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CFPB Announces Consumer Advisory Board Meeting
On June 9, the CFPB will hold its next Consumer Advisory Board meeting in Little Rock, AR. According to the meeting’s agenda, the Board will discuss (i) an auto lending education initiative; (ii) trends and themes; and (iii) payday lending. Director Cordray and Assistant Director for Regulations Kelly Cochran are among the CFPB personnel who are scheduled to speak at the meeting. The event is open to the public.
NYDFS Announces First Settlements to Provide Restitution to Consumers Affected by Alleged Unlawful Payday Lending Practices
The NYDFS recently announced that it entered into consent orders with two debt buyers, one based out of Kansas and the other out of Virginia. According to the Department, the debt buyers improperly purchased and collected on illegal payday loans from New York consumers, with the Kansas-based debt buyer allegedly attempting to collect on more than 7,000 payday loan debts of New York consumers and collecting payments on more than 4,000 of those debts between 2007 and 2014. The NYDFSs press statement further alleges that the Kansas-based debt buyer repeatedly called New York consumers at work and at home, threatened to call consumers employers, and called family members to pressure consumers into paying their alleged payday loan debts. Pursuant to the consent order with the Kansas company, the debt buyer will (i) discharge more than $2.26 million in consumers payday loan debts; (ii) contact credit reporting bureaus and request that they remove any negative information that it previously provided associated with New Yorkers payday loan accounts; (iii) move to vacate judgments it obtained on New Yorkers payday loan accounts; and (iv) release pending garnishments, levies, liens, restraining notices, or attachments associated with judgments on New York consumers payday loan accounts. The Kansas debt buyer will issue almost $725,000 in refunds to more than 3,000 New Yorkers. The Virginia-based debt buyer will provide refunds totaling more than $66,000 to 52 New Yorkers allegedly affected by its lending practices, and discharge almost $53,000 in payday loan debts to 106 New Yorkers. The two settlements are the first NYDFS settlements to provide consumer restitution to New Yorkers affected by payday loans.
CFPB Files Complaint Against Payday Lending Company for Alleged Deceptive Practices
On May 11, the CFPB filed a complaint for alleged violations of the Consumer Financial Protection Act of 2010 (CFPA) against a Mississippi-based company offering cash checking services and payday loans. Regarding the company’s check cashing services, the CFPB alleges that the company violated state consumer protection laws by (i) explicitly forbidding employees from disclosing check cashing fees to consumers and providing new employees with a training presentation instructing them to “NEVER TELL THE CUSTOMER THE FEE”; and (ii) telling consumers that check transactions could not be canceled or that the process to reverse transactions would be lengthy, when neither was the case. The CFPB’s complaint further contends that the company’s payday lending practices differ from other companies’ practices in that it provides “multiple two-week loans over the course of the month” as opposed to providing 30-day loans to monthly consumers. The CFPB’s complaint states that, “[b]y borrowing from [the company], these consumers pay more in fees for the same or less net cash received during the month. Nevertheless, [the company] has deceptively represented to consumers that borrowing from [it] is more financially beneficial than, or at least financially equivalent to, taking out a 30-day loan from one of [its] competitors.” Further, the complaint states that consumers using the company’s services would often overpay and, from at least 2011 until 2014, the company failed to take “affirmative steps to notify consumers when they made an overpayment or to refund overpayments to consumers.”
The CPFB’s complaint, which also names one other company that provides payday loans and check cashing services in Mississippi and the president and sole owner of both companies, seeks monetary relief, injunctive relief, and penalties.
CFPB Issues Report on Payday and Installment Loans; Director Cordray Weighs in on Online Lending Industry
On April 20, the CFPB issued a report titled “Online Payday Loan Payments,” which covers an 18-month period in 2011 and 2012 and examines how online lenders’ attempts to recover debts are affecting consumers. Also on April 20, the CFPB held a press call during which Director Cordray delivered remarks regarding the small-dollar lending market, specifically focusing on findings included in the simultaneously released report. According to Director Cordray, online payday lenders have considerable power over consumers’ bank accounts because they use automated networks to deposit loans and collect payments, which often results in banks or credit unions charging consumers overdraft and non-sufficient funds fees. Director Cordray further summarized key findings from the report, including, but not limited to: (i) half of online consumers incurring an average of $185 in bank penalties – in addition to the penalties imposed by the lenders and the average annualized interest rate of 300% to 500% – as a result of reoccurring failed debits made by online payday lenders; (ii) one-third of online consumers losing their checking or savings accounts due to overdraft and non-sufficient funds fees; and (iii) consumers facing “hefty bank fee[s]” due to lenders’ repeated debit requests, despite the fact that second payment requests have a 70% failure rate, with third or subsequent payment attempts failing at an even higher rate. Director Cordray concluded by emphasizing that the CFPB’s “process of reforming the market for small-dollar loans” is ongoing, and that the CFPB will consider the data from the report as it prepares new regulations to address the industry.
FTC Releases 2015 Annual Highlights
On April 6, the FTC released its 2015 Annual Highlights report, which is comprised of four key sections: (i) enforcement; (ii) policy; (iii) education; and (iv) stats and data. Regarding enforcement highlights in 2015, the report covers a range of administrative and court actions related to, among other things, technological innovations that pose fraud and security risks, the security of consumers’ personal identifiable information, and alleged payday loan scams. Significant actions summarized in the enforcement section include the FTC’s (i) December settlement with a leading U.S.-based hotel and resort chain resolving charges that its data security practices were unfair and deceptive; (ii) Operation Ruse Control, a nationwide cross-border crackdown designed to protect consumers from alleged fraud within the auto industry; and (iii) Operation Collection Protection, a federal, state, and local initiative implemented to combat alleged abusive and deceptive debt collection practices. The policy and education sections of the report separately highlight the agency’s efforts to provide guidance and recommendations to government bodies and lawmakers at the state and federal levels regarding best practices for implementing competition principals into proposed laws, regulations, or policies, as well as its education outreach program, such as Start with Security, a conference designed to provide companies with tips for implementing effective data security. Notably, according to the stats and data section of the report, the FTC received more than three million consumer complaints in 2015, with debt collection, “other,” and identity theft leading the numbers at 897,655, 512,022, and 490,220 complaints, respectively.
New York DFS Takes Action Against Online Payday Loan Lead Generator
Recently, the New York DFS announced that an online payday loan lead generator and its CEO will pay a $1 million penalty and cease payday loan lead generation activities in New York to resolve allegations that its payday loans charge fees had interest rates greater than the usury limits allowed under New York law, and that it failed to protect consumers' personal information. According to the DFS, the company (i) "advertised payday loans and connected New York consumers to payday lenders without disclosing that the payday loans contained terms that violate New York usury laws"; and (ii) failed to take any protective measures when selling leads to its network of lead buyers, despite advertising that it "prides itself in putting [its] customer's security and personal information protection at the top of [its] priority list." In the event that the company solicits non-payday lending services in New York in the future, the order requires it to establish and adhere to data security protocols for the secure use, transfer, and storage of consumers' personal information. This action represents the DFS's first action to require a company to implement consumer data security measures to its future collection of consumers' personal information.
Fourth Circuit Reverses District Court's Decision; Rules Debt Collector's Arbitration Provisions Unenforceable
Recently, the U.S. Court of Appeals for the Fourth Circuit reversed a District Court’s decision that a debt collector’s arbitration provisions in loan agreements were enforceable. Hayes v. Delbert Services Corp., No. 15-1170 (4th Cir. Feb. 2, 2016). The defendant collected on loans that were transferred from an online payday lender owned by a member of the Cheyenne River Sioux Tribe. The loan agreements for the transferred loans provided that disputes between the borrower and the payday lender, or any assignee, would be resolved by binding arbitration “conducted by the Cheyenne River Tribal Nation by an authorized representative in accordance with its consumer dispute rules and the terms of this Agreement.” The loan agreement also provided that the agreement “IS MADE PURSUANT TO A TRANSACTION INVOLVING THE INDIAN COMMERCE CLAUSE OF THE CONSTITUTION OF THE UNITED STATES OF AMERICA, AND SHALL BE GOVERNED BY THE LAW OF THE CHEYENNE RIVER SIOUX TRIBE. The arbitrator will apply the laws of the Cheyenne River Sioux Tribal Nation and the terms of this Agreement.” The agreement went on to state that the arbitrator would not apply “any law other than the law of the Cheyenne River Sioux Tribe of Indians to this Agreement.”
The Fourth Circuit held that existing Supreme Court precedent makes it clear that the freedom to contract for arbitration does not extend to using an arbitration provision or choice of law clause to create a “substantive waiver of federally protected civil rights.” Essentially, the Fourth Circuit found the arbitration provisions in the loan agreement purported to create a prospective waiver of substantive rights under federal law, which rendered the arbitration provisions unenforceable. The Fourth Circuit observed that “a party… may not flatly and categorically renounce the authority of the federal statutes to which it is and must remain subject.” The Fourth Circuit also found that the arbitration provisions addressing governing law were not severable, because they went to the essence of the contract.
On February 16, the defendant filed a petition for rehearing arguing that the Fourth Circuit’s ruling (i) conflicts with past Supreme Court and Fourth Circuit decisions; and (ii) “will lead to the invalidation of countless arbitration agreements with foreign choice-of-law clauses on the ground that explicitly providing for the application of foreign law violates the prospective waiver doctrine.”
Obama Administration's FY 2017 Budget Proposal Makes Room for Small Dollar Loan Program
This week, the Obama Administration released the Fiscal Year 2017 Budget Proposal. President Obama’s proposed budget for the Department of the Treasury would, through the Community Development Financial Institutions (CDFI) Fund, reserve at least $10 million until September 30, 2018 to provide grants for loan loss reserve funds and to provide technical assistance for small dollar loan programs under section 1206 of the Dodd-Frank Act. The Small Dollar Loan Program, according to the budget proposal, “will support broader access to safe and affordable financial products and provide an alternative to predatory lending by encouraging CDFIs to establish and maintain small dollar loan programs.” Earlier this year, Senator Sherrod Brown (D-OH), in a letter to the President, requested that the FY 2017 budget proposal prioritize funding for small dollar loan programs, as outlined in Title XII – Improving Access to Mainstream Financial Institutions – of the Dodd-Frank Act.
On a similar note, the House Financial Services Committee held a hearing titled, “Short-term, Small Dollar Lending: The CFPB’s Assault on Access to Credit and Trampling of State and Tribal Sovereignty,” on February 11, which examined the short-term, small dollar credit marketplace. During the hearing, House members expressed concern that the CFPB and other government agencies are “overextending their efforts” in regulating the industry, thus limiting consumers’ access to credit. Per the CFPB’s 2015 Regulatory Agenda, the agency is “in the process of developing a Notice of Proposed Rulemaking to address concerns in markets for payday, auto title, and similar lending products.” This stimulated conversations on how the potential rule would affect consumers and existing state and tribal law. CFPB Acting Deputy Director David Silberman was present at the hearing; Silberman maintained that the CFPB’s regulatory efforts are to ensure that small dollar loans are affordable and that consumers are not “spiraling into continual debt.”
Senator Brown Requests Funding for Dodd-Frank Small Dollar Loan Programs
On January 6, U.S. Senator Sherrod Brown, who serves on the Senate Committee on Banking, Housing, and Urban Affairs, sent a letter to President Obama requesting that the FY 2017 budget proposal prioritize funding for programs outlined in Title XII – Improving Access to Mainstream Financial Institutions of the Dodd-Frank Act, which has yet to be implemented. According to Senator Brown, resources are needed in order to implement Title XII, which would, among other things, (i) allow the Treasury to establish partnerships with certain eligible entities to help low and moderate income individuals access accounts at banks and credit unions; and (ii) foster partnerships with non-profits, federally insured depository institutions, community development financial institutions (CDFIs), or State, local, or tribal governments to provide low-cost, small dollar loans to traditionally unbanked or underbanked Americans as a more affordable option to the more costly alternative financial services (AFS), such as payday loans, money orders, cash checking, remittances, and auto title loans.
FTC Announces Settlements with Online Payday Lenders Over Alleged Violations of TILA and EFTA
On January 5, the FTC announced separate settlements with two online payday lenders to resolve charges dating back to April 2012 that the defendants violated TILA, the Federal Trade Commission Act (FTC Act), and the Electronic Fund Transfer Act (EFTA). According to the FTC, the defendants (i) violated TILA by failing to accurately disclose information regarding the loan terms, such as the finance charge, annual percentage rate, payment schedule, and the total of payments; (ii) violated the FTC Act’s prohibition on deceptive acts or practices by misrepresenting how much loans would cost consumers; and (iii) violated the EFTA by conditioning extension of credit to consumers on the consumers’ repayment by preauthorized debits from their bank accounts. In addition to prohibiting the defendants from engaging in practices that violate the TILA and EFTA, the FTC’s final orders require the defendants to each pay $2.2 million and collectively waive $68 million in uncollected fees to consumers. Combined with other settlements, the FTC has recovered approximately $25.5 million in connection with its case against several payday lending companies and related individuals.