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CFPB: Credit applications rebound to pre-pandemic levels
On July 27, the CFPB published a special issue brief finding that consumer applications for auto loans, new mortgages, and revolving credit cards had, for the most part, returned to pre-pandemic levels by May 2021. The brief compares the number of applications made in these categories before the pandemic to the number being made now and provides a state-by-state analysis of the change in applications. Highlights of the brief include: (i) sub-prime borrower credit applications increased in conjunction with federal stimulus payments; (ii) auto loan inquiries dropped 52 percent by the end of March 2020 but returned to their usual pre-pandemic trend by January 2021; however, the Bureau reports wide geographic variability in the demand for auto loans while changes in credit card applications were generally uniform; (iii) new mortgage credit inquiries experienced a smaller drop in March 2020 compared to other credit types but later saw a surge, with inquiries exceeding the usual, seasonally adjusted volume by 10 to 30 percent—a reflection of unusually high activity seen throughout the pandemic; (iv) revolving credit card inquiries declined by over 40 percent and took the longest to rebound, not returning to normal levels until March 2021; and (v) consumers with deep subprime credit scores represented the largest decline in auto loan inquiries compared to prior years, followed by inquiries from consumers with subprime credit scores, with both categories of consumers also showing declines in new mortgage and revolving credit card inquiries. “While consumer credit applications have generally recovered to pre-pandemic levels in the aggregate, we see important differences across consumers,” acting CFPB Director David Uejio stated. “Both borrowers with superprime and subprime credit scores are still not applying for credit as much as they were pre-pandemic. We will continue to keep a close watch on the marketplace as the economic recovery continues, to help ensure all consumers have access to financial products and services that are fair, transparent, and competitive.”
Maryland Court of Special Appeals: Borrower may maintain cause of action before credit grantor’s collections exceed principal amount
On July 1, the Court of Special Appeals of Maryland affirmed a state circuit court’s ruling, holding that “a consumer borrower may maintain a cause of action against a credit grantor under the Credit Grantor Closed End Credit Provisions (CLEC). . .before the credit grantor has collected more than the principal amount of the loan.” In 2014, the borrower entered into a loan agreement with the credit grantor. Although the borrower allegedly made numerous payments on the credit contract, her personal property was repossessed in 2017. She filed a CLEC claim against the credit grantor, alleging the company “specifically refused” to provide her with a requested written statement memorializing her account history, “including all debits and credits to her account and any monthly statements sent to [her] and all other documents which refer to payments due or received.” The credit grantor moved to dismiss, arguing, among other things, that the borrower was not entitled to monetary recovery under CLEC and that she failed to allege that she paid amounts in excess of the principal, and as such, did not assert a proper claim under CLEC. The borrower countered “that ‘CLEC damages are available regardless of whether a credit grantor has collected more than [the] principal amount of the loan,” and that furthermore, citing several cases, “‘[t]he relief that is provided by CLEC § 12-1018 has also already been determined by Maryland Appellate Courts and includes monetary, equitable and declaratory relief[.]’” The circuit court granted the credit grantor’s motion to dismiss, in part, as to the CLEC claim, holding that when relying on the plain language of the statute, the consumer was not entitled to relief.
On appeal, the Court of Special Appeals held, based on CLEC’s plain language, statutory construction, legislative history, and precedent that a consumer can bring a claim under CLEC for damages, and/or declaratory and injunctive relief before the consumer has paid amounts in excess of principal. However, because the borrower had “failed to allege actual damages or request other appropriate relief under CLEC,” the Court of Special Appeals affirmed the judgment of the circuit court dismissing her CLEC claim.
Wyoming passes consumer lending act
Earlier this year, the Wyoming governor signed HB 8 to authorize sales-finance activities for some licensees and establish procedures and calculations for refunding certain credit-insurance products upon prepayment. Among other things, this act exempts certain supervised financial institutions from certain notice and fee requirements in the Wyoming Uniform Consumer Credit Code (the Code) and generally restructures the Code to repeal statutes for consumer-related and supervised loans, consolidating the provisions for those loans into existing laws for consumer loans. Regarding the MLA, the act authorizes that “the administrator may seek an appropriate remedy, penalty, action or license revocation or suspension.” This act is effective July 1.
CFPB analyzes HMDA data of small to medium-size lenders
On June 14, the CFPB released a report analyzing differences in certain loan and borrower characteristics and general lending patterns for lenders below and above the 100-loan closed-end threshold set by the 2020 HMDA final rule. As previously covered by InfoBytes, last year the Bureau issued a final rule permanently raising coverage thresholds for collecting and reporting data about closed-end mortgage loans under HMDA from 25 to 100 loans.
While the Bureau notes that the “analysis is necessarily limited and preliminary,” the report’s findings, which analyzed publicly available HMDA data from 2019 for which the 25-loan threshold still applied, show, among other things, that (i) lenders that are exempt under the 2020 final rule (those whose origination volume exceeds the 25-loan threshold but falls below the 100-loan threshold) “do not appear to be more likely to lend to Black and non-White Hispanic borrowers than larger volume lenders”; (ii) these lenders may be more likely to lend to non-natural person borrowers such as trusts, partnerships, and corporations; (iii) a higher percentage of these loans are secured by properties in low-to-moderate income (LMI) census tracts, properties in rural areas, second liens, and investment properties; (iv) these lenders tend to make more loans to borrowers who appear to have higher income levels than large lenders’ borrowers; and (v) a slightly higher percentage of loans made by these lenders are secured by manufactured homes than by lenders with origination volumes over 300. According to the Bureau’s blog post, the “findings are consistent with a possible explanation that lenders below the 2020 rule’s 100-loan closed-end threshold are making more loans to investors buying up property in [LMI] census tracts for rental or resale.”
Connecticut Supreme Court says lender protected by tribal sovereign immunity
On May 20, the Connecticut Supreme Court held that a lender accused of issuing usurious consumer loans without being properly licensed is protected by tribal sovereign immunity. In 2014, the Connecticut Department of Banking initiated an enforcement action against two lenders and a tribal officer of one of the lenders, claiming the lenders violated Connecticut’s banking and usury laws by making high-interest consumer loans over the internet without a license. The commissioner issued cease-and-desist orders and imposed civil penalties on the lenders. The lenders filed a motion in Connecticut Superior Court to dismiss the administrative proceedings for lack of jurisdiction, claiming they were arms of a federally recognized tribe and entitled to tribal sovereign immunity. The Superior Court vacated the orders against the lenders and remanded the case for an evidentiary hearing on whether the lenders are entitled to sovereign immunity.
The Connecticut Supreme Court reversed in part the Superior Court’s order, finding that the lower court should have applied the “Breakthrough factors” adopted by the U.S. Court of Appeals for the Fourth, Ninth, and Tenth Circuits to determine whether the lenders were arms of the tribe. These factors include analysis of (i) “the method of creation” of the entities; (ii) the stated purpose of the entities; (iii) “the structure, ownership, and management of the entities,” which includes the amount of control the tribe has over them; (iv) the tribe’s intent with respect to extending its sovereign immunity to the entities; and (v) “the financial relationship between the tribe and the entities.” Applying these factors, the Connecticut Supreme Court found that one of the lenders was entitled to sovereign immunity because the lender was created under tribal law, is controlled by directors appointed by the tribal council for the purpose of promoting tribal economic development and welfare, and there was a “significant financial relationship” between the tribe and the lender. With respect to the other lender, the court found that there was insufficient evidence to show that it is an arm of the tribe and that further proceedings were necessary to determine its right to sovereign immunity.
Texas updates guidance for tax lenders, continuing to urge them to work with consumers and allowing employees to work remotely
On April 15, the Texas Office of the Consumer Credit Commissioner updated its advisory bulletin (previously discussed here, here, here, here, and here) urging property tax lenders to continue to work with consumers during the Covid-19 crisis. Among other measures, the regulator urges licensees to increase consumer communication regarding the effects of Covid-19 on the licensees’ business, work out modifications for payment difficulties, and review policies for fees, late fees, and delinquency practices, to help support successful repayment. The guidance also: (i) reminds licensees of legal requirements for using electronic signatures, and (ii) continues to permit licensees to conduct activity from unlicensed locations, subject to certain conditions. The guidance is in effect through May 31, 2021, unless withdrawn or revised.
Mississippi reenacts licensing requirements
On March 17, the Mississippi governor signed HB 1075, which will, among other things, reenact licensing provisions for lenders who provide “credit availability transactions” to customers through fully amortized loans paid over a term of four to 12 months. Under the act, transactions made by unlicensed lenders will be null and void. The act outlines licensing requirements, including those related to annual renewal fees, bond deposits, and expedited licensing requests. The provisions also allow the commissioner to “issue a temporary license authorizing the operation of a credit availability business on the receipt of an application for a license involving principals and owners that are substantially identical to those of an existing licensed credit availability licensee.” Temporary licenses will remain effective until a determination is made on the status of a permanent license. The act also outlines provisions for check cashing business, including licensing requirements and limits on other activities. The act takes effect July 1.
Virginia reaches settlement with open-end credit plan lender
On March 4, the Virginia attorney general announced a settlement with an open-end credit plan lender, resolving allegations that the company violated Virginia consumer finance laws by (i) imposing a $100 origination fee on loans during a statutorily-mandated finance charge-free grace period; (ii) “[e]ngaging in a pattern of repeat transactions and ‘rollover’ loans with thousands of consumers who were required to close accounts that they paid down to a $0 balance,” but were then allowed to open new accounts for which new fees were charged on a monthly basis; and (iii) charging interest on accounts at an annual rate of 273.75 percent, far exceeding the 36 percent limit that open-end credit lenders are allowed to charge. Under the terms of the settlement, the company is permanently enjoined from further violating Virginia’s consumer finance laws, and is required to pay $850,000 in restitution and $150,00 in attorneys’ fees and settlement costs. The company must also provide more than $10 million in debt forbearance on “accounts that remain unpaid and that were not converted to a separate loan program in October 2018.”
Illinois legislature passes 36 percent rate cap for all consumer loans
On January 13, the Illinois legislature unanimously passed the “Predatory Loan Prevention Act,” (available in House Amendment 3 to SB 1792), which would prohibit lenders from charging more than 36 percent APR on all consumer loans. Specifically, the legislation would apply to any non-commercial loan, including closed-end and open-end credit, retail installment sales contracts, and motor vehicle retail installment sales contracts. For calculation of the APR, the legislation would require lenders to use the system for calculating a military annual percentage rate under the Military Lending Act. Any loan made in excess of 36 percent APR would be considered null and void and no entity would have the “right to collect, attempt to collect, receive, or retain any principal, fee, interest, or charges related to the loan.” Additionally, each violation would be subject to a fine up to $10,000.
National bank settles DACA discrimination class action
On January 8, the U.S. District Court for the Northern District of California granted final approval to a settlement resolving allegations brought by a national class and a California class against a national bank concerning the denial of credit to recipients who held valid and unexpired Deferred Action for Childhood Arrivals (DACA) status. In a motion for preliminary settlement filed last June, the plaintiffs claimed that the bank allegedly determined DACA recipients to be ineligible for direct auto financing because of their noncitizen status, even though “[t]here is no federal or state law or regulation that prohibits banks from lending to non-citizens generally, or DACA recipients specifically, based on their status as non-citizens.” The bank moved to dismiss, claiming the plaintiffs failed to plead facts sufficient to state claims under the Equal Credit Opportunity Act and the Fair Credit Reporting Act. The parties engaged in discovery, but ultimately agreed to stay the case and engaged a mediator to assist with settlement discussions.
Under the terms of the settlement, the bank is required to provide verified California class members up to $2,500 per claim and national class members up to $300 pending submission of a valid claim. The settlement also provides injunctive relief, a service award to the class representative, attorneys’ fees and costs, and settlement administration costs. Additionally, the bank will amend its direct auto lending practices in order “to extend loans to current and valid DACA recipients on the same terms and conditions as U.S. citizens,” and will provide class counsel an annual status report detailing the status of its programmatic relief for a two year period.