Skip to main content
Menu Icon
Close

InfoBytes Blog

Financial Services Law Insights and Observations

Filter

Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.

  • Comptroller Curry Calls On Banks To Offer Payday Loan Alternatives

    Consumer Finance

    On April 1, Comptroller Thomas Curry delivered remarks in which he urged banks to offer alternatives to “high cost payday loans.” The Comptroller defended his agency’s guidance on deposit advance products and stated that “properly managed small-dollar loan programs do not exhibit the same level of risks [the OCC] identified with deposit advance products, and that such loans can be made available to consumers.” He added that many of the risks identified with regard to deposit advance guidance, including the product’s short-term balloon payment feature, were specific to that product. He encouraged banks to offer “responsible” small-dollar loan programs comprised of products with reasonable terms, and to report payment information for such products to credit bureaus. In addition to helping consumers, the comptroller believes such programs (i) can be offered at an incremental cost to banks; (ii) can help build banks’ reputations and expand existing customer relationships; and (iii) can potentially be eligible for positive CRA consideration. The remarks did not provide specific guidance on the pricing and other small dollar loan terms that the OCC would consider appropriate.

    Payday Lending OCC Installment Loans

  • CFPB Report, Field Hearing, Build Record For Changes To Payday Lending Market

    Consumer Finance

    On March 25, the CFPB released a report and held a field hearing on payday loans. Through both, the CFPB sought to expand the record on which it will formulate new rules to address its concerns about the payday lending market. Director Cordray indicated in his remarks at the field hearing that the CFPB is on the verge of initiating the public phase of a rulemaking.

    The Report

    The report—the first such “Data Point” report from the CFPB’s Office of Research—focuses on “loan sequences,” what the CFPB describes as “a series of loans taken out within 14 days of repayment of a prior loan.” The analysis was performed using the same data obtained from storefront payday lenders through the supervisory process and used by the CFPB in its prior analysis and report.  Like the prior analysis, this latest analysis did not include online payday lending data.  The CFPB acknowledges certain limitations of the data used, including that data collected from different lenders contain different levels of detail and that some lender data did not include default-related information. (Note that the CFSA challenged, under the Information Quality Act, the CFPB’s prior report and the data on which it relied. The CFPB rejected that challenge.)

    The CFPB reports that over 80% of payday loans are rolled over or followed by another loan within 14 days. In addition, the CFPB’s report offers the following findings:

    • State rollover restrictions: Same-day renewals are less frequent in states with mandated cooling-off periods, but 14-day renewal rates in states with cooling-off periods are nearly identical to states without such limitations.
    • Sequence duration and volume: 36% of new loans end with loan being repaid; more than half of loans that are renewed are only renewed one time, but 22% of sequences extend for seven or more loans; 15% of new sequences are extended for 10 or more loans.
    • Loan size and amortization: For more than 80% of the loan sequences that last for more than one loan, the last loan is the same size as or larger than the first loan in the sequence. Loan size is more likely to go up in longer loan sequences, and principal increases are associated with higher default rates.
    • Loan usage: Monthly borrowers are disproportionately likely to stay in debt for 11 months or longer. Among new borrowers (i.e., those who did not have a payday loan at the beginning the year covered by the data), 22% of borrowers paid monthly averaged at least one loan per pay period. The majority of monthly borrowers are government benefits recipients.  Most borrowing involves multiple renewals following an initial loan, rather than multiple distinct borrowing episodes separated by more than 14 days. Roughly half of new borrowers (48%) have one loan sequence during the year. Of borrowers who neither renewed nor defaulted during the year, 60% took out only one loan.

    The Field Hearing

    In remarks to open the hearing, Director Cordray offered his conclusion that “the business model of the payday industry depends on people becoming stuck in these loans for the long term, since almost half their business comes from people who are basically paying high-cost rent on the amount of their original loan.” He stated that the “fundamental problem is that too many borrowers cannot afford the debt they are taking on or at least cannot afford the size of the payments required by a payday loan.” He identified as a particular concern borrowers who receive monthly payments, including borrowers “who receive Supplemental Security Income and Social Security Disability or retirement benefits, are thus in serious danger of ensnaring themselves in a debt trap when they take out a payday loan.” Director Cordray suggested that state-mandated cooling off periods are insufficient to help consumers avoid these so-called debt traps.

    Based on its payday lending supervisory program, the CFPB has concerns about the following payday practices: (i) inhibiting borrowers from using company payment plans that are intended to assist them when they have trouble repaying their outstanding loans; (ii) use of the electronic payment system in ways that pose risks to consumers; and (iii) unfair or deceptive collection activities, including using false threats, disclosing debts to third parties, making repeated phone calls, and continuing to call borrowers after being requested to stop.

    Director Cordray stated that the Bureau is in “the late stages of its consideration about how [it] can formulate new rules to bring needed reforms to this market.”  His comments and the study findings suggest that these new rules could include, among other things, ability to repay requirements, a two-week or more cooling off period, and limits on the number of rollover or renewal loans. The Director did not provide any additional detail on a rulemaking timeline, but it is likely to take many months . Director Cordray promised that any eventual rule will not limit access to small dollar credit for those who can afford it.

    CFPB Payday Lending Installment Loans Agency Rule-Making & Guidance

  • More CFPB Senior Staff Changes Announced

    Consumer Finance

    On March 12, the CFPB announced several new senior officials, as described below.  We also have learned that Peter Carroll, the CFPB’s Assistant Director for Mortgage Markets, will be leaving the Bureau later this month.

    • Jeffrey Langer has joined the CFPB as the Assistant Director of Installment and Liquidity Lending Markets in the Bureau’s Research, Markets, and Regulations Division. Mr. Langer most recently served as senior counsel at Macy’s, Inc., prior to which he was a lawyer in private practice. Mr. Langer is a founding fellow and treasurer of the American College of Consumer Financial Services Lawyers and is a former chair of the Consumer Financial Services Committee of the American Bar Association Business Law Section.

      Mr. Langer will fill a position vacated by Rick Hackett last year.  At the time of Mr. Hackett’s departure, Corey Stone, Assistant Director, Credit Information, Collections, and Deposit Markets, took over smaller dollar loan markets on a permanent basis. Rohit Chopra, the CFPB’s Student Loan Ombudsman, took responsibility for auto and student loans on an acting basis. Although Mr. Stone will continue to oversee smaller dollar loan markets, including payday and auto title loans, the addition of Mr. Langer allows Mr. Chopra to focus only on his Ombudsman duties.

    • Christopher D. Carroll has joined the CFPB as the Assistant Director and Chief Economist for the Office of Research in the Bureau’s Research, Markets, and Regulations Division, as the CFPB announced last year. Dr. Carroll is a professor of economics at Johns Hopkins University, from which he has taken a leave of absence to serve at the Bureau. He also is a member of the Board of Directors of the National Bureau of Economic Research, and the co-chair of the NBER Research Group on Consumption. Dr. Carroll has served as a senior economist for the Council of Economic Advisors on two separate occasions, and as an economist for the Board of Governors of the Federal Reserve System. Ron Borzekowski, who joined the CFPB at its inception from the Federal Reserve Board, has been serving as the acting head of the Office of Research.

    • Daniel Dodd-Ramirez has joined the CFPB as the Assistant Director of Financial Empowerment in the Bureau’s Consumer Education and Engagement Division. Mr. Dodd-Ramirez previously served as the executive director of Step Up Savannah Inc. in Savannah, Ga., from 2005 to 2014. Prior to Step Up, he served as education project director and community organizer for People Acting for Community Together (PACT) in Miami, Florida, and before that was the human resources director for Families First, a social services agency in southern Vermont.

    CFPB Mortgage Origination Mortgage Servicing Auto Finance Student Lending Installment Loans

  • North Carolina Regulator Issues Guidance On New Service Contracts Sales Tax

    Consumer Finance

    Recently, the North Carolina Department of Revenue issued guidance regarding a new state law that imposes the state’s 4.75% general sales and use tax, as well as applicable local and transit sales and use tax rates, to the sales price of “service contracts.” The law applies to “service contracts” sold at retail by a retailer on or after January 1, 2014 and sourced to North Carolina. “Service contract” includes any warranty agreement, maintenance agreement, repair contract, or similar agreement or contract by which a seller agrees to maintain or repair tangible personal property. The guidance addresses retailer liability, stating that a retailer that sells a covered service contract is liable for the sales and use tax due on the transaction. Further, a retailer that authorizes another person to sell or enter into a covered service contract with a purchaser on behalf of the retailer is encouraged to ensure that any agreement between the parties provides that any sales and use tax collected on the sales price of a service contract must be submitted to the retailer to be remitted to the Revenue Department. A retailer is not relieved of its liability for sales and use tax on the retail sale of a covered service contract due to failure by another person to collect or remit the applicable sales and use tax due on the sale to the retailer of the contract. The guidance also addresses (i) sales and use tax applicable to receipts for certain contracts entered into prior to January 1; (ii) sourcing of service contracts; and (iii) cancellation or refund of a service contract.

    Auto Finance Installment Loans

  • Pennsylvania Updates Auto Finance Statutes

    Consumer Finance

    On November 27, Pennsylvania enacted HB 1128, which updates and consolidates the state’s Motor Vehicle Sales Finance Act (MVSFA) and Goods and Services Installment Sales Act (GSISA), and includes numerous changes relevant to auto finance companies. Among other things, the bill amends the MVSFA with regard to installment sales contracts, to, among other things: (i) require installment sale contracts to include a statement informing the buyer of possible additional rights under the state Unfair Trade Practices and Consumer Protection Law; (ii) add triggers allowing for an acceleration clause; (iii) require a holder to notify a buyer upon payment in full by specifying the obligation has been paid in full on the instruments which are to be returned to that buyer with delivery in 10 days of the tender date; and (iv) prohibit a buyer from waiving any provisions in the chapter, including any purported waiver affected by a contractual choice of the law of another jurisdiction contained in an installment sale contract. Other MVSFA amendments provide that only costs disclosed at the time of the installment sale can be included in the contract and specifically prohibit costs for repairs that arise after contract execution from being added to the original contract. The bill amends the GSISA to, among other things: (i) add new requirements related to repossession; (ii) specify new standards for closed-end and open-end credit agreements; and (iii) increase certain maximum allowable fees and finance charges. The changes take effect November 27, 2014.

    Auto Finance Installment Loans

  • Banking Industry Trade Groups Oppose Expansion of MLA Covered Loans

    Consumer Finance

    On August 1, six banking industry trade groups submitted a joint comment letter relating to a proposal by the Department of Defense (DOD) to revise protections under the Military Lending Act (MLA), which apply to consumer credit extended to members of the military and their families.  Among other things, the MLA caps the annual interest on short-term, small-dollar loans — including certain payday, car title, and refund anticipation loans.  The MLA does not currently include credit cards, bank loans secured by funds on deposit, installment loans, or open-end credit.

    In June, the DOD issued an advanced notice of proposed rulemaking (ANPR) to solicit input on potential changes to the definition of “consumer credit” in the regulations that implement the MLA, which would significantly broaden its application.  The ANPR sought comment on whether the definition of “consumer credit” should be revised to expand coverage of the MLA to additional small-dollar loan products.  The trade groups suggest that expanding coverage would be redundant, costly, and confusing in light of the “well-established system of financial protections for consumers [that] exists beyond the [MLA].”  In other words, there is no need to create an entirely separate class of credit products for servicemembers and their families not directly related to military service.

    The trade groups specifically identify several potential negative consequences of expanded coverage, including reduced access to installment loans and other credit products, and inability to refinance existing credit.  On balance, the trade groups view the current rules — adopted after plenary discussion and careful consideration by all stakeholders — to be effective in achieving the proper balance between protecting military families and ensuring their access to credit.  Thirteen state attorneys general took an opposing view in a comment letter submitted on June 24.

    For additional commentary on the ANPR, please see the recent article from BuckleySandler Partner Valerie Hletko.

    Credit Cards CFPB Payday Lending Servicemembers Installment Loans Military Lending Act Deposit Advance

  • Senate Committee on Aging Scrutinizes Short-Term, Small Dollar Loans

    Consumer Finance

    On July 24, the Senate Special Committee on Aging held a hearing titled “Payday Loans: Short-term Solution or Long-term Problem?” that included discussion of several short-term, small-dollar credit products. Although the Committee’s jurisdiction is intended to cover policy issues related to older Americans, the hearing reviewed small dollar products more generally. Numerous Senators, including committee Chairman Sen. Bill Nelson (D-FL) and Sen. Elizabeth Warren (D-MA) scrutinized bank deposit advance products and, building off the CFPB’s testimony and earlier white paper, characterized them as payday loans that trap consumers in a cycle of debt. Sen. Nelson suggested that banks have an obligation to provide customers with alternatives and a range of options to meet their needs, while Sen. Donnelly (D-IN) and others repeatedly raised the concept of a 36% national usury cap. Committee members, with the help of a representative from Maine’s financial regulator, tried to build a record in support of federal legislation to address alleged practices of online lenders, including charges that such lenders often avoid state licensing requirements to circumvent state usury caps. Committee members and witnesses also discussed the role of banks in assuring debits from customer accounts are compliant with state law.

    CFPB Payday Lending Installment Loans U.S. Senate Internet Lending

  • North Carolina Increases Maximum Installment Loan Rates, Adds Servicemember Protections

    Consumer Finance

    On June 20, North Carolina enacted SB 489 to increase from $10,000 to $15,000 the maximum installment loan amount, and to increase the maximum allowable interest rates on installment loans. Under the new tiered rate structure, effective July 1, 2013, lenders may charge 30 percent on loans up to $4,000, 24 percent on loans $4,000 to $8,000, and 18 percent on loans $8,000 to $15,000. The bill also (i) extends the allowable terms of such loans to 96 months, (ii) allows lenders to charge late and deferral fees, and (iii) adds new protections for military servicemembers.

    Servicemembers Consumer Lending Installment Loans

  • State Law Update: Two Nebraska Bills Amend Lender Licensing Rules

    Consumer Finance

    On March 7, Nebraska enacted two bills intended to amend and clarify requirements for installment loan brokers, payday lenders, mortgage bankers, and mortgage loan originators (MLOs). The first, LB 279, makes nonsubstantive clarifications to the definition of a “loan broker” and narrows the exemption for accountants to certified public accountants only. The bill also authorizes the Nebraska Department of Banking and Finance to share examination reports and other confidential information with the CFPB and other state regulators. The second, LB 290, removes many mortgage licensing requirements previously applicable to individuals and separately identifies MLO duties. Those duties include providing notification to the Department (i) within 10 days of events such as bankruptcy, criminal indictments, and suspension/revocation proceedings; and (ii) within 30 days of certain changes, including changes of employer and address. The bill also allows firms to electronically submit certain required reports and provides that the 120-day period for calculating abandonment of a license application runs from the date the Department sends the applicant electronic notice of  deficient items. By state rule, both bills take effect three months after the end of the state’s legislative session, which scheduled to conclude May 30, 2013.

    Payday Lending Mortgage Licensing Installment Loans

  • State Law Update: Illinois Amends Consumer Installment and Payday Loan Acts

    Consumer Finance

    On August 20, Illinois enacted House Bill 3935, which amends the state’s Consumer Installment Loan Act and Payday Loan Act to clarify that loans made by unlicensed lenders are considered null and void and that unlicensed lenders have no right to collect on such loans. The amendments take effect on January 1, 2013.

    Payday Lending Installment Loans

Pages

Upcoming Events