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CFPB's Jeffrey Langer Lends Perspective on Marketplace Lending
On April 12, CFPB Assistant Director for Installment Lending and Collections Markets Jeffrey Langer delivered remarks at the San Francisco LendIt USA Conference on the marketplace lending industry. Langer began his remarks by summarizing the CFPB’s Project Catalyst initiative, which was designed to support and encourage consumer-friendly innovation pertaining to financial products and services, such as marketplace lending. Langer, referencing the CFPB’s recently released consumer bulletin on online marketplace lending, commented that marketplace lending is a “young” industry with both potential benefits and potential risks. For example, Langer explained that marketplace lenders may be able to offer consumers faster and more convenient methods of obtaining credit, and may also have fewer overhead costs to pass along to consumers as compared to brick-and-mortar institutions. However, Langer also expressed concerns about the industry’s agility in changing markets, opining that, “[i]t is unclear whether marketplace lenders’ have adequate loan servicing infrastructure or the ability to scale infrastructure quickly and effectively in the event of [an economic] downturn.” According to Langer, “it is simply too soon to know whether marketplace lending will be able to realize its potential as a means of delivering credit at a lower cost to consumers (and small businesses) who have the ability to repay the loans they obtain or whether the marketplace lending business model will prove unable to sustain itself through a full business cycle.” Langer additionally noted that marketplace lenders could face fair lending risk as a result of introducing new types of data and/or analytics in making credit decisions.
California DBO Seeks Information Regarding Marketplace Lending Industry
On December 11, the California Department of Business Oversight (DBO) announced an inquiry into the marketplace lending industry, requesting that 14 lenders complete an online survey to provide five-year trend data on their loan and investor funding programs. In addition, the survey requests that participating firms provide information on their business models and online platforms. Marketplace lenders market themselves as a faster, more accessible source of financing for consumers and small businesses. Due March 9, 2016, the survey responses are intended to assist the DBO assess the state’s licensing and regulatory regime of the industry by: (i) assessing the industry’s size in California and the number of consumers and businesses it affects; and (ii) understanding the various loan and investor funding programs used by marketplace lenders. In four years, the national online lending market reportedly grew from $1 billion in loans to $12 billion; analysts anticipate that by 2020, the total volume will be $122 billion.
Department of Treasury Extends Comment Period on Expanding Access to Credit Through Online Marketplace Lending
On August 18, the Department of Treasury extended the comment period for the public to respond to its Request for Information (RFI) on online marketplace lending, entitled Public Input on Expanding Access to Credit Through Online Marketplace Lending. Originally published on July 20, the RFI seeks public input on three areas relating to the online marketplace industry: (i) business models of and products offered to consumers and small businesses; (ii) potential expansion of access to credit to the historically underserved; and (iii) the ways in which the financial regulatory framework can develop to support safe growth within the industry. Since the July 20 publication of the RFI, only four (4) comments have been received. Earlier this month, Treasury held a public forum to discuss online marketplace lending, with roughly 80 participants from the marketplace lending industry, consumer advocates, nonprofit public policy organizations, and the financial services industry. Per the August 18 extension, the public will now have until September 30 to provide comments on the RFI.
Department of Treasury Seeks Public Feedback on Online Marketplace Lending
On July 20, the Federal Register published the Department of the Treasury’s Request For Information on Expanding Access to Credit Through Online Marketplace Lending (RFI). The RFI seeks public comment on the three specific areas relating to the online marketplace lending industry: (i) business models of and products offered to consumers and small businesses; (ii) potential expansion of access to credit to the historically underserved; and (iii) the ways in which the financial regulatory framework can develop to support safe growth within the industry. According to the RFI, online marketplace lending delivers lower costs and faster decision times than traditional lenders, but, so far, the loans are usually only originated to prime or near-prime consumers. However, some online marketplace lenders are developing product structures and underwriting models that may allow for originating loans to non-prime borrowers at lower interest rates. With the rapid growth occurring in the online lending industry, the RFI aims to assist the Treasury Department in examining online lenders’ potential “to expand access to credit, and how the financial regulatory framework can develop to ensure the industry grows safely.” Comments are due August 31, 2015.
Second Circuit Denies Injunctive Relief to Tribe-Owned Online Lenders Seeking Protection From New York State Regulator
On October 1, the Second Circuit affirmed the denial of a preliminary injunction sought by Native American online lenders that would have prevented the New York State Department of Financial Services (“DFS”) from restricting their lending to New York residents. Otoe-Missouria Tribe v. New York State Dept. of Fin. Servs., No. 13-3769-cv (2d Cir. 2014). The lawsuit stems from the DFS’ efforts, led by Superintendent Benjamin Lawsky, to crack down on internet-based, short-term lending businesses. As part of this effort, the DFS is seeking to bar plaintiffs—two Native American tribes allegedly providing internet loans with triple-digit interest rates—from extending loans to New York residents that violate New York’s usury laws. Plaintiffs brought suit seeking to enjoin the DFS from interfering with the tribes’ online lending business, arguing that the state’s efforts to curb their online business violated the Indian Commerce Clause because it infringed on the tribes’ fundamental right to self-government. The court rejected this argument, finding that the state’s action was directed at activity that took place entirely off tribal land and involved New York residents who sought loans without leaving the state.
New York DFS Launches New Database Of Online Payday Lenders
On June 16, the New York DFS launched a new database of online lenders that have been subject to actions by DFS based on evidence of illegal payday lending, and announced that one national bank had agreed to start using the tool. The DFS believes the database will help financial institutions meet “know your customer” obligations with regard to online lenders and will help ensure that electronic payment and debit networks are not used to transmit or collect on allegedly illegal, online payday loans made to New York residents. According to the DFS, the national bank plans to use the information about companies that may be engaged in illegal lending to (i) help confirm that its merchant customers are not using their accounts to make or collect on illegal payday loans to New York consumers; and (ii) identify payday lenders that engage in potentially illegal payday loan transactions with its New York consumer account holders, and, when appropriate, contact the lenders’ banks to notify them that the transactions may be illegal. The bank also agreed to provide DFS with information about payday lending activities by lenders listed in the database, including identifying lenders that continue to engage in potentially illegal lending activities despite the DFS’s previous actions. The database announcement is just the latest step taken by the DFS with regarding to online payday lending. Over the past year, the DFS has opened numerous investigations of online lenders and has scrutinized or sought to pressure debt collectors, payment system operators, and lead generators in an attempt to halt lending practices that the DFS claims violate state licensing requirements and usury restrictions.
CFPB Director Announces Prepaid Card Rule Delay, Discusses Other Initiatives
On June 10, CFPB Director Richard Cordray testified before the Senate Banking Committee in connection with the CFPB’s recently released Semiannual Report to Congress. The hearing covered a broad range of topics, including, among several others, prepaid cards, student loans, small dollar loans, and arbitration clauses.
Prepaid Cards
Director Cordray advised in response to an inquiry from Senator Menendez (D-NJ) that the CFPB’s prepaid card proposed rule, which the CFPB recently indicated could be released this month, likely will not come until the end of the summer. He reassured the Senator that the delay does not indicate any particular problem about the rulemaking, only that certain of the issues raised have been “hard to work through.”
Student Loans
Senator Menendez raised concerns about “automatic defaults” in the student loan context, an issue raised in the CFPB Student Loan Ombudsman’s mid-year report on student loans. In that report, the CFPB stated, based on an unidentified number of consumer complaints, that “industry participants are automatically placing loans in default – even when a borrower is paying as agreed” – in circumstances such as when a co-signer dies or goes into bankruptcy. The Ombudsman acknowledged that financial institutions may have legitimate business purposes for exercising contractual acceleration options which demand the full balance of a loan when a borrower’s co-signer has died or filed for bankruptcy. Senator Mendendez described legislation to address the issue. Senator Brown (D-OH) also focused on student loan issues, picking up on the CFPB’s common refrain that problems in the student loans servicing market are similar to those seen in mortgage servicing. He called for the CFPB to establish student loan servicing standards. Director Cordray acknowledged that the two markets are different, but pointed to “poor customer service, problems with transfers, lack of information, and harm to consumers” as “eerie” examples of problems seen in both markets.
Small Dollar Loans
On small dollar loans, Senator Brown expressed concern that an eventual CFPB rule on traditional payday loans could lead to arbitrage and leave gaps in consumer protection related to other small dollar loans, including, for example, online loans, auto title loans, and installment loans. Director Corday described this issue as one of “extreme importance” as the CFPB addresses the small dollar loan market. He stated that implementation of the Military Lending Act has given rise to similar problems, which the CFPB is working with the Department of Defense to address. He explained that the CFPB’s process on a payday loan rule is taking longer as the Bureau attempts to deal with these issues, but believes “it's well worth a little additional time in order to make sure that what we do won't be made a mockery of by people circumventing it through just transforming their product slightly.”
Arbitration
Senator Warren (D-MA) turned her attention, which recently has focused on student loans, to the issue of arbitration. She stated that “arbitration stacks the deck against customers in favor of large corporations,” and that it is “no surprise that many big banks, and other big corporations, force customers to agree to arbitration clauses to get credit cards, or open checking accounts, knowing that this means that the customer will have no real remedy if things go wrong.” Director Cordray responded that in hearing from corporations and consumers on the issue of arbitration clauses, there is almost no relation between the two, which is contrary to CFPB’s experience on other issues. He explained that while the Dodd-Frank Act barred arbitration in mortgage contracts, he only directed the CFPB to study and consider interventions related to arbitration in other consumer finance contracts. He said the CFPB has pursued a very thorough process to conduct the required study, which the Director believes will be completed this year. Senator Warren pressed him to commit to new rules if the study presents evidence such rules are required. Director Cordray declined to describe any possible policy judgments or actions that could follow the study, but promised the CFPB will fulfill its obligation to engage in policymaking that appropriately reflects the conclusions of the study.
House Oversight Committee Report Challenges DOJ's Operation Choke Point
On May 29, the House Oversight Committee released a staff report on Operation Choke Point, DOJ’s investigation of banks and payment processors purportedly designed to address perceived consumer fraud by blocking fraudsters’ access to the payment systems. The report provides the following “key findings”: (i) the operation was created by DOJ to “choke out” companies it considers to be “high risk” or otherwise objectionable, despite the fact that those companies are legal businesses; (ii) the operation has forced banks to terminate relationships with a wide variety of lawful and legitimate merchants; (iii) DOJ is aware of these impacts and has dismissed them; (iv) DOJ lacks adequate legal authority for the initiative; and (v) contrary to DOJ’s public statements, Operation Choke Point is primarily focused on the payday lending industry, particularly online lenders. The findings are based on documents provided to the committee by DOJ, including internal memoranda and other documents that, among other things, “acknowledge the program’s impact on legitimate merchants” and show that DOJ “has radically and unjustifiably expanded its [FIRREA] Section 951 authority.” The committee released the nearly 1,000 pages of supporting documents, which are available in two parts, here and here.
Utah Federal Court Dismisses Putative Class's "True Lender" Claims Against Online Merchant
On May 23, the U.S. District Court for the District of Utah dismissed a putative class action filed against an ecommerce merchant for allegedly operating a financing program that violated various California laws, including the state's usury law. Sawyer v. Bill Me Later, Inc., No. 11-988, 2014 WL 2159044 (D. Utah May 23, 2014). The court explained that the customer chose to finance his online purchase and was required to sign a contract: (i) identifying a Utah-chartered bank as the lender and as the owner of the account; (ii) specifying that the customer was accepting the loan in Utah, credit was being extended from Utah, and an annual interest rate of 19.99% would apply to outstanding loan amounts; and (iii) disclosing a schedule for late fees. The bank funded the transaction by paying the merchant on the customer’s behalf and held the receivables for at least two days before selling them to the merchant. The customer sued after he failed to pay for the purchase within 30 days and the merchant applied the disclosed interest rate and assessed a late fee, which the customer claimed together exceeded the usury cap in California, where the purchase was made. The court rejected the customer’s claim that the merchant, rather than the bank, was the “true lender” or the real party in interest. The court determined that “the lending framework more closely resembles credit card programs than the circular payday loan structures” described by the customer. The court concluded that loans serviced through contracts with third parties such as the merchant in this case are included within the definition of “any loan” under Section 27 of the Federal Deposit Insurance Act and as such are expressly preempted by federal statute.
California Supreme Court Agrees To Hear Tribe-Affiliated Payday Lending Case
On May 21, the California Supreme Court granted the state’s appeal of an appellate court decision that short-term, small-dollar credit businesses owned by certain federally recognized Indian tribes are sufficiently related to their respective tribes to be protected under the doctrine of tribal immunity from state regulation. California v. Miami Nation Enterprises, S216878 (Cal. May 21, 2014). Earlier this year, the California Court of Appeals, Second District, affirmed dismissal of a civil action filed by the Commissioner of the California Department of Corporations seeking to enforce a cease and desist order against five tribe-affiliated online lenders, holding that a business functions as an arm of the tribe if it: (i) has been formed by tribal resolution and according to tribal law, for the purpose of tribal economic development and with the clearly expressed intent by the sovereign tribe to convey its immunity to that entity; and (ii) has a governing structure both appointed by and ultimately overseen by the tribe.