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ARRC issues LIBOR transition “best practices”
On May 27, the Alternative Reference Rates Committee (ARRC)—a group of private-market participants convened by the Federal Reserve Board and the Federal Reserve Bank of New York—released a set of best practices for market participants to transition from LIBOR to the Secured Overnight Financing Rate (SOFR) before the anticipated cessation of LIBOR at the end of 2021. Key practices recommended include: (i) new USD LIBOR cash products should include ARRC-recommended fallback language as soon as possible; (ii) third-party technology and operations vendors should complete enhancements necessary to support the preferred alternative SOFR by the end of 2020 as outlined in previously issued guidance; (iii) new use of LIBOR should end no later than June 30, 2021, depending on the specific cash product market; and (iv) parties that choose to select a replacement rate at their discretion following a LIBOR transition event should disclose the planned rate selection to relevant parties at least six months prior to the new rate’s effective date.
Find continuing InfoBytes coverage on LIBOR here.
Federal Reserve publishes revised terms, other information regarding lending and liquidity facilities
On May 12, the Federal Reserve Board issued additional information regarding the Term Asset-Backed Securities Loan Facility (TALF) and the Payment Protection Program Liquidity Facility (PPPLF). It issued a revised term sheet for TALF, indicating that eligible borrowers include businesses that (i) are created or organized in, or under the law of the United States; (ii) have significant operations in and a majority of their employees based in the United States; and (iii) maintain an account relationship with a primary dealer. The board also announced that, on a monthly basis, it will publicly disclose the name of each participant in the TALF and the PPPLF, as well as amounts borrowed and interest rate charged. In addition, the board issued FAQs regarding the TALF.
Virginia caps interest and fees charged under short-term loans
On April 22, the Virginia legislature enacted HB 789, which amends certain provisions of the Virginia Consumer Protection Act (VCPA) related to consumer lending. Specifically, the provisions increase the maximum short-term loan from $500 to $2,500, and sets the duration of these loans to a minimum of four months and a maximum of 24 months, subject to exceptions. Interest and fees that may be charged on a short-term loan are capped at an annual rate of 36 percent, plus a maintenance fee. In addition, licensed lenders are required to make a reasonable attempt to verify a borrower’s eligibility and may not collect fees and charges that exceed 50 percent of the original loan amount if such amount is $1,500 or less, or 60 percent of the original loan amount if the original amount is greater than $1,500. Additional amendments include provisions that (i) update the requirements for motor vehicle title loans, including prohibiting loans to borrowers with outstanding title loans, and prohibiting licensees from collecting or receiving credit insurance premiums and charges for ancillary products, among other things; (ii) make a violation of the bill’s provisions a prohibited practice subject to enforcement under the VCPA; (iii) allow licensed lenders to use the services of access partners, subject to certain conditions; (iv) provide that installment loans must be between $300 and $35,000 to be paid in substantially equal installment payments, with terms of no fewer than six and no more than 120 months; and (iv) outline short-term loan advertising requirements. Persons required to be licensed under these provisions must apply for a license on or before October 1, 2020. Licenses will take effect January 1, 2021 for those issued by the State Corporation Commission prior to this date.
OCC issues Comptroller’s Handbook booklet updating interest rate risk
On March 26, the OCC issued Bulletin 2020-26 announcing the revision of the Interest Rate Risk booklet of the Comptroller’s Handbook, which replaces the June 1997 version of the same name. The revised booklet “incorporates and reflects applicable statutes and regulations, guidance, and examination procedures,” and expands model risk and model risk management discussions, “including developing, reviewing, and stress testing model assumptions.” The revised booklet also provides guidelines “consistent with the Pillar 2 supervisory approach outlined in the Basel Committee on Banking Supervision’s Interest Rate Risk in the Banking Book.”
Federal student loan payments suspended, interest waived during Covid-19 national emergency
On March 20, U.S. Secretary of Education Betsy DeVos announced temporary relief for student loan borrowers in response to the Covid-19 national emergency. The borrower relief measures include:
- Automatic 0% interest rates on all federally held student loans for at least 60 days;
- Option to suspend payments for at least two months;
- Administrative forbearance on any federally held loan by all federal student loan servicers at the request of the borrower, for at least 60 days, beginning on March 13;
- Automatic payment suspension for any borrower who is “more than 31 days delinquent as of March 13, or who becomes more than 31 days delinquent”; and
- The entire loan “payment will be applied to the principal” loan amount “once all interest accrued prior to the president's March 13 announcement is paid” for all borrowers who wish to continue making payments on their loans.
Additional information may be found at StudentAid.gov/coronavirus.
ARRC proposes legislation for US dollar LIBOR contracts
On March 6, the Alternative Reference Rates Committee (ARRC) announced a legislative proposal for New York state legislation for U.S. dollar LIBOR contracts intended to “minimize legal uncertainty and adverse economic impacts associated with LIBOR transition.” The ARRC—a group of private-market participants convened by the Federal Reserve Board and the Federal Reserve Bank of New York in cooperation with a number of other federal financial regulatory agencies—explained that it proposed legislation in New York because the state’s law governs a substantial number of financial contracts that refer to U.S. dollar LIBOR. The proposed bill includes measures to address the absence of sufficient LIBOR fallback or transition language in existing financial contracts referencing LIBOR. The proposed legislation would prohibit parties from being able to use the discontinuance of LIBOR as a reason for declaring a breach of contract, establish a recommended benchmark replacement index as a commercially reasonable substitute for LIBOR, and override contractual language referencing a LIBOR-based rate and require use of the benchmark replacement. Contractual parties would also be permitted to mutually opt-out of any mandatory application of the proposed legislation under the bill. The ARRC specifically highlighted that its proposed legislation would not override existing contract language that already delineated a non-LIBOR rate as a fallback to LIBOR.
District court: Maryland’s interest on escrow law not preempted by National Bank Act
On February 24, the U.S. District Court for the District of Maryland denied a national bank’s motion to dismiss a putative class action alleging the bank violated Maryland law by not paying interest on escrow sums for residential mortgages. After the bank allegedly failed to pay the mortgage escrow interest, the consumer filed a lawsuit asserting various claims including for violation of Section 12-109 of the Maryland Consumer Protection Act (MCPA), which “requires lenders to pay interest on funds maintained in escrow on behalf of borrowers.” In response, the bank filed a motion to dismiss on the basis that the state law is preempted by the National Bank Act (NBA) and by 2004 OCC preemption regulations.
The court disagreed, determining that under the Dodd-Frank Act, national banks are required to pay interest on escrow accounts when mandated by applicable state or federal law. Citing previous decisions in similar escrow interest cases brought against the same bank in other states (covered by InfoBytes here and here), the court stated that Section 12-109 “does not prevent or significantly interfere with [the bank’s] exercise of its federal banking authority, because [Section] 12-109’s ‘interference’ is minimal, when compared with statutes that the Supreme Court has previously found were preempted.” The court noted that state law—which “still allows [the bank] to require escrow accounts for its borrowers”—provides that the bank must pay a small amount of interest to borrowers if it chooses to maintain escrow accounts. Moreover, the court concluded that the bank’s “suggestions about interference are belied by the fact that its direct competitors dutifully comply with [Section] 12-109.” As for the OCC’s 2004 preemption regulation, Section 34.4, the court determined that the regulation is entitled to minimal deference, and noted that it is not clear that the OCC, in promulgating the regulations, “ever considered whether the NBA preempts state laws that mandate payment of interest for escrow accounts.” According to the court, the regulations do not mention state escrow interest laws at all. As such, the court stated that it “will not defer to the OCC’s regulation, or to the agency’s current position that [Section] 12-109 is preempted.”
Maryland orders vehicle title lender to pay $2.2 million
On February 21, the Maryland attorney general announced the issuance of a final order against a vehicle title lender, its owner, and related businesses (defendants) for making unlicensed and usurious consumer loans in violation of the Maryland Consumer Protection Act. According to the AG’s Consumer Protection Division (Division), the defendants offered consumers short-term, high-interest loans secured by a consumer’s motor vehicle title. The defendants allegedly kept the vehicle’s title, and, if the consumer failed to make a payment on the loan, would repossess or sell the vehicle. The Division claimed that these transactions, which the defendants claimed were pawn transactions, were actually consumer loans under Maryland law and carried interest rates of 360 percent. Under the terms of the final order, all loans the defendants made to Maryland consumers are void and unenforceable. The defendants are also ordered to, among other things, permanently cease engaging in unlicensed lending activities in the state and may not make loans that exceed the maximum allowed rate of interest, charge fees that are not permitted under state law, repossess secured vehicles or other personal property, or operate without requisite surety bonds. In addition, the defendants may not repossess consumers’ vehicles and must return any repossessed vehicles still in their possession. Finally, the defendants must pay at least $2.2 million in restitution to affected consumers, a $1.2 million civil penalty, a $50,000 claims procedure fee, and $73,000 in costs.
CFPB, South Carolina, and Arkansas file charges in pension-advance scheme
On February 20, the CFPB, the South Carolina Department of Consumer Affairs, and the Arkansas attorney general filed a complaint in the U.S. District Court for the District of South Carolina against a South Carolina-based company and two of its managing partners (defendants) for allegedly violating the Consumer Financial Protection Act and the South Carolina Consumer Protection Code by working with a series of broker companies that brokered contracts offering high-interest credit to disabled veterans and other consumers in exchange for the assignment of some of the consumers’ unpaid earnings, monthly pensions, or disability payments. Under federal law, agreements under which a person acquires the right to receive a veteran’s pension or disability payment are void, and South Carolina law—which governs these contracts—“prohibits sales of unpaid earnings and prohibits assignments of pensions as security on payment of a debt.”
The complaint alleges that the defendants substantially assisted broker companies that allegedly engaged in deceptive and unfair acts or practices through the marketing and administration of high-interest credit. (Covered by InfoBytes here.) The defendants’ alleged actions include: (i) “developing a pre-approval or risk-assessment process for the contracts and conducting underwriting”; (ii) “approving or denying consumers’ applications to enter into the transactions”; (iii) “directing and administering the execution of the contracts”; (iv) “serving as the payment processor for the initial lump-sum payment and fees”; and (v) “continuing to serve as the transactions’ payment processor, tracking and controlling the collection and distribution of consumers’ payments on the contracts.” In addition, the Bureau alleges, among other things, that the defendants provided substantial assistance to the broker companies’ deceptive misrepresentations that consumers could be subjected to criminal prosecution if they breached their contracts. In addition, the defendants also allegedly collected on contracts brokered by the broker companies that were void from inception “by initiating ACH debts to take payments from consumers’ bank accounts,” demanding payments through letters and other communications, and filing suit against consumers who failed to make payments.
The complaint seeks injunctive relief, restitution, damages, disgorgement, and civil money penalties.
Massachusetts AG reaches $1.25 million settlement with online lender
On January 21, the Massachusetts attorney general announced a $1.25 million settlement with an online marketplace lender to resolve allegations that it violated the state’s Small Loan Statute by facilitating the origination of loans with excessive interest rates to Massachusetts borrowers. According to an assurance of discontinuance (AOD) filed in the Suffolk Superior Court, the company allegedly facilitated personal loans to Massachusetts residents with interest rates exceeding the statutory interest rate cap set by the Small Loan Statute, which regulates terms for consumer loans of $6,000 or less. “Small loans” are defined by the statute as those where the disbursed amount is $6,000 or less. To determine whether a loan is a “small loan,” the Small Loan Statute provides that if, after all deductions or payments (whether on account of interest, expenses, or principal made substantially contemporaneously with the making of the loan), the amount retained by the borrower is $6,000 or less, the transaction will be deemed to be a loan in the amount of the sum retained by the borrower after deductions or payments, notwithstanding that the loan was nominally for a greater sum (the “deduction provision”). Among other things, the AG’s office claimed the company facilitated “small loans” with interest rates above the maximum permitted rate for non-licensed small loan companies, and that after the company obtained a small loan company license, it allegedly facilitated loans that exceeded the maximum permitted rate for licensed small loan companies based in part on its reading of the Act’s “deduction provision.” The company admitted no liability, agreed to pay $1.25 million to the Commonwealth, comply with Massachusetts law, and stop facilitating small loans to state residents with interest rates that exceed the maximum permissible rate based on the AG’s reading.