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CFPB announces settlement with Alabama-based operation for allegedly failing to properly disclose finance charges
On July 19, the CFPB announced a settlement with a small-dollar lending operation that allegedly failed to properly disclose finance charges and annual percentage rates associated with auto title loans in violation of the Truth in Lending Act (TILA) and the prohibition on deceptive practices in the Consumer Financial Protection Act (CFPA). According to the consent order, the Alabama-based operation, which owned and operated approximately 100 retail lending outlets in Alabama, Mississippi, and South Carolina under several names, materially misrepresented the finance charges consumers would incur for Mississippi auto title loans by disclosing a finance charge based on a 30-day term while having consumers sign a 10-month payment schedule. The Bureau asserts that “[c]onsumers acting reasonably likely would not understand that the finance charge disclosed in the loan agreement does not actually correspond to their loan payment term.” Furthermore, the Bureau contends that the operation also failed to disclose the annual percentage rate on in-store advertisements as required under TILA. The order requires the operation to pay redress in the amount of $1,522,298, which represents the total undisclosed finance charges made directly or indirectly by affected consumers on their loans. However, based on defendants’ inability to pay this amount, full payment is suspended subject to the operation’s paying $500,000 to affected consumers. In addition to the penalties, the operation is prohibited from continuing the illegal behavior and the operation’s board must ensure full compliance with the consent order.
8th Circuit reverses district court’s decision, rules compound interest not contractually agreed upon violates FDCPA
On July 16, the U.S. Court of Appeals for the 8th Circuit reversed a district court’s decision, holding that under Minnesota law, compound interest cannot be collected unless specifically agreed to in a contract. The decision results from a suit filed by a consumer alleging that a law firm violated the Fair Debt Collection Practice Act (FDCPA) when it sent a debt collection letter seeking payment of credit card debt while asserting that the consumer owed compound interest. The consumer’s suit alleged that the debt’s owner, debt collector, and law firm (defendants) “used a false, deceptive, or misleading representation or means . . . and an unfair or unconscionable means” when attempting to collect the debt. Specifically, the consumer alleged the principal balance included interest on the contractual interest—which he claimed he did not agree to in the underlying credit card agreement—and that as a result, the defendants misrepresented the amount of debt and attempted to collect interest that was not permitted under Minnesota law. The district court dismissed the consumer’s claim, finding that he failed to state an FDCPA claim because he did not allege a materially false statement in the collection letter. The 8th Circuit reversed however, finding that the consumer stated a claim under the FDCPA because a demand to pay an amount of debt that is unauthorized under state law is actionable as a false statement or unfair collection attempt, and that a false representation of the amount of a debt that overstates what is owed under state law is a material violation of the FDCPA. The appellate court also rejected the law firm’s argument that there was no FDCPA violation because the agreement authorized the total amount of interest stated in the letter, further declining to calculate the interest under the credit-card terms provided by the law firm because the consumer had contested the terms as unauthenticated.
House passes bipartisan package of securities and banking bills focusing on capital market regulations
On July 17, the House passed S. 488, the “JOBS and Investor Confidence Act of 2018” (Act) by a vote of 406 to 4. The package of 32 securities and banking bills now comprises Senate bill S. 488, which previously contained an amendment to the Securities Act Rule 230.701(e) and was included as part of the Economic Growth, Regulatory Relief, and Consumer Protection Act S.2155/P.L. 115-174. The Act focuses on capital market regulations and contains many capital formation provisions designed to, among other things, (i) expand access for smaller companies attempting to raise capital; (ii) reduce regulation for smaller companies such as providing federal stress test relief for nonbanks; (iii) revise crowdfunding provisions to allow for crowdfunding vehicles and the registration of crowdfunding vehicle advisers; (iv) exempt low-revenue issuers from Sarbanes-Oxley Act Section 404; (v) grant banks safe harbor when they keep open certain accounts and transactions at the request of law enforcement; and (vi) clarify various rules, review current securities laws for inefficiencies, and establish additional procedures focusing on virtual currency and money laundering efforts. Additional changes would amend a section of the Exchange Act governing SEC registration of individuals acting as brokers or dealers. The Fair Credit Reporting Act would also be amended to permit entities—including HUD—the ability to furnish data to consumer reporting agencies regarding an individual’s history of on-time payments with respect to a lease, or contracts for utilities and telecommunications services, provided the information about a consumer's usage of the service relates to payment by the consumer for such service or other terms of the provision of that service. S. 488 would also allow certain non-profits conducting charitable mortgage loan transactions to use forms required under the TILA-RESPA Integrated Disclosure Rule, and require the director of the CFPB to issue such regulations as may be necessary to implement those amendments. S. 488 now returns to the Senate for further action.
Federal Reserve submits annual report to Congress on credit card profitability of depository institutions
In July, the Federal Reserve Board submitted its annual report to Congress on the profitability of credit cards as required by Section 8 of the Fair Credit and Charge Card Disclosure Act of 1988. The Report to Congress on the Profitability of Credit Card Operations of Depository Institutions (the Report) focuses on credit card banks with assets exceeding $200 million meeting the following criteria: (i) more than 50 percent of assets are loans made to individual consumers; and (ii) 90 percent or more of consumer lending involves credit cards or related plans. As of December 31, 2017, the 12 banks that met this criteria accounted for almost 50 percent of outstanding credit card balances on the books of depository institutions. According to the Report, credit card loans have replaced other methods of borrowing, such as closed-end installment loans and personal lines of credit. In the aggregate, “consumers carried slightly over $1 trillion in outstanding balances on their revolving accounts as of the end of 2017, about 6.1 percent higher than the level at the end of 2016.” While the Report notes the difficulty with tracking credit card profitability due to revisions in accounting rules and other factors, it indicates that delinquency rates and charge-off rates for credit card loans saw a modest increase in 2017 across all banks but remained below their historical averages.
The Report also discusses recent trends in credit card pricing practices. Data from a survey that studied a sample of credit card issuers found that the average credit card interest rate across all accounts is about 13 percent, while the average interest rate on accounts that assessed interest was closer to 15 percent. The Report notes that, “while average interest rates paid by consumers have moved in a relatively narrow band over the past several years,” there exists is a great deal of variability across credit card plans and borrowers, reflecting various card features and the risk profile of the borrower.
On July 13, the CFPB announced a settlement with a Kansas-based company and its former CEO and part-owner for using a network of debt collection agencies (the Agencies) that allegedly engaged in improper debt collection tactics in violation of the prohibitions in the Consumer Financial Protection Act (CFPA) on engaging in unfair, deceptive, or abusive acts or practices (UDAAPs) and on providing substantial assistance to others engaging in such practices. The Bureau also alleged that the company, acting through the Agencies, violated the Fair Debt Collection Practices Act (FDCPA). According to the consent order, the Kansas-based company and its part-owner had “knowledge or a reckless disregard” of the illegal debt collection tactics used by the Agencies, including misrepresenting the amount the consumer actually owed and falsely threatening consumers and their families with lawsuits. In its findings and conclusions, the CFPB alleges that, after reviewing the Agencies’ practices, the company’s “compliance personnel recommended terminating the Agencies because of the Agencies’ illegal collection acts and practices, but [the company and its part-owner] continued placing accounts with the Agencies” and selling debts to one of the Agencies. In addition, the Bureau alleges the company and its part-owner provided operational assistance to the Agencies, such as (i) drafting and implementing policies and procedures that falsely implied compliance with federal laws; (ii) defending the Agencies’ practices when original creditors raised concerns about collection tactics; and (iii) preventing compliance personnel from conducting effective reviews of the Agencies. The order imposes a civil money penalty judgment of $3 million against the Kansas-based company and $3 million against the part-owner but the full payment is suspended subject to the company paying a $500,000 penalty and the part-owner paying a $300,000 penalty. In addition to the penalties, the company is prohibited from continuing the illegal behavior and must create and submit to the Bureau a comprehensive compliance plan, while the part-owner is permanently restrained from acting as an officer, director, employee, agent or advisor of, or otherwise providing management, advice, direction or consultation to, any individual or business that collects, buys, or sells consumer debt.
On July 10, the Attorney General of Texas and 13 other state Attorneys General filed an amici curiae brief with the U.S. Court of Appeals for the 5th Circuit, challenging the constitutionality of the CFPB. As previously covered by InfoBytes, in April, the 5th Circuit agreed to hear a challenge by two Mississippi-based payday loan and check cashing companies to the constitutionality of the CFPB’s single-director structure in response to a CFPB action filed against the companies. The brief encourages the appellate court to disagree with the en banc decision of the D.C. Circuit, which upheld the Bureau’s structure (covered by a Buckley Sandler Special Alert). Instead, the Attorneys General argue, the court should find the structure unconstitutional rendering “all its actions unlawful.” The brief poses similar arguments to past challenges, including (i) the director should be removable at will by the president and (ii) the president’s removal power should only be restricted for multi-member commissions.
Notably, the U.S. District Court for the Southern District of New York recently disagreed with the D.C. Circuit decision, concluding the CFPB’s organizational structure is unconstitutional and terminated the Bureau as a party to an action because the agency lacked the authority to bring claims under the Consumer Financial Protection Act (CFPA). (Previously covered by InfoBytes here.)
On July 11, the Deputy Attorney General, Rod Rosenstein, announced the establishment of a new task force on market integrity and consumer fraud pursuant to an Executive Order (EO) issued by President Trump on the same day. The task force, led by Rosenstein, will provide guidance for the investigation and prosecution of cases involving fraud on the government, financial markets, and consumers. The announcement lists a wide range of fraudulent activities, including (i) cyber-fraud; (ii) fraud targeting older Americans and service members; (iii) securities and commodities fraud; and (iv) corporate fraud affecting the general public, such as money laundering and other financial crimes. Rosenstein emphasized that the task force will work to achieve “more effective and efficient outcomes” to identify and stop fraud “on a wider scale than any one agency acting alone.”
While the EO requests senior officials from numerous federal agencies be invited by the DOJ to participate in the task force, Rosenstein was joined by acting Director of the CFPB, Mick Mulvaney; Chairman of the SEC, Jay Clayton; and Chairman of the FTC, Joe Simons in the announcement. Mulvaney stated, “[t]he Bureau takes its mandate to enforce the law seriously, and the Bureau will continue to apply the law to achieve this end of combatting fraud against Americans…. This task force is an example of the growing cooperation of the Bureau’s work with other federal and state authorities to combat a multitude of bad actors out there today.”
On July 9, the New York Attorney General and a New Jersey-based litigation funding company and its affiliates filed a joint letter in the U.S. District Court for the Southern District of New York addressing how the parties would like to proceed in the legal matter after the court terminated the CFPB as a party to the action. As previously covered by InfoBytes, in June, the district court held the agency’s structure is unconstitutional and therefore not allowed to bring claims under the Consumer Financial Protection Act (CFPA), but allowed the Attorney General to continue the action. The letter discusses the parties’ desired path for the litigation should the Bureau choose to appeal the court’s constitutionality determination. If the Bureau should appeal, the defendants request the court allow the immediate appeal and stay the current litigation, while the Attorney General disagrees with allowing the immediate appeal and “would like the case to proceed as expeditiously as possible.”
As for whether the court continues to have jurisdiction over the remaining claims, the Attorney General argues that the federal district court continues to have subject matter jurisdiction over the Consumer Financial Protection Act (CFPA) claims and supplemental jurisdiction over the state law claims. The defendants disagree and interpret the June decision to strike all substantive provisions of the CFPA that would form the basis for federal jurisdiction.
The letter states the Bureau has not yet decided if it will pursue an appeal of the court’s determination.
On July 11, the New York Department of Financial Services (NYDFS or the Department) released a study of online lending in New York, as required by AB 8938. (Previously covered by InfoBytes here.) In addition to reporting the results of its survey of institutions believed to be engaging in online lending activities in New York, NYDFS makes a series of recommendations that would expand the application of New York usury and other statutes and regulations to online loans made to New York residents, including loans made through partnerships between online lender and banks where, in the Department’s view, the online lender is the “true lender.”
In particular, NYDFS recommends, “[a]ll New York lenders should operate under the same set of rules and be subject to consistent enforcement of those rules to achieve a level playing field for all market participants….” Elsewhere in the report, the Department states that it “disagrees with [the] position” that online lenders are exempt from New York law if they partner with a federally-chartered or FDIC-insured bank that extends credit to New York residents. NYDFS criticizes these arrangements, stating its view that “the online lender is, in many cases, the true lender” because the online lender is “typically … the entity that is engaged in marketing, solicitation, and processing of applications, and dealing with the applicants” and may also purchase, resell, and/or service the loan.
NYDFS also noted that it opposed pending federal legislation that would reverse the Second Circuit’s decision in Madden v. Midland Funding, LLC, which held that federal preemption of New York’s usury laws ceased to apply when a loan was transferred from a national bank to a non-bank. The Department expressed concern that, if passed, the bill “could result in ‘rent-a-bank charter’ arrangements between banks and online lender that are designed to circumvent state licensing and usury laws.”
Noting that many online lenders remain unlicensed in New York, the Department states that “[d]irect supervision and oversight is the only way to ensure that New York’s consumers and small business owners receive the same protections irrespective of the channel of delivery….” To this end, NYDFS recommended lowering the interest rate threshold for licensure from 16 percent to 7 percent.
Although NYDFS stressed that its survey results may be unreliable due to uneven response rates, it reported that, for respondents, the average median APR for online loans to businesses was 25.9%, the average median APR for online loans to individuals for personal use was 14.8%, and the average median APR for the underbanked customers was 19.6% (New York currently caps interest for civil liability at 16% and at 25% for criminal liability).
Overall, the report appears to forecast a more difficult regulatory and enforcement environment in New York for online lenders, as has been the case in West Virginia and Colorado.
On June 29, the CFPB released a new Data Point report from the Office of Research titled, “Final Student Loan Payments and Broader Household Borrowing,” which examines how student borrowers transition out of their student loan debt and repayment patterns are interconnected with general household finances. Among other things, the report found (i) 94 percent of final payments exceed the scheduled payment, and the median final payment made is 55 times larger than the scheduled payment; (ii) student borrowers who pay off loans early are 31 percent more likely to take out their first mortgage in the year following the student loan payoff than in the previous year; and (iii) student borrowers who pay off loans on schedule are likely to use new monthly savings to pay down other debts. The CFPB’s findings suggest (i) the timing of student loan payoffs may be determined by life events such as increases in wealth and household formations, and (ii) continuing to study student loan payoffs may help predict the evolution of the student loan market.