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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.
On April 18, the Oklahoma governor signed SB 720 to create the Oklahoma Small Lenders Act (the Act) and establish a framework to license and regulate small loan lenders in the state through the Department of Consumer Credit (ODCC). Beginning on January 1, 2020, any licensee under the Deferred Deposit Lending Act (DDLA) may begin an application under the Act and all licenses under the DDLA will be terminated and deemed expired on August 1, 2020. As of August 1, 2020, no lender may make a small loan covered by the Act unless they are properly licensed; and “small loan” is defined as an unsecured loan with a period between 60 days and 12 months that is fully amortized and payable in substantially equal periodic payments and contains no prepayment penalty. A licensee may only charge a maximum of 17 percent as a periodic interest rate, and the maximum aggregated principal loan amount of all small loans outstanding per customer is $1,500. Additionally, the Act outlines requirements for licensure, default procedures, reporting requirements, and penalties for violations.
On April 3, the New Mexico governor signed HB 150, which amends the New Mexico Bank Installment Loan Act of 1959 and the New Mexico Small Loan Act of 1955 to, among other things, change provisions relating to financial institutions and (i) clarify that unfair or deceptive trade practices, or unconscionable trade practices, are considered violations of the Unfair Practices Act; (ii) expand annual lender reporting requirements, including identifying secured and unsecured loan products, fees and interests paid by the borrowers, loan terms, and default rates; (iii) clarify allowable loan insurance, including provisions related to licensing requirements for lenders; and (iv) expand state and federal disclosure requirements. The amendments also limit interest and other charges (permitted finance charges cannot exceed the lesser of $200 or 10 percent of the principal with outlined exceptions); grant rights of rescission within specified time frames to allow borrowers to return the full amount of funds advanced by the lender without being charged fees; and provide for penalties for lenders who willfully violate any of the provisions. Specifically, the act applies to installment loans covered by the Installment Loan Act and the Small Loan Act, and does not apply to federally insured depository institutions. The act takes effect January 1, 2020, and is applicable to loans subject to the aforementioned acts that are executed on or after the effective date.
On January 22, a coalition of 14 state Attorneys General submitted a comment letter responding to the FDIC’s Request for Information (RFI) on small-dollar lending. (See previous InfoBytes coverage on the RFI here.) According to the letter, while the coalition welcomes the FDIC’s interest in encouraging FDIC-supervised financial institutions to offer responsibly underwritten and prudently structured small-dollar credit products that are economically viable and address consumer credit needs, the coalition simultaneously raises several legal risks affecting state-chartered banks seeking to enter this space.
- Banks face challenges when entering into relationships with “fringe lenders,” specifically with respect to the potential evasion of state restrictions related to state usury laws, “rent-a-bank” lending, and tribal sovereign immunity. The coalition recommends that the FDIC discourage banks from entering into such relationships.
- State-chartered banks are still subject to state unfair or deceptive acts or practices laws and state-law unconscionability claims. The coalition recommends that the FDIC encourage banks to evaluate consumers’ ability to repay, factoring in conditions such as consumers’ monthly expenses, their ability to repay a loan’s entire balance without re-borrowing, and their “capacity to absorb an unanticipated financial event. . .and, nonetheless, still be able to meet the payments as they become due.” The coalition recommends that the FDIC include the factors banks should consider before extending small-dollar loans to consumers in any guidance that it issues.
On January 22, the California Department of Business Oversight (DBO) announced a $900,000 settlement with a California-based lender for allegedly steering borrowers into high-interest loans to avoid statutory interest rate caps. According to the DBO, the lender’s practice of overcharging interest and administrative fees violated the California Financing Law, which caps interest on small-dollar loans up to $2,499 at rates between 20 percent and 30 percent, but does not provide a cap for loans of $2,500 and higher. The DBO also asserts that the lender’s brochures, which advertised loans of “‘up to $5,000’ without stating that the minimum loan amount offered by [the lender] was $2,501,” were false, misleading, or deceptive. Moreover, the lender allegedly failed to allow certain borrowers the opportunity to make advance payments “in any amount on any loan contract at any time.”
Additionally, the DBO alleges that the lender overcharged roughly $700,000 in payday loan transactions by (i) collecting charges twice; (ii) allowing borrowers to take out a new loan before paying off the old one; and (iii) depositing some borrowers’ checks prior to the specified date in the loan agreement without their written authorization.
Under the terms of the consent order, the lender will, among other things, provide $800,000 in refunds to qualifying borrowers, pay $105,000 in penalties and other costs, and provide accurate verbal disclosures to borrowers concerning loan amounts and interest rate caps.
On November 14, the FDIC issued a request for information (RFI) seeking public comment on ways it can encourage FDIC-supervised financial institutions to offer “responsible, prudently underwritten small-dollar credit products that are economically viable and address the credit needs of bank customers.” In the RFI’s release, FDIC Chairman Jelena McWilliams pointed to studies showing that “[c]onsumers benefit when small-dollar credit products are available from banks” and requested “the public to use the RFI process to tell [the FDIC] how to ensure that consumers can obtain small dollar credit from banking institutions in a responsible manner.” The RFI seeks information related to the “full spectrum of issues” related to banks offering small-dollar credit, including regulatory and non-regulatory obstacles for banks, as well as actions the FDIC could take to assist banks in serving the small-dollar market. In addition to general feedback, the RFI includes a list of suggested topics and questions for commenters to address. Comments will be due 60 days after publication in the Federal Register.
Recently, the OCC and the CFPB have also made efforts to encourage banks to meet the small-dollar credit needs of consumers. In May, the OCC issued Bulletin 2018-14 encouraging banks to offer responsible short-term, small-dollar installment loans with typical maturities between two and 12 months (covered by InfoBytes here). In addition to applauding the OCC’s Bulletin, the CFPB announced it expects to publish proposed rules reconsidering the ability-to-repay provisions of the rule covering Payday, Vehicle Title, and Certain High-Cost Installment Loans in January 2019 (covered by InfoBytes here).
OCC Comptroller discusses state of banking system; emphasizes areas of economic opportunity and innovation
On November 14, Comptroller of the Currency Joseph Otting discussed the condition of the U.S. federal banking system at the “Special Seminar on International Finance” in Tokyo. Otting highlighted three areas where the OCC is working to promote economic opportunity and service to bank customers: innovation, short-term small dollar lending, and supervision of international banks operating in the U.S. Specifically, Otting discussed, among other things, the importance of (i) providing a path for fintech companies to become national banks to promote modernization, innovation, and competition; and (ii) encouraging banks to provide responsible short-term small-dollar installment loans—typically between $300 and $5,000—to help consumers meet unplanned financial needs.
Notably, while noting that foreign banks have the option to operate under a state license and that the OCC strongly supports the dual banking system in the U.S., Otting stressed that the OCC is well qualified to supervise foreign banks’ federal U.S. branches, and noted that there are “supervisory efficiencies” to be gained when switching from state-by-state oversight and “consolidating the supervision of branches of foreign banks with the supervision of the national bank subsidiary of the parent company, which the OCC already supervises.” According to Otting, operating under a single regulatory framework with one prudential regulator—the OCC—would achieve a “more complete, more efficient, and, importantly, more thorough regulation of the institution.”
On October 17, the Office of Information and Regulatory Affairs released the CFPB’s fall 2018 rulemaking agenda. According to the Bureau’s preamble, the information presented is current as of August 30 and represents regulatory matters it “reasonably anticipates” having under consideration during the period of October 1, 2018, to September 30, 2019. The Bureau also states it plans on “reexamining the requirements of [ECOA] in light of recent Supreme Court case law and the Congressional disapproval of a prior Bureau bulletin concerning indirect auto lender compliance with ECOA and its implementing regulations.”
Key rulemaking initiatives include:
- Property Assessed Clean Energy Loans (PACE): The Bureau is planning to complete an assessment of its 2013 rules for assessing consumers’ ability to repay mortgage loans by January 2019, which will inform the drafting of a request for information or advance notice of proposed rulemaking (ANPR) on PACE issues to facilitate the Bureau’s rulemaking process.
- HMDA/Regulation C: The Bureau plans to follow-up on its action in August 2017 to amend Regulation C to increase the threshold for collecting and reporting data with respect to open-end lines of credit for a period of two years so that financial institutions originating fewer than 500 open-end lines of credit in either of the preceding two years would not be required to begin collecting such data until January 1, 2020.
- Debt Collection: The Bureau states it plans to issue an ANPR addressing issues such as communication practices and consumer disclosures by March 2019, and has received support from industry and consumer groups to engage in rulemaking to explore ways to apply the FDCPA to modern collection practices.
- Small Dollar Lending: The Bureau anticipates it will issue a proposed rule on small dollar lending in January 2019.
- Payday Rule: The Bureau estimates it will issue an ANPR in January 2019 to reconsider the merits and compliance date for its final payday/vehicle title/high-cost installment loan rule.
- FCRA: Comments must be submitted by November 19 on the changes and underlying disclosures implemented by its interim final rule, which amended certain model forms under the FCRA and took effect September 21. (See previous InfoBytes coverage on the interim final rule here.)
Long term priorities now include rulemaking addressing (i) small business lending data collection; (ii) consumer reporting; (iii) amendments to FIRREA concerning automated valuation models; (iii) consumer access to financial records; (iv) rules to implement the the Economic Growth, Regulatory Relief, and Consumer Protection Act, concerning various mortgage requirements, student lending, and consumer reporting; and (v) clarity for the definition of abusive acts and practices.
On September 30, the California governor signed AB 237, which establishes a pilot program under the California Financing Law with the stated purpose of encouraging lenders to provide affordable small dollar loans to consumers. Significant features of the program include: (i) an increase to the upper limit of a permissible loan, from $2,500 to $7,500; and (ii) the authorized imposition of specified alternative interest rates and charges on unsecured loans of at least $300 and less than $2,500.
Under California’s Pilot Program for Increased Access to Responsible Small Dollar Loans (Pilot Program), licensees who choose to participate in the Pilot Program will be required to apply and pay a specified fee to the Commissioner of Business Oversight (Commissioner). Participating licensees will also be required, among other things, to (i) determine a borrower’s ability to repay the loan, factoring in all verifiable outstanding credit and capping total monthly debt service payments at 50 percent of the borrower’s gross monthly income for loans of $2,500 or less and 36 percent for loans greater than $2,500; (ii) establish terms of 180 days or more for loans with principal balances of at least $1,500, but less than $2,500, upon origination; (iii) establish terms of no less than one year and no more than five years for loans with principal balances exceeding $2,500; (iv) implement policies and procedures for the purpose of answering borrower questions and performing reasonable background checks on any finders associated with the licensee’s participation in the Pilot Program (AB 237 permits approved licensees to use the services or one more finders); and (v) reduce the interest rate of each subsequent loan made to the same borrower by a minimum of one percentage point under certain conditions. In addition, AB 237 allows the Commissioner to charge a licensee certain fees associated with the use of a finder, stipulates examinations requirements for licensees and finders, and establishes deadlines and requirements for the Commissioner when submitting required findings from the Pilot Program. The Pilot Program will run through January 1, 2023.
Governor Brown issued a message in conjunction with his signing AB 237 expressing his concern, among others, that increasing the cap on small dollar loans without also providing stricter regulatory oversight may lead to “unintended consequences.” Governor Brown requested that the state’s Department of Business Oversight “increase their vigilance and more carefully oversee both lenders and finders to ensure their actions comply with existing law.”
- Amanda R. Lawrence and Sherry-Maria Safchuk to discuss "California privacy rule" on an NAFCU webinar
- Sasha Leonhardt to discuss "The Servicemembers Civil Relief Act and the Military Lending Act: Common pitfalls and emerging issues" at a NAFCU webinar
- Michelle L. Rogers to discuss "BigLaw" at the Women in Business Law Leadership Conference
- Buckley Webcast: NYDFS mortgage servicing rules: Untangling federal and state servicing requirements
- H Joshua Kotin and Jessica M. Shannon to discuss "TILA/RESPA mortgage servicing and origination" at the NAFCU Regulatory Compliance School
- Michelle L. Rogers to discuss "Developing a risk-based response when the whistle blows" at the Whistleblower Program & Investigations Roundtable
- Daniel P. Stipano to discuss "Pathway of the SARs: Tracking trajectories of suspicious activity reports from alerts to prosecution" at the ACAMS International AML & Financial Crime Conference
- Daniel P. Stipano to discuss "Which bud’s for you? A deep-dive into evolving marijuana laws" at the ACAMS International AML & Financial Crime Conference
- Benjamin W. Hutten to discuss "Understanding OFAC sanctions" at a NAFCU webinar
- Brandy A. Hood to discuss "RESPA 8 (TRID applied compliance)" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Michelle L. Rogers to discuss "Major litigation" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- John P. Kromer to discuss "Navigating the multi-state fintech regulatory regime" at the American Conference Institute Legal, Regulatory and Compliance Forum on Fintech & Emerging Payment Systems
- Jonice Gray Tucker to discuss "Leveraging big data responsibly" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
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- Hank Asbill to discuss "What judges want from trial lawyers" at the American Bar Association Section of Litigation Anatomy of a Trial: Murder Trial of Ziang Sung Wan
- Steven R. vonBerg to speak at the "Conference super session" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference