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  • Illinois adopts rules implementing Predatory Loan Prevention Act

    State Issues

    On April 22, the Illinois Department of Financial and Professional Regulation (IDFPR) published in the Illinois Register a notice of adopted rules to implement the Predatory Loan Prevention Act (PLPA or the Act). As previously covered by InfoBytes, the Act was signed into law in March 2021 to prohibit lenders from charging more than 36 percent APR on all non-commercial consumer loans under $40,000, including closed-end and open-end credit, retail installment sales contracts, and motor vehicle retail installment sales contracts. Violations of the Act constitute a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act and carry a potential fine up to $10,000. Additionally, any loan with an APR exceeding 36 percent will be considered null and void.

    In general, the adopted rules require lenders to provide a disclosure to consumers about the 36 percent APR rate cap established by the PLPA, incorporate the APR calculation method required by the PLPA, and amend the rules for reporting of payday loans to the state database. The rules specify that words in the definitions are not defined to have the same meaning as in Regulation Z, including any interpretation by the CFPB. For purposes of calculating the PLPA ARP, the rules specify that the calculation excludes only certain specified bona fide fees, but includes finance charges, loan application fees, and fees imposed for participation in any plan or arrangement for a loan, “even if that charge would be excluded from the finance charge under Regulation Z.”

    The IDFPR made several amendments related to rate cap disclosure notices. These specify that all loan applications must include a separate rate cap disclosure signed by the consumer (disclosures must be provided in English and in the language in which the loan was negotiated) that clearly and conspicuously states: “A lender shall not contract for or receive charges exceeding a 36% annual percentage rate on the unpaid balance of the amount financed for a loan, as calculated under the Illinois Predatory Loan Prevention Act (PLPA APR). Any loan with a PLPA APR over 36% is null and void, such that no person or entity shall have any right to collect, attempt to collect, receive, or retain any principal, fee, interest, or charges related to the loan. The annual percentage rate disclosed in any loan contract may be lower than the PLPA APR.”

    The rules take effect August 1.

    State Issues State Regulators Illinois Predatory Lending Consumer Finance Interest Rate APR

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  • CFPB releases fact sheet on interest rate calculation under QM APR

    Federal Issues

    On February 23, the CFPB released a factsheet on the interest rate that is used for calculating prepaid interest under the price-based General Qualified Mortgage (QM) annual percentage rate (APR) calculation rule for certain adjustable-rate mortgages (ARMs) and step-rate loans. As previously covered by InfoBytes, the Bureau issued the General QM Final Rule in December 2020, which amended Regulation Z and revised the definition of a General QM by eliminating the General QM loan definition’s 43 percent debt-to-income ratio limit and replacing it with bright-line price-based thresholds. The fact sheet, among other things, “describes the interest rate that is used for calculating prepaid interest for purposes of this special APR calculation rule.” Additionally, the fact sheet clarifies, by section, the interest rate used to calculate the APR under the General QM ARMs special rule and the interest rate used to calculate prepaid interest under the General QM ARMs special rule.

    Federal Issues CFPB Mortgages Qualified Mortgage APR Interest Rate

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  • CFPB sues pawn lenders for MLA violations

    Federal Issues

    On November 12, the CFPB filed a complaint against a Texas-based pawn lender and its wholly owned subsidiary (together, “lenders”) for allegedly violating the Military Lending Act (MLA) by charging active-duty servicemembers and their dependents more than the allowable 36 percent annual percentage rate on pawn loans. According to the Bureau, between June 2017 and May 2021, the two lenders together allegedly made more than 3,600 pawn loans carrying APRs that “frequently exceeded” 200 percent to more than 1,000 covered borrowers. The Bureau further claimed that the lenders failed to make all loan disclosures required by the MLA and forced borrowers to waive their ability to sue. The identified 3,600 pawn loans only represent a limited period for which the Bureau has transactional data, the complaint stated, adding that the pawn stores located in Arizona, Nevada, Utah, and Washington that originated these loans only comprise roughly 10 percent of the Texas lender’s nationwide pawn-loan transactions. As such, that Bureau alleged that the lenders—together with their other wholly owned subsidiaries—made additional pawn loans in violation of the MLA from stores in these and other states. The Bureau seeks injunctive relief, consumer restitution, disgorgement, civil money penalties, and other relief, including a court order enjoining the lenders from collecting on the allegedly illegal loans and from selling or assigning such debts.

    As previously covered by InfoBytes, the Bureau issued a prior consent order against an affiliated lender in 2013, which required the payment of $14 million in consumer redress and a $5 million civil money penalty. The affiliated lender was also ordered to cease its MLA violations. In its current action, the Bureau noted that because the Texas lender (who was not identified in the 2013 action) is a successor to the prior affiliated lender, it is therefore subject to the 2013 order. Accordingly, the Bureau alleged that the Texas lender’s violations of the MLA also violated the 2013 order.

    Federal Issues CFPB Enforcement Military Lending Military Lending Act Consumer Finance Interest Rate APR Nonbank CFPA Servicemembers

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  • DFPI issues third round of draft regulations for commercial financing disclosures

    State Issues

    On October 12, the California Department of Financial Protection and Innovation (DFPI) issued a third draft of proposed regulations implementing the requirements of the commercial financing disclosures required by SB 1235 (Chapter 1011, Statutes of 2018). As previously covered by InfoBytes, in 2018, California enacted SB 1235, which requires non-bank lenders and other finance companies to provide written consumer-style disclosures for certain commercial transactions, including small business loans and merchant cash advances. In July 2019, California released the first draft of the proposed regulations, initiated the formal rulemaking process with the Office of Administrative Law in September 2020, and subsequently released a second round of modifications in August (covered by InfoBytes here, here, and here). The third modifications to the proposed regulations follow a consideration of public comments received on the various iterations of the proposed text. Among other things, the proposed modifications:

    • Amend several terms including “approved advance limit,” “approved credit limit,” “at the time of extending a specific commercial financing offer,” “benchmark rate,” “broker,” “provider,” and “recipient funds.”
    • Define the term “specific commercial financing offer” to mean a written communication to a recipient related to specific payment amounts and costs of financing, but does not include a recipient’s name, address, or general interest in financing.
    • Amend certain disclosure requirements and thresholds, including specific circumstances that a provider can disregard when making calculations and disclosures.
    • Clarify APR calculation requirements and tolerances and outline disclosure criteria for specifying the amount of financing used to pay down or pay off other amounts owed by a recipient.
    • Amend duties and requirements for financers and brokers.
    • Amend criteria for specifying the amount of funding a recipient will receive.

    Comments on the third modifications must be received by October 27.

    State Issues State Regulators DFPI California Disclosures Commercial Finance APR Consumer Finance

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  • DFPI again modifies draft regulations for commercial financing disclosures

    State Issues

    On August 9, the California Department of Financial Protection and Innovation (DFPI) issued a second draft of proposed regulations implementing the requirements of the commercial financing disclosures required by SB 1235 (Chapter 1011, Statutes of 2018). As previously covered by InfoBytes, in 2018, California enacted SB 1235, which requires non-bank lenders and other finance companies to provide written consumer-style disclosures for certain commercial transactions, including small business loans and merchant cash advances. In July 2019, California released the first draft of the proposed regulations, and last September, California initiated the formal rulemaking process with the Office of Administrative Law (covered by InfoBytes here and here). The second modifications to the proposed regulations follow a consideration of public comments received on the initial proposed text, as well as additional comments received on modifications made to the proposed text in April. Among other things, the proposed modifications (i) amend several terms including “approved advance limit,” “approved credit limit,” and “amount financed”; (ii) clarify the definition of “at the time of extending a specific commercial financing offer”; (iii) replace the London Interbank Offered Rate (LIBOR) with the Secured Overnight Financing Rate as one of the benchmark rate options; (iv) add several terms including “broker,” “recipient funds,” “average monthly cost,” “estimated monthly cost,” and “prepaid finance charge”; (v) provide that for disclosure purposes, “a provider shall assume that there are 30 days in every month and 360 days in a year” and specify that the annual percentage rate must be expressed to the nearest ten basis points; (vi) amend certain disclosure requirements and thresholds; (vii) clarify methods for estimating monthly sales, income, or receipt projections for sales-based financing; (viii) amend duties and requirements for financers and brokers; and (ix) clarify APR calculation requirements and tolerances and outline disclosure criteria for specifying the amount of funding a recipient will receive.

    Comments on the second modifications must be received by August 24.

    State Issues State Regulators DFPI Disclosures Commercial Finance Small Business Lending APR Merchant Cash Advance

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  • CFPB settles with company over misrepresenting deposit risks, loan APRs

    Federal Issues

    On May 27, the CFPB announced a settlement with a Florida-based lender and the CEO of the company (collectively, “defendants”) to resolve allegations that the defendants violated the Consumer Financial Protection Act by misrepresenting the risks associated with their deposit product and the annual percentage rate (APR) associated with their consumer loans. The settlement resolves a complaint against the defendants filed in the U.S. District Court for the Southern District of Florida in November 2020 (covered by InfoBytes here). The CFPB alleged that the company took deposits from consumers to fund loans, claiming their deposits would have a fixed and guaranteed 15 percent annual percentage yield and would be deposited at FDIC-insured institutions. However, according to the complaint, the representations were false in that the funds were not held in FDIC-insured accounts and the rate of return was not guaranteed. The CFPB also alleged that most deposited funds were used to fund short-term, high-interest personal loans that were deceptively marketed as having an APR of 440 percent when the actual APRs are alleged to have been more than 900 percent, well in excess of the rate permitted under Florida’s criminal-usury law, causing the loans to be uncollectable and creating risk that obligations could not be met to depositors who sought to withdraw their deposited funds. The complaint claimed that the defendants had loaned a total of more than $30 million to consumers since 2017. 

    Under the terms of the stipulated order, the defendants are (i) subject to a judgment for monetary relief and damages for the full amount defendants received from consumers who purchased their financial products and services, around $1 million, plus all interest due to consumers under the terms of the advertised products and services purchased; and (ii) required to pay a $100,000 civil money penalty. The order also permanently bans the defendants from engaging in deposit-taking activity and from making deceptive statements to consumers.

    Federal Issues CFPB CFPA Enforcement Usury Consumer Finance APR Deposits Courts

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  • Illinois legislature passes 36 percent rate cap for all consumer loans

    State Issues

    On January 13, the Illinois legislature unanimously passed the “Predatory Loan Prevention Act,” (available in House Amendment 3 to SB 1792), which would prohibit lenders from charging more than 36 percent APR on all consumer loans. Specifically, the legislation would apply to any non-commercial loan, including closed-end and open-end credit, retail installment sales contracts, and motor vehicle retail installment sales contracts. For calculation of the APR, the legislation would require lenders to use the system for calculating a military annual percentage rate under the Military Lending Act. Any loan made in excess of 36 percent APR would be considered null and void and no entity would have the “right to collect, attempt to collect, receive, or retain any principal, fee, interest, or charges related to the loan.” Additionally, each violation would be subject to a fine up to $10,000.

    State Issues Consumer Lending APR Military Lending Act Usury Interest Rate State Legislation

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  • CDBO releases proposed commercial financing disclosure regulations

    State Issues

    On September 11, the California Department of Business Oversight (CDBO) initiated the formal rulemaking process with the Office of Administrative Law (OAL) for the proposed regulations implementing the requirements of the commercial financing disclosures required by SB 1235 (Chapter 1011, Statutes of 2018). In September 2018, California enacted SB 1235, which requires non-bank lenders and other finance companies to provide written consumer-style disclosures for certain commercial transactions, including small business loans and merchant cash advances (covered by InfoBytes here). In July 2019, California released the first draft of the proposed regulations (covered by InfoBytes here) to consider comments prior to initiating the formal rulemaking process with the OAL.

    The new proposed regulations, which have been modified since the July 2019 draft, provide general format and content requirements for each disclosure, as well as specific requirements for each type of covered transaction. Additionally, the proposed regulations provide information on calculating the annual percentage rate (APR), including additional details for calculating the APR for factoring transactions, as well as calculating the estimated APR for sales-based financing transactions, among other things. Additional details about the proposed regulations can be found in the CDBO’s initial statement of reasons. Comments on the proposed regulations will be accepted through October 28.

    State Issues Small Business Lending Fintech Disclosures APR Commercial Finance Nonbank CDBO Merchant Cash Advance

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  • FFIEC releases APR, APY computational tools

    Agency Rule-Making & Guidance

    On April 16, the FFIEC, on behalf of its member agencies, announced the release of two computational tools for annual percentage rates (APR) and annual percentage yields (APY). These web-based tools are intended to assist financial institutions when complying with consumer protection laws and regulations.

    The APR Computational Tool is intended to help examiners and financial institutions verify finance charges and APRs included on consumer loan disclosures subject to TILA and Regulation Z, including calculations “related to unsecured and secured installment and construction loans, including real estate-secured loans.” The tool can also be used to verify military annual percentage rates for loans subject to the Military Lending Act. The APY Computational Tool is designed to support the verification of APYs on consumer deposit account disclosures, including advertisements and periodic statements, subject to the Truth in Savings Act and Regulation DD. See FDIC FIL-45-2020 and OCC Bulletin 2020-40 regarding the release of these tools.

    Agency Rule-Making & Guidance FFIEC APR APY Military Lending Act TILA Regulation Z Truth in Savings Act Regulation DD FDIC OCC

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  • California DBO releases draft regulations for commercial financing disclosures

    State Issues

    In July, the California Department of Business Oversight (DBO) issued a request for comment on the first draft of regulations implementing the state’s new law on commercial financing disclosures. As previously covered by InfoBytes, in September 2018, the California governor signed SB 1235, which requires non-bank lenders and other finance companies to provide written consumer-style disclosures for certain commercial transactions, including small business loans and merchant cash advances. Most notably, the act requires financing entities subject to the law to disclose in each commercial financing transaction—defined as an “accounts receivable purchase transaction, including factoring, asset-based lending transaction, commercial loan, commercial open-end credit plan, or lease financing transaction intended by the recipient for use primarily for other than personal, family, or household purposes”—the “total cost of the financing expressed as an annualized rate” in a form to be prescribed by the DBO.

    The draft regulation provides general format and content requirements for each disclosure, as well as specific requirements for each type of covered transaction. In addition to the detailed information in the draft regulation, the DBO has released model disclosure forms for the six financing types, (i) closed-end transactions; (ii) open-ended credit plans; (iii) general factoring; (iv) sales-based financing; (v) lease financing; and (vi) asset-based lending. Additionally, the draft regulation uses an annual percentage rate (APR) as the annualized rate disclosure (as opposed to the annualized cost of capital, which was considered in the December 2018 request for comments, covered by InfoBytes here). Moreover, the draft regulation provides additional information for calculating the APR for factoring transactions as well as calculating the estimated APR for sales-based financing transactions.

    Comments on the draft regulations are due by September 9.

    State Issues Small Business Lending Fintech Disclosures APR Commercial Finance Agency Rule-Making & Guidance Nonbank Merchant Cash Advance

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