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.”

 

 

The comment period for the CFPB’s proposed rule on Payday, Title and High-Cost Installment Loans ended Friday, October 7, 2016.  The CFPB has its work cut out for it in analyzing and responding to the comments it has received.

We have submitted comments on behalf of several clients, including comments arguing that: (1) the 36% all-in APR “rate trigger” for defining covered longer-term loans functions as an unlawful usury limit; (2) multiple provisions of the proposed rule are unduly restrictive; and (3) the coverage exemption for certain purchase-money loans should be expanded to cover unsecured loans and loans financing sales of services.  In addition to our comments and those of other industry members opposing the proposal, borrowers in danger of losing access to covered loans submitted over 1,000,000 largely individualized comments opposing the restrictions of the proposed rule and individuals opposed to covered loans submitted 400,000 comments.  So far as we know, this level of commentary is unprecedented.  It is unclear how the CFPB will manage the process of reviewing, analyzing and responding to the comments, what resources the CFPB will bring to bear on the project or how long it will take.

Like other commentators, we have made the point that the CFPB has failed to conduct a serious cost-benefit analysis of covered loans and the consequences of its proposal, as required by the Dodd-Frank Act.  Rather, it has assumed that long-term or repeated use of payday loans is harmful to consumers.

Gaps in the CFPB’s research and analysis include the following:

  • The CFPB has reported no internal research showing that, on balance, the consumer injury and costs of payday and high-rate installment loans exceed the benefits to consumers.  It finds only “mixed” evidentiary support for any rulemaking and reports only a handful of negative studies that measure any indicia of overall consumer well-being.
  • The Bureau concedes it is unaware of any borrower surveys in the markets for covered longer-term payday loans.  None of the studies cited by the Bureau focuses on the welfare impacts of such loans.  Thus, the Bureau has proposed to regulate and potentially destroy a product it has not studied.
  • No study cited by the Bureau finds a causal connection between long-term or repeated use of covered loans and resulting consumer injury, and no study supports the Bureau’s arbitrary decision to cap the aggregate duration of most short-term payday loans to less than 90 days in any 12-month period.
  • All of the research conducted or cited by the Bureau addresses covered loans at an APR in the 300% range, not the 36% level used by the Bureau to trigger coverage of longer-term loans under the proposed rule.
  • The Bureau fails to explain why it is applying more vigorous verification and ability to repay requirements to payday loans than to mortgages and credit card loans—products that typically involve far greater dollar amounts and a lien on the borrower’s home in the case of a mortgage loan—and accordingly pose much greater risks to consumers.

We hope that the comments submitted to the CFPB, including the 1,000,000 comments from borrowers, who know best the impact of covered loans on their lives and what loss of access to such loans will mean, will encourage the CFPB to withdraw its proposal and conduct serious additional research.

 

The CFPB is publishing a notice in tomorrow’s Federal Register to correct the comment deadline for its payday loan Request for Information (RFI).  The corrected deadline will be November 7, 2016.

The RFI seeks feedback regarding consumer protection concerns pertaining to (1) loan products outside the scope of the CFPB’s proposed payday loan rule, and (2) “risky” credit practices not covered by the proposed rule.

Last Friday, the CFPB’s proposed payday loan rule and RFI were published in the Federal Register.  When they were issued in June, the proposal and RFI had comment deadlines of, respectively, September 14, 2016 and October 14, 2016.  In the version published in the Federal Register, the comment deadline for the payday loan proposal was extended to October 7.  However, October 14 remained the comment deadline for the RFI in the published version.

 

 

 

 

 

The CFPB has issued its April 2016 complaint report which highlights complaints about mortgages and complaints from consumers in California.  The CFPB began taking complaints about mortgages in December 2011.

General findings include the following:

  • As of April 1, 2016, the CFPB handled approximately 859,900 complaints nationally, including approximately 26,500 complaints in March 2016.  As of April 1, 2016, debt collection continued to be the most-complained-about financial product or service, representing about 26 percent of complaints submitted.  Debt collection complaints, together with complaints about credit reporting and mortgages, collectively represented about 69 percent of the complaints submitted in March 2016.
  • Complaints about “other financial services” showed the greatest percentage increase based on a three-month average, increasing about 53 percent from the same time last year (January to March 2015 compared with January to March 2016).  This category includes complaints about debt settlement, check cashing, credit repair, refund anticipation checks, and money orders.  Complaints during those periods increased from 126 complaints in 2015 to 193 complaints in 2016.
  • Payday loan complaints showed the greatest percentage decrease based on a three-month average, decreasing about 14 percent from the same time last year (January to March 2015 compared with January to March 2016).  Complaints during those periods decreased from 489 complaints in 2015 to 420 complaints in 2016.  In the March 2016 complaint report, payday loan complaints also showed the greatest percentage decrease based on a three-month average.
  • Student loans were the product with the greatest month-over-month increase in complaints, with complaints increasing by 83 percent from February to March 2016.  We note that, rather than reflecting an increase in the number of borrowers making student loan complaints, the increase most likely reflects that in February 2016, the CFPB began accepting complaints about federal student loans.  Previously, such complaints were directed to the Department of Education.New Mexico, Indiana, and Minnesota experienced the greatest complaint volume increases from the same time last year (January to March 2015 compared with January to March 2016) with increases of, respectively, 32, 29, and 26 percent.
  • Hawaii, Vermont, and Maine experienced the greatest complaint volume decreases from the same time last year (January to March 2015 compared with January to March 2016) with decreases of, respectively, 29, 23, and 20 percent.

Findings regarding mortgage complaints include the following:

  • The CFPB has handled approximately 223,100 mortgage complaints, representing about 26 percent of total complaints. Mortgages are the second most-complained-about product or service after debt collection.
  • The most-complained-about issue involved payment-related problems.  Problems raised in complaints included prolonged loss mitigation review processes in which the same documentation was repeatedly requested, a lack of responsiveness from the consumer’s single point of contact, receipt of conflicting foreclosure notices while the consumer was undergoing a loss mitigation assistance review, denial of modification applications, and offers of unaffordable modification terms.
  • Problems related to servicing transfers were also raised in complaints (such as not being properly informed of a transfer), a prior or current servicer’s failure to apply payments made around the time of transfer to the consumer’s account, a lack of explanation for increased monthly escrow payments, and a failure to provide a new servicer with documentation related to a loss mitigation review process that was ongoing at the time of servicing transfer.
  • Other problems raised in complaints involved payments not being accepted or applied as intended particularly for consumers approved for a loss mitigation option, difficulty in communicating with servicers that resulted in confusing and contradictory information, escrow discrepancies (such as over-collection, unexplained shortages and untimely tax and insurance disbursements), the failure by servicers to release funds needed for repairs after receiving insurance proceeds from the consumer that were paid to cover property damage, and difficulties with the loan origination process (such as unresponsive loan representatives, requirements for multiple loan applications and processing delays resulting in loss of favorable interest rates or expiration of rate locks).

In its press release about the complaint report, the CFPB highlighted the mortgage loan complaints regarding loss mitigation, servicing transfers, and communications with servicers.  These matters are of significant concern to the CFPB, because it views them as presenting a greater risk of consumer harm.  One must consider the potential for the CFPB to use the complaints to justify decisions regarding revisions to the RESPA and TILA servicing requirements in the upcoming final rule or to provide a basis for enforcement activity.

Findings regarding complaints from California consumers include the following:

  • As of April 1, 2016, approximately 118,900 complaints were submitted by California consumers of which approximately 50 percent were from consumers in the Los Angeles and San Francisco metro areas.
  • Mortgages are the most-complained-about product, representing  32 percent of the complaints submitted by California consumers and 26 percent of complaints submitted by consumers nationally.
  • Debt collection and credit reporting were, respectively, the second and third most-complained-about financial products by California consumers.  The percentage of debt collection and credit reporting complaints submitted by California consumers was lower than the national average.