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On June 6, the CFPB released a final rule to delay the August 19, 2019 compliance date for the mandatory underwriting provisions of the agency’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (the Rule). Compliance with these provisions of the Rule is now due by November 19, 2020.
As previously covered by InfoBytes, in February, when the CFPB released two notices of proposed rulemaking (NPRM) related to certain lending requirements under the Rule—one proposing the delay to the compliance date for mandatory underwriting provisions, and the other proposing to rescind the underwriting portion of the Rule that would make it an unfair and abusive practice for a lender to make covered high-interest rate, short-term loans, or covered longer-term balloon payment loans without reasonably determining that the consumer has the ability to repay—the Bureau emphasized that the NPRM extending the compliance date for mandatory underwriting provisions did not extend the effective date for the Rule’s provisions governing payments.
Notably, on May 30, the U.S. District Court for the Western District of Texas entered an order continuing the stay of the original compliance date for both the underwriting provisions and the payment provisions of the Rule in a payday loan trade group’s litigation challenging the Rule. (Previous InfoBytes coverage on the litigation is available here.) The order requires the parties to file a joint status report no later than August 2.
On May 30, the Oregon Governor signed HB 2089, which, among other things, prohibits title loan and payday loan lenders from making a new loan to a consumer until seven days after the consumer has fully repaid a previous title loan or payday loan. In addition, lenders may not make or renew a title loan or payday loan with an interest rate exceeding 36 percent annually, excluding a one-time allowable origination fee. These amendments apply to loan contracts, including renewals, executed on or after January 1, 2020.
On May 22, the FDIC announced it resolved a 2014 lawsuit brought by payday lenders that alleged that the FDIC, the OCC and the Federal Reserve abused their supervisory authority during Operation Chokepoint, an Obama Administration DOJ initiative that formally ended in August 2017 (covered by InfoBytes here) and was designed to target fraud by investigating U.S. banks and certain of their clients perceived to be a higher risk for fraud and money laundering. As previously covered by InfoBytes, in 2014, payday lenders filed a lawsuit against the federal banking agencies alleging that they participated in Operation Chokepoint “to drive [the payday lenders] out of business by exerting back-room pressure on banks and other regulated financial institutions to terminate their relationships” with such lenders. The payday lenders argued, among other things, that the initiative resulted in over 80 banking institutions terminating their business relationships with law-abiding companies.
Along with the announcement of the tentative settlement between the parties, the FDIC released a statement summarizing the FDIC’s internal policies and guidance for FDIC recommendations to financial institutions to terminate customer deposit accounts. The statement also included a letter written to the plaintiffs’ counsel acknowledging that “certain employees acted in a manner inconsistent with FDIC policies with respect to payday lenders in what has been generically described as ‘Operation Choke Point,’ and that this conduct created misperceptions about the FDIC’s policies.” In the press announcement regarding the resolution of the case, the FDIC emphasized that neither the statement nor the letter represent a change in the FDIC’s policy and guidance, and that all “existing applicable regulations and guidance documents remain in full force and effect.” Further, while the May 21 joint status report filed in the case noted that FDIC senior leadership had not yet reviewed the agreement, the report noted that the FDIC does “not anticipate any objections.”
Additionally, on May 23, the OCC acknowledged it had been dismissed from the litigation as part of the lawsuit’s resolution.
On May 15, a group of 25 Democratic Attorneys General submitted a comment letter in response to the CFPB’s February proposal to rescind certain provisions related to the underwriting standards of the “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (the Rule) (covered by InfoBytes here). In the comment letter, the Attorneys General argue, among other things, that the elimination of the underwriting provisions of the Rule: (i) is inconsistent with the Bureau’s obligations to protect consumers under the Dodd-Frank Act; (ii) ignores state experiences with payday and vehicle title lending; and (iii) would reduce states’ ability to protect their residents from predatory lending.
Specifically, the letter argues that the Bureau’s reasoning for repealing the underwriting requirements—that the findings of the Rule “were not supported by sufficiently ‘robust and reliable’ evidence”—would saddle the Bureau with an unreasonably high evidentiary standard that would prevent the Bureau from regulating unfair and abusive practices. Additionally, the letter states that the Bureau’s conclusion that the underwriting requirements would harm consumers by reducing consumer’s access to credit and ability to choose lenders offering credit ignores “the experiences of numerous states that have implemented restrictions on payday and vehicle title lending—restrictions that have protected consumers without unreasonably limiting consumers’ access to credit.” States’ restrictions on payday and vehicle title lending, according to the letter, have “benefited consumers and expanded access to manageable credit.” Lastly, the letter asserts that maintaining a federal regulatory floor on lending activities is “crucial to supporting and complementing state oversight,” and removal of the floor will “enable lenders to continue trying to avoid state regulation and continue marketing expensive and often unlawful products to consumers without providing borrowers an opportunity for negotiation or comparison.”
The comment letter was written by the Attorneys General of the District of Columbia, New Jersey, California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Mexico, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, Virginia, Washington, and Wisconsin.
As previously covered by InfoBytes, the same group of Attorneys General had urged the CFPB via a previous comment letter not to delay the August 19, 2019 compliance date for any aspect of the Rule, and had warned that they would consider taking legal action if the Bureau did so.
On May 16, the House Committee on Oversight and Reform’s Subcommittee on Economic and Consumer Policy held a hearing to examine the CFPB’s proposal to repeal parts of its “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (the Rule). (See previous InfoBytes coverage on the proposed repeal here.) Thomas Pahl, Policy Associate Director of the Research, Markets and Regulations Division at the Bureau, testified on the Bureau’s rulemaking and its position on the Rule. Committee Chairman Raja Krishnamoorthi (D-IL) opened the hearing by discussing the Bureau’s five years of research on the payday loan industry, which resulted in the issuance of the Rule in 2017. Krishnamoorthi claimed that Americans overwhelmingly support the requirement that lenders must determine a borrower’s ability to repay before making payday, title, and other high-cost installment loans, and provided an example of a consumer’s experience in this industry.
In his opening remarks, Pahl stressed that a complete picture of the Bureau’s activities concerning payday lenders requires understanding the use of the CFPB’s range of tools provided under the Dodd-Frank Act, such as its (i) consumer financial education initiatives; (ii) supervision of payday lenders to ensure compliance with federal statutes and regulations; and (iii) enforcement actions that target bad actors. Pahl emphasized that enforcement remains a key part of the Bureau’s consumer protection efforts, and highlighted five consent orders as well as two final judgments obtained against payday lenders. According to Pahl, the “payday loan cases are a testament to the agency’s commitment to use its enforcement tool to take decisive action against wrongdoers and send a clear message to the marketplace that should deter unlawful behavior and support a level playing field.” Pahl next discussed the Rule, stating that the Mandatory Underwriting Provisions rest on a determination that it is an unfair and abusive practice to make covered high-interest rate, short-term loans or covered longer-term balloon payment loans without reasonably determining that the consumer has the ability to repay. According to Pahl, the Bureau found that these provisions would lead to a decrease in the number of payday loans of between 51 and 52 percent (short-term vehicle title loans would decrease between 89 and 93 percent) and a decrease in revenue of between 67 and 68 percent, resulting in a contraction in the number of payday and vehicle title lenders. Pahl discussed the Bureau’s February 6 notice of proposed rulemaking (NPRM), which sought comments on repealing the ability-to-repay provision (see InfoBytes coverage here), since the Bureau “has come to have serious doubts as to whether the appropriate legal standards were applied and whether the evidence was sufficiently robust and reliable to support the Bureau's determination that small dollar lenders engage in an unfair or abusive act or practice if they make loans without making a reasonable determination that consumers can repay them.” A second NPRM was issued the same day to delay the Rule’s compliance date, and Pahl commented that the Bureau has begun to evaluate the comments received on both NPRMs.
During the hearing, Krishnamoorthi also questioned Pahl as to whether there is a threshold at which point an interest rate on a payday loan would be considered unfair and abusive or unconscionable. Pahl responded that the Dodd-Frank Act prohibits the Bureau from imposing any usury requirements and that “unconscionability is a matter of state law traditionally.”
In March, the CFPB updated its examination procedures for short-term, small-dollar lending (payday lending) in its Supervision and Examinations Manual. The procedures are comprised of modules and each examination will cover one more module. Prior to using the procedures, examiners will complete a risk assessment and examination scope memorandum, which will assist in determining which of the five modules the exam will cover: (i) marketing; (ii) application and origination; (iii) payment processing and sustained use; (iv) collections, accounts in default, and consumer reporting; and (v) service provider relationships. The examinations will review for potential violations of TILA, EFTA, FDCPA, FCRA, ECOA, UDAAP, and Gramm-Leach-Bliley Act (GLBA), all of which apply to payday lending.
On March 18, a coalition of 25 Democratic state Attorneys General urged the CFPB not to delay the August 19, 2019 compliance date for any aspect of the Payday, Vehicle Title, and Certain High-Cost Installment Loans rule (Rule) and warned that they would consider taking legal action if the Bureau does so. (CFPB’s Notice of Proposed Rulemaking, which announced the proposed delay in the effective date, was covered by InfoBytes here.) The AGs assert that the Bureau did not provide enough legal justification for delaying the underwriting provisions until November 2020 because the 2017 Rule already provided affected lenders ample time to comply. Moreover, the AGs emphasize that the Bureau cannot use the related proposal of future rescission of the underwriting requirements as a justification for the compliance delay; the delay “must be justified on its own merits.” As for the merits of the Bureau’s justification, among other things, the AGs reject the Bureau’s conclusion that “it should not assign the weight that it did in the 2017 [Rule] to ‘the interest of enacting protections for consumers as soon as possible,’” arguing that diminishing the weight assigned to consumer protection is in opposition to the Bureau’s statutory mandate. The AGs also raise concern about the ambiguity in the compliance date for the payment-related provisions of the Rule and stress that the August 19, 2019 date should stay in effect because “lenders will have had 21 months to prepare.” The AGs conclude that they “will closely examine whether to take action to address any unlawful action by CFPB” should the proposed delay be finalized.
On February 6, the CFPB announced a settlement with an Indiana-based payday retail lender and affiliates (companies) in seven states to resolve alleged violations of the Consumer Financial Protection Act (CFPA), Truth in Lending Act (TILA), and Gramm-Leach-Bliley Act (GLBA) privacy protections. The CFPB alleges that the companies engaged in unfair acts or practices, failed to properly disclose annual percentage rates, and failed to provide consumers with required initial privacy notices.
Specifically, the Bureau alleges that the companies violated CFPA’s UDAAP provisions by, among other things, (i) failing to implement processes to prevent unauthorized charges, including those resulting from unauthorized draws on borrowers’ bank accounts; (ii) requiring loan applicants to provide contact information for their employers, supervisors, and four personal references, and then repeatedly calling employers to seek payments when borrowers became delinquent; (iii) disclosing the borrower’s financial information during those calls and, in certain instances, asking the third party to make payments on the loan; (iv) misusing personal references for marketing purposes; and (v) advertising check-cashing and telephone reconnection services they were no longer providing.
While the companies have not admitted to the allegations, they have agreed to pay a $100,000 civil money penalty and are prohibited from continuing the illegal behavior.
On February 6, the CFPB released two notices of proposed rulemaking (NPRM) related to certain payday lending requirements under the agency’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (the Rule). As previously covered by InfoBytes, last October the Bureau announced plans to reconsider the Rule’s mandatory underwriting requirements and address the Rule’s compliance date.
The first NPRM proposed will rescind certain provisions of the Rule related to underwriting standards for payday loans and related products scheduled to take effect later this year. Specifically, the CFPB proposes to rescind the portion of the Rule that would make it an unfair and abusive practice for a lender to make covered high-interest rate, short-term loans or covered longer-term balloon payment loans without reasonably determining that the consumer has the ability to repay. The proposed changes would also rescind prescribed mandatory underwriting requirements for making the ability-to-repay determination, provisions exempting certain loans from the mandatory underwriting requirements, as well as related definitions, reporting, and recordkeeping requirements. The CFPB explains that it now initially determines that the evidence underlying the identification of the unfair and abusive practice in the Rule “is not sufficiently robust and reliable to support that determination, in light of the impact those provisions will have on the market for covered short-term and longer-term balloon-payment loans, and the ability of consumers to obtain such loans, among other things.” If finalized, the proposals represent a significant change to the Rule as finalized during the tenure of former Bureau Director Richard Cordray in October 2017. (See Buckley Special Alert for more detailed coverage on the Rule.) Comments will be accepted for 90 days following publication in the Federal Register.
The second NPRM seeks to delay the Rule’s compliance date for mandatory underwriting provisions from August 19, 2019 to November 19, 2020. Notably, the Bureau states in a press release announcing the NPRMs that the proposal to delay the effective date does not extend to the Rule’s provisions governing payments, which “prohibit payday and certain other lenders from making a new attempt to withdraw funds from an account where two consecutive attempts have failed unless consumers consent to further withdrawals.” Lenders also will still be required to provide written notice to consumers both before the first attempt to withdraw payment from their accounts, as well as prior to subsequent attempts involving different dates, amounts, or payment channels. These provisions are not under reconsideration and will take effect August 19, 2019. Comments will be accepted for 30 days following publication in the Federal Register.
CFPB files proposed consent order banning certain Canadian and Maltese payday lenders from U.S. consumer lending
On February 1, the CFPB and a group of payday lenders, including individuals and corporate officials based in Canada and Malta (collectively, “defendants”), filed a proposed consent order with the U.S. District Court for the Southern District of New York that would resolve allegations that the defendants violated the Consumer Financial Protection Act. According to the Bureau’s press release, the defendants allegedly (i) misrepresented to consumers an obligation to repay loan amounts that were voided because the loan violated state licensing or usury laws; (ii) misrepresented that loan agreements were not subject to federal or state laws; (iii) misrepresented that non-payment would result in lawsuits, arrests, imprisonment, or wage garnishment; and (iv) conditioned loan agreements upon irrevocable wage assignment clauses. Under the terms of the proposed order, the defendants would be, among other things, (i) permanently banned from consumer lending in the U.S.; (ii) permanently restrained from the collection or sale of existing U.S. consumer debts; and (iii) subject to certain reporting and recordkeeping requirements. The proposed order does not impose a fine on the defendants.
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