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Special Alert: CFPB's Proposed Rule Regarding Payday, Title, and Certain Other Installment Loans
On June 2, 2016, the CFPB published its proposed rule (the “Proposed Rule”) addressing payday loans, vehicle title loans, and certain other installment loans (collectively “covered loans”). This alert summarizes the Proposed Rule and compares the Proposed Rule to the CFPB’s March 26, 2015 outline released pursuant to the Small Business Regulatory Enforcement Fairness Act (SBREFA). Those wishing to comment on the Proposed Rule must do so by September 14, 2016.
Summary of the Proposed Rule
The Proposed Rule is issued pursuant to the CFPB’s authority under section 1031 of the Dodd-Frank Act to identify and prevent unfair, deceptive, or abusive acts or practices. It defines two types of covered loans: (1) “short-term” loans that have terms of 45 days or less; and (2) “longer-term” loans with terms of more than 45 days that have a “total cost of credit” exceeding 36% and either a “leveraged payment mechanism” or a security interest in the consumer’s vehicle. A “leveraged payment mechanism” includes a right for the lender to initiate transfers from the consumer’s account and certain other payment mechanisms. The Proposed Rule would exclude (i) credit extended for the sole and express purpose of financing a consumer’s initial purchase of a good when the credit is secured by the property being purchased; (ii) credit secured by any real property or by personal property used or expected to be used as a dwelling; (iii) credit cards; (iv) student loans; (v) non-recourse pawn loans; and (vi) overdraft services and lines of credit.
The Proposed Rule would make it an abusive and unfair practice for a lender to make a covered short-term or longer-term loan without determining upfront that the consumer will have the ability to repay the loan (the “full-payment test”). For both types of covered loans, the Proposed Rule would require a lender to determine whether the consumer can afford the full amount of each payment of a covered loan when due and still meet basic living expenses and major financial obligations. As a practical matter, the full-payment test imposes restrictions on rollovers, loan sequences, and refinancing by preventing the offering of short-term loans fewer than 30 days after payoff without a showing that the borrower’s financial situation is materially improved (and capping successive short-term loans at 3 before requiring a 30-day cooling off period), and preventing the refinancing of longer-term loans without a showing that payments would be smaller or would lower the total cost of credit. The Proposed Rule also would provide conditional exemptions for certain covered loans meeting specified criteria, as discussed further below. These conditional exemptions essentially provide alternative compliance options to the Proposed Rule’s full-payment test. Additionally, the Proposed Rule would require lenders to use and furnish information to registered information systems established to track covered loans.
Click here to view the full Special Alert.
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Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- John P. Kromer, (202) 349-8040
- Walter E. Zalenski, (202) 461-2910
- Marshall T. Bell, (202) 461-2997
Federal Register Publishes CFPB Arbitration Proposal; Comment Period Closes August 22
On May 24, the CFPB’s proposed rule on arbitration agreements was published in the Federal Register. As previously covered in InfoBytes, the CFPB’s proposal seeks to ban covered providers of most financial consumer products and services from including mandatory pre-dispute arbitration clauses in consumer agreements. Comments on the proposal are due by Monday, August 22, 2016.
CFPB, Federal Banking Agencies, and NCUA Issue Interagency Guidance Regarding Deposit Reconciliation Practices
On May 18, the CFPB, the Federal Reserve, the OCC, the FDIC, and the NCUA issued interagency guidance on supervisory expectations regarding customer account deposit reconciliation practices. According to the guidance, banks create a “credit discrepancy” if they credit a customer a different amount than the total of the items the customer tried to deposit into an account. In further explaining what constitutes a credit discrepancy, the guidance states, “the customer may deposit $110 to an account, but may indicate on the deposit slip that only $100 has been tendered. In this case, the financial institution may credit $100 to the customer’s account as indicated on the deposit slip without reconciling the $10 discrepancy.” According to the guidance, some financial institutions fail to correct the inconsistencies between the dollar value of items deposited to the customer’s account and the amount actually credited to that same account. This is a potential violation of (i) the Expedited Funds Availability Act’s, as implemented by Regulation CC, requirement to make deposited funds available for withdrawal within prescribed time limits; (ii) the FTC Act’s ban of unfair or deceptive acts or practices; and (iii) the Dodd-Frank Act’s prohibition of unfair, deceptive, or abusive acts or practices. In addition to reminding financial institutions of their obligations to comply with the aforementioned applicable laws, the guidance stresses that financial institutions are expected to “adopt deposit reconciliation policies and practices that are designed to avoid or reconcile discrepancies, or designed to resolve discrepancies such that customers are not disadvantaged.”
CFPB Issues Spring 2016 Rulemaking Agenda
On May 18, the CFPB released an overview of its Spring 2016 Rulemaking Agenda, which outlines the CFPB’s current initiatives. In addition to summarizing the CFPB’s recently released proposed rule to ban pre-dispute arbitration clauses in future consumer agreements, the agenda states that the CFPB expects to release this Summer (i) a Notice of Proposed Rulemaking regarding small dollar loan products, including payday loans and auto title loan; (ii) a rule to finalize its November 2014 proposed rule on prepaid products; (iii) a Notice of Proposed Rulemaking to provide clarity concerning its TRID Know Before You Owe mortgage rule; and (iv) a final rule to amend its 2014 proposed rule revising certain provisions of mortgage servicing requirements under RESPA and TILA. The agenda further comments on the CFPB’s oversight of (i) overdraft services on checking accounts, noting that the agency “is engaged in pre-rule making activities to consider potential regulation” of such services; (ii) debt collection practices, observing that the agency is in the process of developing proposed rules to further regulate the industry; (iii) nonbank institutions, emphasizing the CFPB’s rulemaking efforts to further define larger participants of certain markets for consumer financial products and services; and (iv) mortgage markets, highlighting CFPB efforts to implement “critical consumer protections under the Dodd-Frank Act.” Finally, the agenda comments that the CFPB is in the “very early stages starting work to implement section 1071 of the Dodd-Frank Act, which amends the Equal Credit Opportunity Act to require financial institutions to report information concerning credit applications made by women-owned, minority-owned, and small businesses.”
FinCEN Deputy Director: Industry Collaboration Key to Finalizing Customer Due Diligence Rule
On May 16, FinCEN Deputy Director Jamal El-Hindi delivered remarks at the Institute of International Bankers (IIB) Annual Anti-Money Laundering Seminar in New York. The focal point of El-Hindi’s remarks were recent Treasury initiatives, including, (i) the final Customer Due Diligence (CDD) rule; (ii) draft beneficial ownership legislation; and (iii) FinCEN’s use of Geographical Targeting Orders, as addressed in the beneficial ownership draft legislation. The remarks provide an overarching summary of Treasury’s recent regulatory efforts and address the process by which Treasury developed the final CDD rule and the draft beneficial ownership legislation, specifically commenting on and emphasizing FinCEN’s collaborative rulemaking efforts with industry: “I encourage you to keep our conversation going—particularly with respect to support for the beneficial ownership legislation. . . .Please know that FinCEN depends on you, the institutions you represent, and the key feedback and financial intelligence they provide.”
FinCEN Finalizes Long-Awaited Customer Due Diligence Rule
On May 6, FinCEN issued a final rule imposing standardized customer due diligence requirements for banks, broker-dealers, mutual funds, futures commission’s merchants and introducing brokers in commodities. Subject to exceptions for certain types of entities deemed low risk by FinCEN, beginning on May 11, 2018, covered institutions must identify any natural person that owns, directly or indirectly, 25% or more of a legal entity customer or that exercises control over the entity. Covered financial institutions would also have to take measures to verify that they know the true identity of each person identified as a beneficial owner (but would not be required to verify that such persons are in fact beneficial owners). The requirement will apply to new accounts opened by legal entity customers, and will not be retroactive. Additionally, the final rule adds a standardized set of four customer due diligence requirements as a “fifth pillar” of an effective anti-money laundering program. In addition to identification and verification of beneficial owners of legal entities, the requirements include: (i) identification and verification of customers; (ii) understanding the nature and purpose of the customer relationship; and (iii) ongoing monitoring for reporting suspicious transactions and, on a risk basis, updating customer information.
CFPB Issues Proposed Rule Seeking to Prohibit Mandatory Arbitration Clauses
On May 5, the CFPB released a highly anticipated proposed rule that would ban covered providers of most financial consumer products and services from including mandatory pre-dispute arbitration clauses in future consumer agreements. In addition, the proposed rule would require a covered provider involved in arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the CFPB. Following its March 2015 Arbitration Study, the CFPB asserts that the proposed rule would (i) protect consumers’ right to seek justice and relief in court; (ii) deter companies from violating the law, claiming “attention on the practices of one company can affect or influence their business practices and the business practices of other companies more broadly”; and (iii) increase transparency by requiring companies that use arbitration clauses to submit to the CFPB any claims filed or awards issued in arbitration.
The CFPB officially announced its proposed rule during a May 5 field hearing in Albuquerque, New Mexico. In his opening remarks at the field hearing, CFPB Director Cordray opined that, “[i]f arbitration truly offers the benefits that its proponents claim, such as providing a less costly and more efficient means of dispute resolution, then it stands to reason that companies will continue to make it available.” Opponents of the proposal argue that, among other things, by requiring companies to insert language into arbitration clauses that explicitly states the clauses cannot be used to stop consumers from being part of a class action, the CFPB is, in fact, placing a de facto ban on arbitration. In a U.S. Chamber post, Executive Director of Center for Capital Markets Competitiveness Travis Norton, who was present at the CFPB’s field hearing, reasoned that companies can only bear the costs of arbitration because they do not simultaneously have to defend themselves in class actions, writing that “[n]o economically rational company (or individual) is going to spend additional money voluntarily [on arbitration] when it is forced to pay millions in litigation costs imposed by the broken class action system.”
DOJ Issues Supplemental Advance Notice of Proposed Rulemaking on Web Accessibility Requirements
On April 29, the DOJ issued a Supplemental Advance Notice of Proposed Rulemaking (SANPRM) titled Nondiscrimination on the Basis of Disability; Accessibility of Web Information and Services of State and Local Government Entities. According to the SANPRM, the DOJ “is considering revising the regulation implementing title II of the Americans with Disabilities Act (ADA or Act) in order to establish specific technical requirements to make accessible the services, programs, or activities State and local governments offer the public via the Web.” Due to advances in technology and website accessibility, the recently released SANPRM replaces a 2010 Advance Notice of Proposed Rulemaking and poses 123 questions related to, among other things, (i) the potential application of technical accessibility requirements to the websites of title II entities; (ii) the appropriateness of proposing alternate conformance levels, compliance date requirements, or other methods designed to minimize significant economic impact on small public entities; and (iii) additional costs imposed on public entities to ensure compliance with the 2008 version of Web Content Accessibility Guidelines. The SANPRM is scheduled to be published in the Federal Register on May 9, 2016; comments are due 90 days after publication.
CFPB Amends Regulations J and L of Interstate Land Sales Full Disclosure Act to Allow Electronic Filings
On May 2, the CFPB announced that it is amending implementing Regulations J and L of the Interstate Land Sales Full Disclosure Act (ILSA) to permit electronic filings. Pursuant to ILSA, certain land developers must register their subdivisions and provide prospective lot purchasers with a disclosure statement known as a Property Report. In light of the amendments, the CFPB simultaneously released electronic filing and payment instructions for submitting the requisite registration and filing fees under ILSA.
CFPB Publishes Final Rule Adopting December 2011 Interim Final Rules
On April 28, the CFPB published a final rule to adopt interim final rules issued in December 2011. Pursuant to the Dodd-Frank Act, the CFPB has rulemaking authority for various consumer financial protection laws, as transferred from seven other federal agencies. Effective immediately, the final rule adopts without change (subject to any intervening final rules published by the CFPB) the 2011 versions of various rules, including but not limited to ECOA, TILA, the SAFE Act, FCRA, FDCPA, RESPA, GLBA, and HMDA.