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On October 30, the CFPB and the South Carolina Department of Consumer Affairs filed a proposed final judgment in the U.S. District Court for the District of South Carolina to settle an action alleging that two companies and their owner (collectively, “defendants”) violated the Consumer Financial Protection Act and the South Carolina Consumer Protection Code by offering high-interest loans to veterans and other consumers in exchange for the assignment of some of the consumers’ monthly pension or disability payments. As previously covered by InfoBytes, in October 2019, the regulators filed an action alleging, among other things, that the majority of credit offers that the defendants broker are for veterans with disability pensions or retirement pensions and that the defendants allegedly marketed the contracts as sale of payments and not credit offers. Moreover, the defendants allegedly failed to disclose the interest rate associated with the offers and failed to disclose that the contracts were void under federal and state law, which prohibit the assignment of certain benefits.
If approved by the court, the proposed judgment would require the defendants to pay a $500 civil money penalty to the Bureau and a $500 civil money penalty to South Carolina. The proposed judgment would permanently restrain the defendants from, among other things, (i) extending credit, brokering, and servicing loans; (ii) engaging in deposit-taking activities; (iii) collecting consumer-related debt; and (iv) engaging in any other financial services business in the state of South Carolina. Additionally, the proposed judgment would permanently block the defendants from enforcing or collecting on any contracts related to the action and from misrepresenting any material fact or conditions of consumer financial products or services.
California DBO reports installment consumer lending by California nonbanks increased 68 percent in 2019
On September 9, the California Department of Business Oversight (CDBO) released its annual report covering the 2019 operations of finance lenders, brokers, and Property Assessed Clean Energy program administrators licensed under the California Financing Law. Key findings of the report include (i) “installment consumer lending by nonbanks in California increased more than 68 percent” from $34 billion to $57 billion, largely due to real estate-secured loans, which more than doubled to $47.3 billion; (ii) consumer loans under $2,500 accounted for 40.2 percent of the total number of consumer loans made in 2019, with unsecured loans making up 98.7 percent of these loans; and (iii) online consumer loans increased by 69.1 percent with the total principal amount of these loans increasing by 134 percent. CDBO also noted in its release that 58 percent of loans ranging from $2,500 to $4,999—the largest number of consumer loans—carried annual percent rates of 100 percent or higher. “This report reflects the final year in which there are no state caps on interest rates for loans above $2,500,” CDBO Commissioner Manual P. Alvarez stated. He further noted that “[b]eginning this year, the law now limits permissible interest rates on loans of up to $10,000. Next year’s report will reflect the [CDBO’s] efforts to oversee licensees under the new interest caps.”
On September 1, NMLS announced that it is now accepting installment lender and branch approval license applications and transition filings for Georgia licensees. New applicants and existing licensees may now make submissions for Georgia Department of Banking and Finance licenses directly through NMLS. According to the announcement, “[c]ompanies holding these license types are required to submit a license transition request through NMLS by filing a Company Form (MU1) and an Individual Form (MU2) for each of their control persons by October 15.” The transition follows the enactment of SB 462, which took effect June 30. The statute transferred all “duties, powers, responsibilities, and other authority relative to industrial loans from the Industrial Loan Commissioner to the Department of Banking and Finance,” which utilizes the NMLS to manage its licensees. Specific details on the licensing requirements in Georgia can be accessed here.
On July 7, the CFPB issued the final rule revoking certain underwriting provisions of the agency’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (Payday Lending Rule). As previously covered by InfoBytes, the Bureau issued the proposed rule in February 2019 and the final rule implements the proposal without revision. Specifically, the final rule revokes, among other things (i) the provision that makes it an unfair and abusive practice for a lender to make covered high-interest rate, short-term loans or covered longer-term balloon payment loans without reasonably determining that the consumer has the ability to repay the loans according to their terms; (ii) the prescribed mandatory underwriting requirements for making the ability-to-repay determination; (iii) the “principal step-down exemption” provision for certain covered short-term loans; and (iv) related definitions, reporting, and recordkeeping requirements. Additional details regarding the final rule can be found in the Bureau’s unofficial redline and executive summary.
While compliance with the payment provisions of the Payday Lending Rule is currently stayed by court order (see previous InfoBytes coverage here), the Bureau states that it “will seek to have them go into effect with a reasonable period for entities to come into compliance.” Additionally, the CFPB ratified the payment provisions of the Payday Lending Rule in light of the U.S. Supreme Court decision in Seila Law (covered by a Special Alert here) and issued a statement on the supervision and enforcement of certain aspects of the payment provisions with respect to certain large loans. According to the statement, the Bureau does not intend to take supervisory or enforcement action with regard to covered loans that exceed the Regulation Z coverage threshold (currently set at $58,300). The statement notes that the Bureau is monitoring and assessing the “effects of the [p]ayment [p]rovisions, including their scope, and [it] may determine whether further action is needed in light of what it learns.”
Moreover, the Bureau released FAQs pertaining to compliance with the payment provisions of the Payday Lending Rule. The FAQs discuss the details of the covered loans and “payment transfers”—defined as a “a debit or withdrawal of funds from a consumer’s account that the lender initiates for the purpose of collecting any amount due or purported to be due in connection with a covered loan”—under the rule.
On June 2, the CFPB announced a settlement with a payday and auto title loan lender and its subsidiaries (collectively, “lender”) resolving allegations that the lender violated the Consumer Financial Protection Act (CFPA) and TILA. Specifically, the Bureau asserts that the lender—which is based in Cleveland, Tennessee and operates 156 stores in eight states—violated the CFPA and TILA by (i) disclosing finance charges that were substantially lower than what the consumer would actually incur if repaid according to the amortization schedules; (ii) delayed refunds of consumer credit balances for months; (iii) made repeated debt collection calls to third-parties, including workplaces after being told to stop; and (iv) improperly disclosed, or risked disclosure, of consumer debt information to third parties. The Bureau alleges that the lender received over $3.5 million in finance charges that exceeded the amount stated in required TILA disclosures.
The consent order requires the lender to pay $2 million of the $3.5 million in consumer redress and $1 civil money penalty, based on a demonstrated inability to pay. The consent order also prohibits the lender from misrepresenting finance charges or engaging in unlawful collection practices and requires certain compliance and reporting measures to be undertaken.
On May 22, the CFPB announced it issued two no-action letter (NAL) templates. The two templates approved by the Bureau are intended to support financial institutions to better assist struggling consumers during the Covid-19 pandemic. Details of the two approved templates include:
- Mortgage servicing. The Bureau approved a template submitted by a mortgage software company that would enable mortgage servicers to use the company’s online platform—which is an online version of Fannie Mae Form 710—to implement loss mitigation practices for borrowers. A copy of the company’s application is available here.
- Small-dollar lending. The Bureau approved a template, in response to a request by a nonpartisan public policy, research and advocacy group for banks, that would assist depository institutions in offering a standardized, small-dollar credit product under $2,500 with a repayment term between 45 days and one year. The template covers, among other things, a product structured as either (i) a fixed-term, installment loan, which the customer would pay back in fixed minimum payment amounts over the term of the loan; or (ii) an open-end line of credit, linked to the consumer’s deposit account, where any amounts drawn would be repaid by consumers in fixed minimum amounts over a fixed repayment period. An institution would need to certify that their product offering meets the product features—labeled as “guardrails” in the template—but the Bureau notes that the inclusion of “any particular guardrail should not be interpreted as a statement by the Bureau that small-dollar credit products must contain such guardrails to avoid violating the law.” A copy of the group’s application is available here.
On May 20, the FDIC, Federal Reserve Board, OCC, and NCUA issued joint principles for offering responsible small-dollar loans. The agencies note the “important role” that small-dollar lending can play during times of economic stress, such as the Covid-19 pandemic, and issued the guidance to encourage supervised banks, savings associations, and credit unions to offer responsible small-dollar loans to consumers and small businesses. The principles cover various loan structures, including open-end lines of credit with minimum payments, closed-end loans with short single payment terms, and longer-term installment payments. The guidance indicates that reasonable loan policies and risk management practices would generally address the following:
- Loan structures. Loan amounts and repayment terms should align with eligibility and underwriting criteria that support successful repayment of the loan, including interest and fees, rather than re-borrowing, rollovers, or immediate collectability in the event of default.
- Loan pricing. Pricing, including for loans offered through managed third-party relationships, should reflect “overall returns reasonably related to the financial institution’s product risks and costs” and comply with applicable state and federal laws.
- Loan underwriting. Underwriting should use internal and/or external data sources to assess a customer’s creditworthiness. Underwriting may use new technologies and automation to lower the cost of providing the small-dollar loans.
- Loan marketing and disclosures. Disclosures should comply with applicable consumer protection laws and regulations and provide information in “a clear, conspicuous, accurate, and customer-friendly manner.”
- Loan servicing and safeguards. Timely and reasonable workout strategies, such as payment term restructuring, should be provided for customers who experience financial distress.
As previously covered by InfoBytes, the federal financial regulators issued a joint statement in March, encouraging institutions to offer reasonable, small-dollar loans to consumers and small businesses to help mitigate the effects of the Covid-19 pandemic.
On March 30, Michigan Department of Insurance and Financial Services Director Anita Fox issued a bulletin clarifying that certain financial services are considered essential businesses and operations. The following financial businesses are deemed essential: (i) banks, credit unions, and consumer finance providers, such as mortgage companies, consumer installment lenders, payday lenders, etc.; (ii) bond issuers; and (iii) title companies, inspectors, appraisers, surveyors, registers of deeds, and notaries. The bulletin clarified the scope of an executive order signed by Governor Whitmer on March 23, which in part, called for residents to stay in their homes and limited in-person exceptions to essential activities (previously discussed here).
Illinois Department of Financial and Professional Regulation issues guidance to Consumer Installment Loan Act, Payday Loan Reform Act, and Sales Finance Agency Act licensees on office closures
On March 30, the Illinois Department of Financial and Professional Regulation (Department) issued guidance to licensees under the Consumer Installment Loan Act, Payday Loan Reform Act, and Sales Finance Agency Act regarding office closures due to Covid-19. A licensee may close its offices without notice and approval of the Department as otherwise required under applicable law if certain conditions are met. For example, the licensee must provide notice to the Department no later than 24 hours after the closure and one business day prior to reopening, and the licensee must provide reasonable methods for consumers to make payments while its offices are closed. Additionally, if any payments are due on any obligations to a licensee on any closed day, then the payment must be considered received on the closed day for all purposes, including the computation of interest or charges, if received at any time before the close of business on the 30th calendar day following the last closed day.
Ohio Division of Financial Institutions issues FAQ for mortgage loan originators and installment lenders during Covid-19 crisis
On March 23, Ohio’s Department of Commerce Division of Financial Institutions published an FAQ pertaining to telework and other operational changes for mortgage loan originators and installment lenders during the Covid-19 crisis. Among other things, the FAQs clarify the types of activities that may be conducted remotely and the applicability of Ohio’s Stay-At-Home Order to financial institutions.
- Hank Asbill to discuss "The federal fraud sentencing guidelines: It's time to stop the madness" at a New York Criminal Bar Association webinar
- Daniel P Stipano to moderate "Digital identity: The next gen of CIP" at the American Bankers Association/American Bar Association Financial Crimes Enforcement Conference