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Tennessee Allows Industrial Banks To Charge Fees For Electronic Payments
On April 4, Tennessee Governor Bill Haslam signed into law SB 1486, which authorizes registered industrial banks, industrial loan and thrift companies, and industrial investment companies to charge a convenience fee to any borrower making payment by credit card, debit card, electronic fund transfer, electronic check, or other electronic means in order to offset actual costs incurred by the lender. The convenience fees cannot exceed the actual costs incurred by the registrant for each payment type, or the average of the actual cost incurred for the various types of electronic payments accepted by the registrant. Registrants who elect to charge a convenience fee must also allow payment by non-electronic means—check, cash, or money order—without the imposition of a convenience fee. The changes take effect July 1, 2014.
Iowa Amends Mortgage, Consumer Credit Laws
On March 26, Iowa Governor Terry Branstad signed into law HF 2324, which revises the state’s mortgage and consumer credit statutes to align with federal law. The bill amends the current $25,000 loan ceiling applicable to certain consumer credit transactions and replaces it with a “threshold amount” that incorporates by reference limits established under federal Truth in Lending Act. The bill also adopts the federal definition of “points and fees” for mortgage transactions and provides that if a loan is extended with points and fees higher than those specified under federal law the loan is subject to state law, including monetary limits on loan origination or processing and broker fees, a limit on the types of permissible lender charges, and a limit on fees relating to payment of interest reduction fees in exchange for a lower rate of interest. The bill also amends the definition of “finance charge” in the state’s consumer credit code to include an initial charge imposed by a financial institution for an overdrawn account. Finally, the bill adds a new section that allows banks to include in their consumer credit contracts over $25,000 a provision that a consumer is responsible for reasonable attorney fees if the bank is the prevailing party in a lawsuit arising from the transaction. The changes take effect July 1, 2014.
Washington Amends Provisions Impacting Non-Depository Institutions
Recently, the state of Washington enacted SB 6134, which amends numerous provisions related to the supervision of non-depository institutions. The bill clarifies the statute of limitations applicable to certain violations by non-depository institutions by providing that enforcement actions for violations of the Escrow Act, the Mortgage Broker Practices Act, the Uniform Money Services Act (UMSA), the Consumer Loan Act, and the Check Cashers and Check Sellers Act (CCSA) are subject to a five-year statute of limitations. In addition, the bill provides that licensees under the CCSA and the UMSA that conduct business in multiple states and register through the NMLS must submit call reports to the Department of Financial Institutions. The changes take effect June 12, 2014.
UK FCA Describes Approach To Consumer Credit Markets, Launches Review Of Credit Card Market
On April 3, Martin Wheatley, Chief Executive of the UK Financial Conduct Authority (FCA), which took over responsibility for overseeing consumer credit markets in the UK on April 1, 2014, identified the FCA’s most “immediate priority” as ensuring “providers of credit, as well as satellite services like credit broking, debt management and debt advice, have sustainable and well-controlled business models, supported by a culture that is based on ‘doing the right thing’ for customers.” He explained that the FCA wants to expand financial service providers’ focus on compliance with specific rules to include “wider FCA expectations of good conduct.” Referencing a paper the FCA published on April 1, the day it began overseeing consumer credit markets, Mr. Wheatley stated that consumer credit providers need to consider how they engage with consumers in vulnerable circumstances. On this issue, the FCA also announced a “competition review” of the UK credit card market to determine, among other things, “how the industry worked with those people who were in difficult financial situations already.”
California Proposes Rule To Clarify Scope Of Licensing Exemption
Earlier this month, the California Department of Business Oversight (DBO) issued a notice and request for comment on a proposed amendment to regulations that implement the California Finance Lenders Law (CFLL) and the California Residential Mortgage Lending Act (CRMLA). The proposed amendment would clarify that non-depository operating subsidiaries, affiliates, and agents of federal banks and other financial institutions do not fall within the licensure exemption for a bank or savings association under the CFLL and the CRMLA. The DBO views the proposed amendment as required in light of the Dodd-Frank Act’s elimination of federal preemption over such entities by the OCC. Comments on the proposal are due by May 7, 2014.
California Eliminates Passive Investor Self-Certification From Finance Lenders Law License Application
Recently, the California Department of Business Oversight (DBO) made a number of changes to the application for a California Finance Lenders Law (CFLL) license that is completed by persons engaged in non-residential lending or brokering. The changes were made following a 45-day notice and comment period. (Presumably, these changes also apply, where applicable, to persons engaged in residential lending or brokering and who are thus required to submit applications via the Nationwide Mortgage Licensing System.)
One of the most significant changes to the application relates to which individuals associated with the owners of an applicant are required to submit a Statement of Identity and Questionnaire and fingerprints to the DBO for investigative purposes. Since 2007, the application specified as follows:
If an entity owns or controls 10% or more of the applicant, a Statement of Identity and Questionnaire and fingerprints must be submitted for each officer, director, general partner, or managing member, as applicable, unless the applicant or entity can make the following representation in a separate cover letter that is incorporated by reference into the CFLL application:
1. [(Name of entity)] is a passive investor and is not responsible in any way for the conduct of the applicant’s lending activities in California. Therefore, it is unnecessary to investigate any individuals managing or controlling [(name of entity)].
2. Describe whether the entity has engaged in any act that would constitute a reason for the California Corporations Commissioner to deny a license under Financial Code Section 22109 and if so, fully disclose the acts.
A public company may submit fingerprints only for persons not included on the public company’s Form 10-K, Form 10-Q or other similar document filed with the Securities and Exchange Commission. The applicant must submit a copy of Form 10-K, Form 10-Q, or other similar document that includes the name of the individuals not submitting fingerprints. Statement of Identity and Questionnaires must still be completed for all individuals. For purposes of this paragraph, “public company” means a company whose securities are listed or designated on a national securities exchange certified by the California Corporations Commissioner under Subdivision (o) of Section 25100 of the California Corporations Code.
But now the application no longer provides an option for the applicant to include a self-certification for passive investors concerning investigations. Instead, the application now specifies as follows:
If an entity owns or controls 10% or more of the applicant, a Statement of Identity and Questionnaire and fingerprints must be submitted for each officer, director, general partner, or managing member, as applicable. The Commissioner may waive this requirement if it is determined that further investigation is not necessary for public protection.
A public company may submit fingerprints only for persons not included on the public company’s Form 10-K, Form 10-Q or other similar document filed with the Securities and Exchange Commission. The applicant must submit a copy of Form 10-K, Form 10-Q, or other similar document that includes the name of the individuals not submitting fingerprints. Statement of Identity and Questionnaires must still be completed for all individuals. For purposes of this paragraph, “public company” means a company whose securities are listed or designated on a national securities exchange certified by the Commissioner of Business Oversight under subdivision (o) of Section 25100 of the California Corporations Code.
In its Final Statement of Reasons for the Adoption of Rules, the DBO acknowledged that not all owners of an applicant may be responsible for the applicant’s lending activities (e.g., pension plans) and that investigating such owners may be burdensome, costly, and unnecessary. But the DBO explained that it chose to remove the self-certification for passive investors because it “has been subject to abuse by some applicants attempting to use it to evade background investigations or to hide the true identity of the owner(s).” At the same time, the DBO emphasized that it still retains authority to forego the investigation of passive investors when doing so is consistent with the CFLL.
As a result of this change, CFLL license applicants (and CFLL licensees whose ownership may change as a result of, for example, an acquisition or internal restructuring) should be prepared for the principal officers, directors, general partners, and managing members, as applicable, of their 10% owners and control affiliates to submit Statements of Identity and Questionnaires and fingerprints, unless they are able to persuade the DBO that investigation of these individuals is not necessary for public protection. It is our understanding from DBO personnel that one way that this may be accomplished is by providing sufficient evidence that these individuals have been investigated and vetted by another governmental or regulatory agency.
Illinois AG Sues To Enforce Dodd-Frank "Abusive" Prohibition
On March 19, Illinois Attorney General (AG) Lisa Madigan announced a suit against a lender for allegedly offering a short-term credit product designed to evade the state’s usury cap. The AG claims the lender offers a revolving line of credit with advertised interest rates of 18 to 24%, and then adds on “account protection fees.” The AG characterizes those fees as interest substantially in excess of the state’s 36% usury cap. According to the AG, after a borrower takes out the short-term loan, the lender allegedly provides a payment schedule and instructs the borrower to make minimum payments, which consumers who filed complaints with the AG’s office believed was a timeline to pay off the full debt. The complaint is the AG’s first under the Dodd-Frank Act and claims that the lender’s practices take unreasonable advantage of consumers and constitute abusive practices. The complaint also alleges violations of the state Consumer Fraud and Deceptive Businesses Practice Act and seeks restitution, civil penalties, disgorgement, and an order nullifying all existing contracts with Illinois consumers and prohibiting the company from selling lines of credit and revolving credit in Illinois.
Maine Seeks To Halt Unlicensed Consumer Lending
On March 16, Maine enacted legislation that makes it a violation of the Maine Unfair Trade Practices Act for a lender not organized and supervised under the laws of any state or the United States to solicit or make, either directly or through an agent, a loan to a Maine consumer unless licensed under state law. The law also establishes as an unfair or deceptive act or practice for entities other than supervised financial institutions to process a check, draft, other form of negotiable instrument or an electronic fund transfer from a consumer's financial account in connection with a loan solicited from or made by an unlicensed lender who is not exempt from the licensure requirement. The statute similarly establishes as an unfair or deceptive act or practice for any person or lender to provide substantial assistance to a lender or processor when the person or lender or the person's or lender's authorized agent either knows or consciously avoids knowing that the lender or processor is unlicensed and not otherwise exempt from licensure or is engaging in an unfair or deceptive act or practice. The Maine UTPA provides a private right of action and allows the state attorney general to seek injunctive relief and civil penalties for violations of an injunction.
South Dakota Clarifies Revolving Credit Account Requirements
On March 3, South Dakota enacted HB 1131, which amends state banking laws to make clear that banks can offer revolving lines of credit not tied to the issuance of a credit card.
UK FCA Finalizes New Consumer Credit Rules
On February 28, the UK Financial Conduct Authority (FCA) announced final rules for consumer credit providers, including new protections for consumers in credit transactions. The FCA states that the most drastic changes relate to payday lending and debt management. For example, with regard to “high-cost short-term credit,” the new rules will (i) limit to two the number of loan roll-overs; (ii) restrict to two the number of times a firm can seek repayment using a continuous payment authority; and (iii) require creditors to provide a risk warning. Among other things, the new rules also establish prudential standards and conduct protocols for debt management companies, peer-to-peer lending platforms, and debt advice companies. The policy statement also describes the FCA’s risk-based and proactive supervisory approach, which the FCA states will subject firms engaged in “higher risk business” that “pose a potentially greater risk to consumers” to an “intense and hands on supervisory experience” and will allow the FCA to levy "swift penalties” on violators. The new rules take effect April 1, 2014. The FCA plans next to propose a cap on the cost of high-cost, short-term credit.