration by the CFPB.  The Chief Counsel for Advocacy was a member of the SBREFA panel.  Following the issuance of the proposal, Advocacy held three roundtables to provide an opportunity for all small businesses (such as those that did not serve as SERs) to provide input on the CFPB’s proposal.  According to the comment letter, the roundtable attendees included storefront payday lenders, online lenders, banks, credit unions, tribal representatives, trade associations representing small businesses, and government representatives.  Some of the attendees had served as SERs and the CFPB attended all three roundtables.

In its comment letter, Advocacy raises concerns with various aspects of the proposal based on the input received from roundtable attendees, including the following:

  • The CFPB has underestimated the potential impact of its proposal on small entities, having limited its Regulatory Flexibility Act analysis to the costs of the new recordkeeping system, the costs of obtaining verification evidence, and the costs of making an ability to pay (ATR) determination consistent with that evidence.  The CFPB has not provided an adequate estimate of the aggregate impact that the ATR requirements may have on the revenues of small entities if their customers no longer qualify for loans.  Advocacy encourages the CFPB to include these additional costs in its analysis of the proposal’s economic impact.
  • Advocacy encourages the CFPB to eliminate some of the ATR requirements such as the credit check requirement which will be costly to small lenders.
  • Advocacy encourages the CFPB to eliminate a cooling-off period because of the reduction in revenues that will result or, at a minimum, to provide a cooling off period that is less than 30 days
  • Advocacy encourages the CFPB to provide an emergency exception to the presumption of unaffordability and provide clear guidance on the circumstances that would qualify for the exception.
  • Advocacy seeks an exemption for small businesses operating in states that currently have payday loan rules and for small credit unions.
  • Advocacy encourages the CFPB to allow at least 24 months after publication of a final rule for small businesses to comply.

In addition, because the CFPB’s proposal “may deprive consumers of a means of addressing their financial situation,” Advocacy encourages the CFPB “to reconsider its proposal and develop requirements that protect consumers without jeopardizing their access to legitimate credit in states that do not currently regulate payday lending.”  Advocacy also states that “[i]f the CFPB believes that it is necessary to move forward at this juncture…Advocacy further encourages the CFPB to perform additional research to determine the impact of the changes on small entities and consumers in those states prior to implementing permanent regulations.”