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Financial Services Law Insights and Observations


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  • Connecticut amends requirements for small lenders

    On June 29, SB 1033 (the “Act) was enacted in Connecticut to amend the banking statutes. The Act, among other things, (i) redefines “small loan”; (ii) redefines “APR” to be calculated based on the Military Lending Act and include the cost of ancillary products among other fees as part of the “finance charge”; (iii) requires more people to obtain small loan licenses; (iv) requires that certain small loans are worth $5,000-$50,000, which is intended to capture larger loans particularly for student borrowers who may enter into income sharing agreements; (v) prohibits small loans from providing for an advance exceeding an unpaid principal of $50,000; and (vi) eliminates a requirement that certain people demonstrate an ability to supervise mortgage servicing offices in person. The Act also includes new licensing provisions, adding that any person who acts as an agent or service provider for a person who is exempt from licensure requires licensure if (i) they have a predominant economic interest in a small loan; (ii) they facilitate and hold the right to purchase the small loan, receivables or interest in the small loan; or (iii) the person is a lender who structured the loan to evade provisions in the Act. If the facts and circumstances deem the person a lender, they must be licensed under the Act.

    Licensing State Issues Small Dollar Lending Loan Origination Connecticut State Legislation

  • CFPB opposes Texas bankers’ request to delay small biz lending rule


    The CFPB recently asked a district court in the 5th Circuit to deny a proposed injunction which would delay the implementation of its small-business lending data collection rule, arguing that plaintiffs have failed to establish standing or meet the requirements for preliminary relief. As previously covered by InfoBytes, plaintiffs (including a Texas banking association and a Texas bank) sued the Bureau, challenging the agency’s final rule on the collection of small business lending data. The small business lending rule, which implements Section 1071 of the Dodd-Frank Act, requires financial institutions to collect and provide to the Bureau data on lending to small businesses with gross revenue under $5 million in their previous fiscal year.

    Plaintiffs explained in their complaint that the goal of invalidating the final rule is premised on the argument that it will drive from the market smaller lenders who are not able to effectively comply with the final rule’s “burdensome and overreaching reporting requirements” and decrease the availability of products to customers, including minority and women-owned small businesses. Plaintiffs also argued that the final rule is invalid because the Bureau’s funding structure is unconstitutional and that certain aspects of the final rule allegedly violate various requirements of the Administrative Procedure Act. Last month, plaintiffs filed a preliminary injunction motion asking the court to enjoin the final rule and stay the compliance deadlines.

    Claiming plaintiffs failed to establish standing for preliminary relief, the Bureau argued that the Texas bank has not demonstrated that it would even have to comply with the final rule. The Bureau further maintained plaintiffs have also not satisfied all four factors required for preliminary relief, including that plaintiffs “have not shown that irreparable harm is imminent or that the balance of equities favors the requested relief,” which would lead to the postponement of reporting requirements mandated by Congress more than ten years ago. With respect to the funding structure constitutionality concerns raised by plaintiffs, the Bureau argued that “even assuming that [p]laintiffs have shown a likelihood of ultimately succeeding on the merits … that factor standing alone would not be enough to warrant preliminary relief.” The Bureau asked the court to, at a minimum, tailor any relief to apply only to plaintiffs and members who would face imminent harm absent such relief.

    Courts CFPB Small Dollar Lending Section 1071 Dodd-Frank Funding Structure Administrative Procedure Act

  • CFPB denies small-dollar lender’s request to set aside CID

    Federal Issues

    The CFPB recently denied a lender’s request to set aside or modify a civil investigative demand (CID) issued in January related to its short-term and small-dollar lending practices. The lender’s redacted petition asserted that it “is a small business that is barely getting by” and that it has already provided documents and information, as well as corporate testimony from the lender’s CEO/chief compliance officer. Maintaining that the CID is overly broad, unduly burdensome, and contains “many deficiencies,” the lender stated that requests made to the Bureau to withdraw the CID, narrow its focus, or raise specific concerns have not been answered. Rather, the lender claimed it was expected to incur further expenses to comply with requests that “it cannot be expected to make sense of” and that “would almost certainly result in financial ruin.”

    In denying the request, the Bureau stated that the lender did not meaningfully engage in the required meet-and-confer process, and informed the lender that, by regulation, it “will not consider a petition to set aside a CID where the petitioner does not first attempt to resolve any objections it has through good-faith negotiation with the Bureau’s investigators.” According to the Bureau, during the meet-and-confer, the lender refused to submit requested information and did not propose any modifications to the CID that would reduce the burden while still ensuring the necessary information would be provided. The Bureau also refuted the lender’s claims that the CID was overly broad, stating that it was seeking information that was “reasonably relevant” to a lawful purpose, i.e. information about its business practices as a short-term and small-dollar lender, employees in possession of relevant information, employee performance metrics, and consumers who took out loans. Obtaining information on the lender’s servicing and collection practices will “shed light on whether the representations it made about the nature and true costs of the loans were deceptive and whether the company improperly induced consumers to renew loans,” the Bureau maintained. The Bureau also disagreed with the assertion that the CID was unduly burdensome, stating that the lender, among other things, failed to establish that complying with the CID would impose excessive financial costs.

    The Bureau directed the lender to comply with the CID within 14 days of the order.

    Federal Issues CFPB Consumer Lending CID Investigations Enforcement Small Dollar Lending

  • DFPI amends requirements for Increased Access to Responsible Small Dollar Loans Program

    State Issues

    On May 10, the California Department of Financial Protection and Innovation (DFPI) issued a notice of approval of amendments to regulations under the California Financing Law (CFL) related to the agency’s pilot program for increased access to responsible small-dollar loans (RSDL program). The RSDL program, which became operative in 2014, allows finance lenders licensed under the CFL and approved by the DFPI commissioner to charge specified alternative interest rates and charges, including an administrative fee and delinquency fees, on loans subject to certain requirements.

    The approved amendments, among other things, increase the upper dollar loan limit from $2,500 to $7,500, require applicants to submit mandatory policies and procedures for addressing customer complaints and responding to questions from loan applicants and borrowers, require lenders report additional information about the finders they use, and allow lenders to use qualified finders to disburse loan proceeds, collect loan payments, and issue notices and disclosures to borrowers. (See also DFPI’s final statement of reasons, which outlines specific revisions and discusses the agency’s responses to public comments.) The amendments are effective July 1.

    State Issues California State Regulators DFPI California Financing Law Pilot Program Small Dollar Lending

  • Connecticut issues CDO against unlicensed small-dollar marketplace lender

    State Issues

    On May 4, the Connecticut Banking Commissioner issued a temporary cease and desist order against an unlicensed California-based marketplace lender after determining it had reason to believe the respondent allegedly violated several provision of the Connecticut General Statutes, as well as Section 1036 of the CFPA. The respondent operates a mobile application to help consumers take out small-dollar loans and solicits lenders via its website through advertisements claiming it “takes the work out of lending by vetting and organizing a marketplace of loan requests” where “[b]orrowers set their own terms and provide appreciation tips to lenders who agree to fund a loan, allowing for mutually beneficial financial outcomes.” Consumers initiate loans on the respondent’s platform for a certain amount, which includes optional monetary tips for both the lender and the respondent of up to 12 and 9 percent of the loan amount respectively. The Commissioner’s investigation noted that while the respondent touted the tips as being optional and not required for submitting a loan request or receiving funding, 100 percent of the loans originated to Connecticut consumers from June 2018 to August 2021 included a tip. When the tips were factored into the finance charge, the APRs of the Connecticut consumers’ loans ranged from 43 percent to over 4,280 percent. During the identified time period, loan disclosures identified the amount of the tips for each loan; however, starting in April 2021, the revised disclosures and promissory notes removed any itemization of the tips, and promissory notes allegedly “failed to indicate any obligation of the borrower to pay tips on their loans.” According to the Commissioner, the corresponding disclosures “stated that only one payment, for the principal loan amount, was due at the end of the loan,” however on the loan’s due date, the total loan amount including tips was withdrawn from the consumer’s account. Additionally, disclosures allegedly informed consumers that the APR on the loans was zero percent even though all the loans carried much higher APRs.

    The Commissioner further concluded that the respondent prohibited direct communication between consumers and lenders and charged several fees on delinquent loans, including late fees and recovery fees for its collection efforts. Moreover, at least one of the contracted collection agencies was not licensed in the state, nor was the respondent licensed as a small loan company in Connecticut, and nor did it qualify for a licensure exemption.

    In issuing its order to cease and desist, order to make restitution, and notice of intent to impose a civil penalty and other equitable relief, the Commissioner stated that the respondent’s “offering, soliciting, brokering, directly or indirectly arranging, placing or finding a small loan for a prospective Connecticut borrower, without the required license” constitutes at least 1,600 violations of the Connecticut General Statutes. The Commissioner cited additional violations, which included engaging in unlicensed activities such as lead generation and debt collection, and cited the respondent for providing false and misleading information related to the terms and costs of the loan transactions in violation of both state law and the CFPA’s prohibition against deceptive acts or practices. In addition to ordering the respondent to immediately cease and desist from engaging in the alleged violations, the Commissioner ordered the respondent to repay any amounts received from Connecticut consumers in connection with their loan, plus interest.

    State Issues Licensing Connecticut State Regulators CFPA UDAAP Deceptive Consumer Finance Small Dollar Lending Interest Rate Disclosures

  • Hawaii enacts installment loan provisions

    Earlier this year, the Hawaii governor signed HB 1192, which amends certain provisions related to small dollar lending requirements. Specifically, the bill sets forth a new licensing requirement for “installment lenders” and specifies various consumer protection requirements. The bill defines installment lender broadly as “any person who is the business of offering or making a consumer loan, who arranges a consumer loan for a third party, or who acts as an agent for a third party, regardless of whether the third party is exempt from licensure under this chapter or whether approval, acceptance, or ratification by a third party is necessary to create a legal obligation for the third party, through any method including mail, telephone, the Internet, or any electronic means.” This language appears to capture loans offered under a bank partnership model under the purview of the new law.

    Further, the bill: (i) caps installment loan amounts at $1,500, and restricts the total amount of changes to no more than 50 percent of the principal loan amount; (ii) limits monthly maintenance fees to between $25 and $35 depending on the installment loan’s original principal amount; (iii) stipulates that the minimum repayment term is two months for installment loans of $500 or less, or four months for loans of $500.01 or more; (iv) states that lenders must “accept prepayment in full or in part from a consumer prior to the loan due date and shall not charge the consumer a fee or penalty if the consumer opts to prepay the loan; provided that to make a prepayment, all past due interest and fees shall be paid first; (v) prohibits a consumer’s repayment obligations to be secured by a lien on real or personal property; (vi) prohibits lenders from requiring consumers to purchase add-on products such as credit insurance; (vii) provides that the maximum contracted repayment term of an installment loan is 12 months; (viii) caps the annual interest rate on installment loans at 36 percent; and (ix) states that any installment loan made without a required license is void (the collection, receipt, or retention of any principal, interest, fees, or other charges associated with a voided loan is prohibited).

    The bill exempts certain financial institutions (e.g., banks, savings banks, savings and loan associations, depository and nondepository financial services loan companies, credit unions) from the installment lender licensing requirements.

    The bill also repeals existing state law on deferred deposits. While HB 1192 became effective July 1, provisions related to the repeal of the existing law on deferred deposits and installment lender licensing requirements are effective January 1, 2022. License applications will be available via the Nationwide Multistate Licensing System.

    Licensing State Issues State Legislation Hawaii Small Dollar Lending Consumer Finance Installment Loans

  • SEC charges Florida payday lender with making fraudulent misrepresentations in offering


    On September 27, the SEC filed charges against a Florida-based payday lender and its CEO (collectively, “defendants”) for fraudulently raising more than $66 million through the sale of promissory notes to hundreds of retail investors, including members of the South Florida Venezuelan-American community. The SEC charges the defendants with falsely promising investors that their money would be used solely to make small-dollar, short-term loans and for associated costs. However, the defendants allegedly misappropriated roughly $2.9 million for personal use, transferred approximately $3.6 million to family and friends without an apparent legitimate business purpose, and used at least $19.2 million of investor funds to make Ponzi-like payments to other investors. The complaint further contends that the defendants mislead investors by promising high annual returns and representing that the business was profitable, and made misrepresentations about the safety and security of the promissory notes. The SEC’s complaint alleges violations of the registration and antifraud provisions of the federal securities laws, and charges the CEO with acting as an unregistered broker. The complaint seeks a permanent injunction against the defendants, disgorgement with prejudgment interest, civil penalties, and an officer and director ban against the CEO.

    Securities Enforcement SEC Payday Lending Small Dollar Lending Fraud

  • DFPI proposes small-dollar lending pilot

    On August 6, the California Department of Financial Protection and Innovation (DFPI) issued a notice of proposed rulemaking (NPRM) to amend certain codes under the California Code of Regulations and to implement the Pilot Program for Increased Access to Responsible Small Dollar Loans (Pilot Program). The Pilot Program is administered by DFPI and established under the California Financing Law (covered by a Buckley Special Alert here). According to DFPI, the proposed regulations implement SB 235, “which authorizes a finder, defined as an entity that brings together a licensed lender and prospective borrower to negotiate a contract, to perform additional services on behalf of a lender,” and AB 237 “which, among other things, increases the upper dollar limit for a permissible Pilot Program loan from $2,500 to $7,500 and requires participating lenders to conduct reasonable background checks on finders.” The proposal would amend regulations of DFPI’s Pilot Program by, among other things: (i) revising general information and instructions to forms; (ii) increasing the upper limit from $2,500 to $7,500 on the amount of a permissible loan; (iii) “requir[ing] Pilot Program applicants to submit the policies and procedures they must maintain to address customer complaints and respond to questions raised by loan applicants and borrowers, including questions about finders”; (iv) permitting finders to disburse funds on behalf of lenders, collecting loan payments from borrowers, and issuing notices and disclosures to borrowers or perspective borrowers; and (v) removing a provision that prohibits finders from discussing marketing materials or loan documents with a borrower or prospective borrower.

    Licensing State Issues State Legislation Small Dollar Lending DFPI

  • SBA extends PPP whole loan sales guidance

    Federal Issues

    On April 30, the Small Business Administration (SBA) issued a procedural notice, effective immediately, extending guidance on whole loan sales applicable to lender merger and acquisition transactions where a lender has Paycheck Protection Program (PPP) loans in its portfolio. The guidance, which was set to expire May 1, will allow lenders participating in the PPP to continue to sell all of their interest in PPP loans to other participating lenders without obtaining SBA’s prior written consent. The new guidance outlines purchasing requirements and provides, among other things, that the purchasing lender “will be the party responsible to SBA with respect to all servicing actions, including requests for loan forgiveness, and will be the party eligible for the guarantee purchase of a PPP loan.”

    Federal Issues SBA Covid-19 Small Dollar Lending

  • Oklahoma and North Dakota adjust finance charges, rates on small dollar loans

    State Issues

    On April 21, the governor of Oklahoma signed SB 796, which amends the loan finance charge limit for supervised lenders. Specifically, a loan finance charge “may not exceed the equivalent of the greater of either” 25 percent per year on an unpaid principal balance or: (i) 32 percent annually on unpaid principal of $7,000 or less; (ii) 23 percent annually on unpaid principal that is greater than $7,000 but does not exceed $11,000; and (iii) 20 percent annually on unpaid principal of more than $11,000. The act also allows lenders to charge a closing fee of up to $28.85. The act takes effect November 1.

    The North Dakota governor also signed into law SB 2103 on April 16, which, when it takes effect on August 1, imposes limits on charges that licensed money brokers can assess, including a 36 percent annual interest rate limit on installment loans, and caps nonpayment or late payment fees at five percent for loans greater than $50,000. The act also includes additional restrictions for loans of less than $2,000, including that (i) the maximum term for an installment loan may not exceed 36 months and balloon payments are prohibited; (ii) existing loan balances may be refinanced into a new loan, provided it is less than $2,000 and “the combination of any refinance fees along with any fees collected as part of the original loans” do “not exceed one hundred dollars per calendar year”; and (iii) licensees may not contract for or receive charges exceeding $100 for a loan extension or payment deferment.

    State Issues State Legislation Consumer Finance Small Dollar Lending


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