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Financial Services Law Insights and Observations

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  • West Virginia issues stay at home order

    State Issues

    On March 23, the West Virginia governor issued a stay at home order requiring non-essential businesses and operations to temporarily cease operations. Essential businesses and operations include financial and insurance institutions, including banks and banking services such as ATM services, currency exchanges, consumer lenders, credit unions, appraisers, title companies, financial markets, trading and futures exchanges, payday lenders, affiliates of financial institutions, professional debt collectors and related creditor service workers, workers engaged in payment clearing and settlement, wholesale funding, and capital markets activities, entities that issue bonds, related financial institutions, institutions selling financial products, insurance companies, underwriters, agents, brokers, and related insurance claims and agency services. Additionally, essential businesses and operations include those businesses that sell, manufacture, or supply other essential businesses and operations with the support of materials necessary to operate. The order becomes effective at 8:00 PM on March 24, 2020, and remains in effect until terminated by subsequent executive order.

    State Issues West Virginia Covid-19 Consumer Lending Consumer Finance

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  • Utah amends consumer lending requirements

    State Issues

    On March 24, the Utah governor signed HB 319, which modifies provisions related to consumer lending in the state, including registration, reporting, and operational requirements for deferred deposit lenders. Among other things, the provisions require deferred deposit lenders to provide borrowers at least 30 days’ notice of default before initiating a civil action, allowing a borrower the opportunity to remedy the default. HB 319 also requires deferred deposit lenders seeking to renew a registration to report, for the immediately preceding calendar year, the total number of loans extended, the total dollar amount loaned, the number of borrowers who were extended loans, and the percentage of loans that were not repaid based on the terms of the loan, among other items. HB 319 further allows third party debt collection agencies to charge a “convenience fee” when debtors use a credit or debit card for the transaction of business, provided the convenience fee amount is disclosed prior to being charged and the debtor is given an alternative payment method that does not carry a fee. The amendments take effect 60 days following adjournment of the legislature.

    State Issues State Legislation Consumer Finance Consumer Lending Deferred Deposit Lenders Third-Party Debt Collection

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  • Indiana amends UCCC provisions for consumer credit sales and loans

    State Issues

    On March 18, the Indiana governor signed SB 395, which amends the state’s Uniform Consumer Credit Code (UCCC) to revise provisions related to consumer credit sales and consumer loans, among other things. Amendments include those that (i) authorize a seller to contract for and receive—subject to certain conditions—a nonrefundable prepaid finance charge based on the amount financed for an agreement for a consumer credit sale entered into after June 30, 2020 (precomputed consumer credit sales are prohibited); (ii) outline conditions related to the maximum allowed credit service charges for consumer credit sales; (iii) state that the amount of an authorized nonrefundable prepaid finance charge cannot be more than $75, $150, or $200, based on the amount financed, for consumer loan agreements entered into after June 30, 2020, where the loan is not secured by an interest in land (precomputed consumer loans are prohibited); and (iv) make conforming changes with respect to supervised loans, as well as conforming technical amendments throughout the UCCC to reflect the amendments. SB 395 also amends the effective date from July 1 of each even-numbered year to January 1 of each odd-numbered year for the adjustment of various dollar amounts in the UCCC based on changes in the Consumer Price Index. While certain amendments take effect upon the bill’s passage, most of the amendments become effective July 1.

    State Issues State Legislation Consumer Lending Consumer Credit

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  • FDIC approves creation of de novo banks; proposes new industrial bank rules

    Agency Rule-Making & Guidance

    On March 18, the FDIC announced (see here and here) the approval of two deposit insurance applications, which will allow for the creation of two de novo industrial banks. The first approval order will permit a California-based company to originate commercial loans to merchants that process card transactions through the company’s payments system and will operate from a main office located in Utah. The second approval order will permit a Nebraska-based corporation to originate and service private student loans and other consumer loans. The new bank will operate as an internet-only bank from a main office located in Utah. Both companies now await approval from the Utah Department of Financial Institutions.

    Separately, on March 17, the FDIC announced that it is seeking comments on a proposed rule that would require certain conditions and commitments for approval or non-objection to certain filings involving industrial banks and industrial loan companies (collectively, “industrial banks”), such as deposit insurance, change in bank control, and merger filings. The proposed rule applies to industrial banks whose parent company is not subject to consolidated supervision by the FRB. The proposed rule would require a covered parent company to enter into written agreements with the FDIC and the industrial bank to: (i) address the company's relationship with the industrial bank; (ii) require capital and liquidity support from the parent company to the industrial bank; and (iii) establish appropriate recordkeeping and reporting requirements.

    The proposed rule would require prospective covered companies to agree to a minimum of eight commitments, which, for the most part, the FDIC has previously required as a condition of granting deposit insurance to industrial banks. These include: (i) providing a list of all parent company subsidiaries annually; (ii) consenting to examinations of the parent company and its subsidiaries; (iii) submitting to annual independent audits; (iv) maintaining necessary records; (v) limiting the parent company’s representation on the industrial bank’s board to 25 percent; (vi) maintaining the industrial bank’s capital and liquidity requirements “at such levels deemed appropriate” for safety and soundness; (vii) entering into tax allocation agreements; and (viii) implementing contingency plans “for recovery actions and the orderly disposition of the industrial bank without the need for a receiver or conservator.” Comments on the proposed rule will be due 60 days after publication in the Federal Register.

    Agency Rule-Making & Guidance FDIC ILC De Novo Bank Consumer Lending Commercial Lending

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  • DoD changes interpretation of MLA related to Guaranteed Asset Protection contracts

    Agency Rule-Making & Guidance

    On February 28, the Department of Defense (DoD) published an amendment to its December 2017 interpretive rule (2017 Rule) for the Military Lending Act (MLA) to withdraw a provision concerning the exemption of credit secured by a motor vehicle or personal property. As previously covered by InfoBytes, the 2017 Rule stated that additional costs may be added to an extension of credit so long as these costs relate to the object securing the credit, and not the extension of credit itself. In particular, the 2017 Rule stated that if credit is extended to cover “Guaranteed Auto Protection insurance or a credit insurance premium” the loan is covered by the MLA.

    Following the publication of the 2017 Rule, the DoD received several requests to withdraw this Rule. The requests raised concerns that creditors “would be unable to technically comply with the MLA . . . because 232.8(f) of the [MLA] regulation would prohibit creditors from taking a security interest in the vehicle in those circumstances and creditors may not extend credit if they could not take a security interest in the vehicle being purchased.” The DoD stated that it found merit in these concerns and agreed that additional analysis is warranted. As a result, the DoD has withdrawn amended Q&A #2 from the 2017 Rule, and reinstated the 2016 Rule, which states that loans secured by “personal property” do not fall within the exception to “consumer credit” if the creditor “simultaneously extends credit in an amount greater than the purchase price.”

    The amended interpretive rule is effective immediately.

    Agency Rule-Making & Guidance Department of Defense Military Lending Act Auto Finance Safe Harbor GAAP Consumer Lending

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  • Senate Democrats criticize OCC and FDIC fintech proposals

    Federal Issues

    On November 21, six Democratic Senators wrote to OCC Comptroller Joseph Otting and FDIC Chairman Jelena Williams to strongly oppose recent proposed rules by the agencies (see OCC notice here and FDIC notice here). As previously covered by a Buckley Special Alert, the OCC and FDIC proposed rules reassert the “valid-when-made doctrine,” which states that loan interest that is permissible when the loan is made to a bank remains permissible after the loan is transferred to a nonbank. In the letter, the Senators suggest that the proposed rules enable non-bank lenders to avoid state interest rate limits. According to the letter, the proposed rules would encourage “payday and other non-bank lenders to launder their loans through banks so that they can charge whatever interest rate federally-regulated banks may charge.” Additionally, the letter urges both agencies to consider their past declarations against “rent-a-bank” schemes, and contends that the agencies should not attempt to address Madden v. Midland Funding, LLC, which rejected the valid-when-made doctrine, through rulemaking, but should instead leave such lawmaking to Congress.

    Federal Issues Agency Rule-Making & Guidance FDIC OCC Fintech Valid When Made Madden Usury Payday Lending Consumer Lending Interest Rate Preemption

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  • District Court: Bank’s delay on adverse-action notice does not qualify for safe harbor

    Courts

    On August 8, the U.S. District Court for the Eastern District of Kentucky granted a loan applicant’s request for partial summary judgment on allegations that a bank violated ECOA when it failed to timely send an adverse-action notice. The court ruled that the bank failed to establish its inadvertent error defense. The plaintiff’s loan application was submitted on October 30, 2018, and subsequently reviewed and denied on November 5 due to “issues with his credit report that needed to be resolved” in order for his application to be fully considered. The adverse action paperwork was then placed in a courier pouch for delivery to the lending officer responsible for notifying the plaintiff. However, the information failed to make it to the intended officer until after the plaintiff filed the action, upon which, the adverse action letter was generated on December 19. Under ECOA, notification of action must be made within 30 days of receipt.

    The bank argued that partial summary judgment was inappropriate because the failure to provide notice within 30 days was an “inadvertent error” under 12 CFR 1002.16, and therefore did not constitute a violation of ECOA. The court stated that, in order to prevail on its argument on the safe-harbor provision for inadvertent errors, the bank, as the nonmoving party, must establish three elements: (i) the error was “mechanical, electronic, or clerical”; (ii) the error was unintentional; and (iii) the error “occurred ‘. . .notwithstanding the maintenance of procedures reasonably adapted to avoid such errors.” However, the bank conceded that it could not explain what caused the courier pouch error, put forth no evidence to show that the effort was clerical in nature, and also acknowledged that it “does not maintain any procedure reasonably adapted to avoid such errors.” As such, the court determined that the bank failed to demonstrate the existence of a genuine issue of any material fact bearing on the elements of the defense, and thus failed to qualify for the safe harbor defense.

    Courts ECOA Safe Harbor Consumer Lending

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  • Oregon requires consumers to repay title, payday loans before lender makes new loan

    State Issues

    On May 30, the Oregon Governor signed HB 2089, which, among other things, prohibits title loan and payday loan lenders from making a new loan to a consumer until seven days after the consumer has fully repaid a previous title loan or payday loan. In addition, lenders may not make or renew a title loan or payday loan with an interest rate exceeding 36 percent annually, excluding a one-time allowable origination fee. These amendments apply to loan contracts, including renewals, executed on or after January 1, 2020.

    State Issues State Legislation Consumer Lending Payday Lending

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  • Indiana amends delinquency charge provisions for consumer credit sales and consumer loans

    State Issues

    On May 6, the Indiana governor signed HB 1136, which amends the state’s Uniform Consumer Credit Code (UCCC) to, among other things, revise provisions related to authorized delinquency charges on consumer credit sales and consumer loans. Specifically, the amendments authorize a creditor to collect a delinquency charge of not more than (i) $5 for installments not paid in full within 10 days after the scheduled due date if installments are due every 14 days or less; (ii) $25 for installments not paid in full within 10 days after the scheduled due date if installments are due every 15 days or more; or (iii) $25 on single installments due at least 30 days after the consumer loan is made if the installment is not paid within 10 days after its scheduled due date. Furthermore, creditors are prohibited from collecting—whether directly or indirectly—a delinquency charge on any payment that (i) is paid within 10 days following its scheduled due date; and (ii) “is otherwise a full payment of the payment due for the applicable installment period. . .if the only delinquency with respect to a consumer credit sale, refinancing, or consolidation is attributable to a delinquency charge assessed on an earlier installment.” In addition, HB 1136 amends the maximum transaction fee for revolving loan accounts to the greater of 2 percent of the transaction amount or $10. The amendments take effect July 1.

    State Issues State Legislation Consumer Lending Consumer Finance Fees

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  • Iowa amends permissible interest rates on credit transactions

    State Issues

    On April 15, the Iowa governor signed HF 260, which amends the maximum interest rate and charges permitted under Iowa Code 2019. Specifically, for interest-bearing consumer credit transactions up to $30,000 (increased from $10,000), the interest rate may not exceed the lesser of $30 or ten percent of the financed amount. The amendments also specify the minimum charge creditors are allowed to collect or retain when prepayments are made in full, and stipulate that if a service charge has been collected on an interest-bearing consumer credit transaction then a “creditor shall not collect or retain a minimum charge upon prepayment.” HF 260 takes effect July 1.

    State Issues State Legislation Interest Rate Fees Consumer Lending

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