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CFPB examines high-cost financings that cover medical expenses
On May 4, the CFPB released a report examining high-cost alternative financing products targeted to patients as a way to cover medical expenses. Products offered by a growing number of financial institutions and fintech companies include medical credit cards and installment loans, which typically carry significantly higher interest rates than those associated with traditional consumer credit cards (26.99 percent annual percentage rate as compared to 16 percent), the Bureau found, adding that these products also often have deferred interest plans which can create significant financial burdens for patients. The report found that between 2018 and 2020, consumers used alternative financing products to pay for nearly $23 billion in healthcare expenses and paid $1 billion in deferred interest. The report further found that companies are primarily marketing their products directly to healthcare providers with promised incentives. While the companies service the credit cards and loans, the Bureau explained that the healthcare providers are responsible for offering the products to patients and disclosing terms and risks. Many of these healthcare providers are unable to adequately explain complex terms, such as deferred interest plans, leaving patients facing ballooned deferred interests and lawsuits, the Bureau warned. According to the Bureau’s announcement, “financing medical debt on a credit card may increase patients’ exposure to extraordinary credit actions that healthcare providers would typically not pursue,” as “there can be a greater incentive for creditors to pursue lawsuits because unlike many healthcare providers, creditors can pursue a debt’s principal plus interest and fees.”
CFPB revises APOR methodology
On April 14, the CPFB announced a revised version of its Methodology for Determining Average Prime Offer Rates (APORs). APORs are a series of benchmark APRs derived from the average interest rates and other loan pricing terms currently offered to consumers by a representative sample of creditors for mortgage loans with low-risk pricing characteristics. APORs are used to determine whether a particular loan is a “Qualified Mortgage” or a “Higher-Priced Mortgage Loan,” which determines the treatment of that loan under various consumer protection laws.
The methodology statement has been revised to address the imminent unavailability of certain data the CFPB previously relied on to calculate APORs. Specifically, Freddie Mac recently made changes to its Primary Mortgage Market Survey (PMMS) used to calculate APORs for three types of loans. These changes make the PMMS unsuitable to be used in the APOR calculations. The CFPB is replacing data from the PMMS with data from ICE Mortgage Technology. This change also requires the CFPB to change certain of the product types for which APORs are produced. The CFPB will begin using ICE Mortgage Technology data and the revised methodology to calculate APORs on April 21, 2023.
We note that the CFPB is not changing the frequency of the APOR calculations, which will still be calculated on a weekly basis. These changes will therefore not address industry concerns that the APORs can be as much as seven days old, which can result in the APORs being significantly different than the actual market rates on a given day. This dissonance can lead to significant issues during periods where interest rates rise rapidly as we saw during much of 2022.
NCUA will maintain loan interest rate ceiling at 18%
On January 27, the NCUA board unanimously voted to maintain the current temporary 18 percent interest rate ceiling for loans made by federal credit unions (FCUs) for another 18 months. The extension starts after the current period ends March 10. According to the announcement, the National Association of Federally-Insured Credit Unions (NAFCU) urged the NCUA to immediately raise the interest rate ceiling to 21 percent in order to help mitigate interest rate-related risks facing FCUs. Recognizing that the NAFCU “has consistently advocated for a floating permissible interest rate ceiling to address constraints of the 15 percent ceiling set by the FCU Act,” NCUA Chairman Todd Harper said the agency is conducting an analysis of a floating interest rate ceiling that should be completed by the April board meeting.
4th Circuit affirms certification of class action in tribal lending case
On January 24, the U.S. Court of Appeals for the Fourth Circuit concluded that a district court did not abuse its discretion when certifying a class action. The lawsuit alleges an individual who orchestrated an online payday lending scheme violated the Racketeer Influenced and Corrupt Organization Act (RICO), engaged in unjust enrichment, and violated Virginia’s usury law by partnering with federally-recognized tribes to issue loans with allegedly usurious interest rates. (Covered by InfoBytes here.) The plaintiffs alleged the defendant partnered with the tribes to circumvent state usury laws even though the tribes did not control the lending operation. The district court stated that, as there was “no substantive involvement” by the tribes in the lending operation and that the evidence showed that the defendant was “functionally in charge,” the lending operation—which allegedly charged interest rates exceeding Virginia’s 12 percent interest cap—could not claim tribal immunity.
After the district court certified two borrower classes, the defendant appealed, arguing, among other things, that “[b]orrowers entered into enforceable loan agreements with lending entities in which they waived their right to bring class claims against him,” and that “common issues do not predominate so as to permit class treatment in this case.” Specifically, the defendant claimed that his role in the lending operations changed throughout the class period, and that individualized “proof” and “tracing” would be necessary to prove that he “participated in the direction of the affairs of the alleged enterprise” or that he received some portion of each borrower’s interest payments.
On appeal, the 4th Circuit disagreed with the defendant’s assertions. It found no reason to question the district court’s conclusion that the defendant was the “de facto” head of the lending operations throughout the class period. “And the fact that [the defendant] served as the ‘de facto head’ of the lending operations for the entire class period supports the district court’s determination that the Borrowers will be able to use common proof to show that [the defendant] ‘participated in the direction of the’ lending operations such that common questions predominate over individual questions[,]” the appellate court stated. The 4th Circuit further concluded that the “record supports the district court’s conclusion that [the defendant] lied when he said he was never involved in receiving or demanding payments on [the lending operation’s] loans.”
New Jersey reaches $27.3 million settlement with merchant cash advance operation
On January 3, the New Jersey attorney general announced a $27.4 million settlement with a private equity firm, its parent company, and six other associated companies (collectively, “respondents”) to resolve allegations related to violations of the New Jersey Consumer Fraud Act (CFA). According to the press release, the respondents targeted small businesses to enter into lending arrangements disguised as merchant cash advances (MCA) on future receivables. The AG claimed these loans effectively charged interest rates far exceeding the state’s usury caps. According to the attorney general’s press release, the respondents also allegedly engaged in deceptive servicing and collection practices against small businesses.
Under the terms of the consent order, the respondents are permanently enjoined from engaging in any acts or practices that violate the CFA and any applicable Advertising Regulations. The respondents have also agreed to forgive all outstanding balances for customers who entered MCAs (approximately $21.75 million) and pay $5.625 million to cover restitution, attorneys’ fees, costs of investigation and litigation and costs of administering restitution, and penalties not to exceed $250,000. The press release stated that the respondents will also (i) dismiss any pending debt collection actions against customers who had their balances forgiven as a result of the settlement; (ii) provide current customers with the ability to request modifications to their payment terms based on actual receivables; (iii) “[i]mprove internal business practices, be transparent in any terms of future MCA agreements regarding fees and reconciliation rights, and give notice to customers before taking legal action to collect on purported unpaid balances”; and (iv) ensure that all respondents, principals, and any future business entities that may result from a change in structure comply with the terms of the consent order.
CFPB discusses mortgage financing risk options in current environment
On December 21, the CFPB reported that higher mortgage interest rates have led to increased monthly payments and higher debt-to-income ratios for borrowers. According to a recent Bureau analysis of quarterly HMDA data, some interest rates on 30-year fixed-rate mortgages have risen as high as seven percent and are at levels higher than what has been seen for nearly 20 years. The Bureau reported that in response to increasing interest rates, financial service providers are offering alternative financing options to provide opportunities for consumers to access lower rates, including adjustable-rate mortgages, temporary buydowns, home equity lines of credit and loans, and loan assumptions where a homebuyer assumes responsibility for the remaining balance of a home seller’s mortgage with the original loan terms. Explaining the various risks associated with these offerings, the Bureau warned consumers that they should understand the costs associated with cash-out refinances and risks related to alternative sales transactions (e.g., contract-for-deeds or land contracts, rent-to-own arrangements, and equity-sharing arrangements), which may sound appealing in a higher interest rate market but may “lack the protections of traditional mortgages, including the ability to build and access home equity, foreclosure protections, or even basic disclosures that allow for comparison shopping.”
Fed issues final rule for LIBOR replacement
On December 16, the Federal Reserve Board adopted a final rule to implement the Adjustable Interest Rate Act by identifying benchmark rates based on the Secured Overnight Financing Rate (SOFR) that will replace LIBOR in certain financial contracts after June 30, 2023. The final rule ensures that LIBOR contracts adopting a benchmark rate selected by the Fed will not be interrupted or terminated following LIBOR’s replacement. Among other things, the final rule identifies: (i) SOFR-based Fed-selected benchmark replacements for LIBOR contracts that will not mature prior to the LIBOR replacement date and do not contain clear and practicable benchmark replacements; (ii) different SOFR-based Fed-selected benchmark replacements for different categories of LIBOR contracts, including overnight, one-month, three-month, six-month, and 12-month LIBOR contracts subject to the Act; and (iii) certain benchmark replacement conforming changes related to the implementation, administration, and calculation of the Fed-selected benchmark replacement. The Fed noted that in response to comments, the final rule restates safe harbor protections contained in the Act for selection or use of the replacement benchmark rate selected by the Fed, and clarifies who would be considered a “determining person” able to choose to use the replacement benchmark rate.
CFPB concerned National Guard and reservists pay extra interest on loans
On December 7, the CFPB released a report examining the use of the Servicemembers Civil Relief Act's (SCRA) interest rate reduction benefit. Among other things, the CFPB raised concerns that servicemembers pay extra interest each year as a result of not taking advantage of interest rate reductions to which they are entitled under the SCRA. The SCRA provides certain legal and financial protections to active duty servicemembers, such as the ability to reduce the interest rate on certain pre-service obligations or liabilities to a maximum of 6 percent. According to the Bureau, members of the National Guard and Reserves are likely to have financial obligations that predate a subsequent period of service. As a result, the interest rate reduction benefit could provide considerable financial value. However, the Bureau found that only a small fraction of activated Guard and Reserve servicemembers receive interest rate reductions. Specifically, the Bureau noted that: (i) between 2007 and 2018, less than 10 percent of eligible auto loans and six percent of personal loans received a reduced interest rate; (ii) in addition to the $100 million of foregone benefits on auto and personal loans, members of the reserve component infrequently benefit from interest rate reductions for credit cards and mortgage loans; and (iii) for longer periods of activation, the utilization rate is low. The Bureau recommended that creditors apply SCRA interest rate reductions for all accounts held at an institution if a servicemember invokes their rights for a single account, and stressed that creditors should automatically apply SCRA rights. The Bureau also noted that more frequent information on SCRA rate reduction utilization would help inform and evaluate future efforts to expand servicemembers’ financial rights and protections.
CFPB analyzes impact of rising interest rates on borrowers
On November 30, the CFPB’s Office of Research published a blog post regarding the recent increase of mortgage interest rates. The Bureau combined the quarterly data of 55 financial institutions reporting mortgage activities for the first and second quarters of 2022 with annual data from past years. The Bureau limited the analyses to closed-end home-purchase loans secured by site-built, single-family, and first-lien principal residences, and excluded reverse mortgage loans from its analysis. Among other things, the Bureau found that after two years of decline, the mortgage interest rate began rising in 2021, with a sharp increase in 2022. The Bureau explained that a “direct consequence of higher interest rates is the higher monthly payments borne by borrowers,” and that “though monthly payment information is not reported in HMDA data, using the reported loan amount, loan term and interest rate, [the Bureau] can impute the monthly principal and interest payment of loans at origination.” The Bureau also reported that Hispanic white and Black borrowers reached new debt burden levels, specifically the average debt-to-income (DTI) ratio for Hispanic white borrowers reached over 40 percent, while the average DTI for Black borrowers rose to 39.4 percent. The Bureau noted that increasing interest rates could also affect whether consumers qualify for mortgage loans. For many mortgage applicants who are on the margin of qualifying, the higher projected DTI could potentially lead to their applications being rejected. Compared to 2021, DTI has become more likely to be reported as a denial reason for denied Black, Hispanic white and non-Hispanic white applications in 2022. Indeed, by the end of the second quarter of 2022, the Bureau reported that over 45 percent of all Black and Hispanic white applicants who were denied had DTI reported as a denial reason.
Pennsylvania announces two settlements involving auto title loans
On October 14, the Pennsylvania AG announced a settlement with the owners of an auto title loan business. According to the settlement, the company made unlawful loans to Pennsylvania borrowers carrying annual interest rates over 200 percent. Under the terms of the settlement, the owners must refund over $1.5 million in unlawful interest charges to consumers. The refunds are in addition to the $3.2 million in debt cancellation victims received under an October 2021 order. The owners are also prohibited from, among other things, knowingly participating in, owning, or working for any company that extends credit to Pennsylvania residents, for seven years after they make their last payment under the settlement.
The Pennsylvania AG also announced a settlement with a Florida-based auto title lender for alleged violations of Pennsylvania usury laws and unfair and deceptive business practices. Under the terms of the settlement, the company, among other things, must cancel all outstanding loans made to Pennsylvania consumers, and refund Pennsylvania consumers all fees and interest they paid, which will result in nearly 200 consumers receiving refunds in the amount of $99,541.