InfoBytes Blog

FTC Files Amicus Brief in Tribal Payday Lending Case

On September 26, the FTC announced that it had filed an amicus brief in the U.S. Court of Appeals for the Seventh Circuit in a class action suit against a Native American payday lender. In that case, the putative class is challenging a payday lender’s practice of requiring borrowers to submit to arbitration at a Native American reservation in South Dakota. The FTC notes that it is pursuing its own action against the same lender, challenging its jurisdiction over borrowers who do not belong to the tribe and who do not reside on the reservation or in South Dakota. In its Seventh Circuit filing, the FTC argues that Native American tribes and tribal courts have legal authority over their own members and not over non-members, unless non-members conduct activities inside the reservation or enter into a commercial relationship with the tribe or a member of the tribe. The FTC claims that borrowers who take out payday loans from these companies via the Internet do not conduct business on the reservation and should not be subject to arbitration there.

FTC Payday Lending Arbitration Internet Lending

Alabama Establishes Payday Loan Database

On September 18, Alabama Governor Robert Bentley announced new State Banking Department regulations that will create a state database of payday loans made to borrowers. Under the Alabama Deferred Presentment Services Act (DPSA), payday lenders are prohibited from making loans to borrowers with more than $500 in outstanding payday loan debt. According to the announcement, the Governor believes that the database is needed to enforce this restriction because lenders and borrowers can easily exceed the $500 limit by obtaining loans from multiple lenders. The regulations also implement other aspects of the DPSA, including a payday lender licensing regime. The database is expected to be operational by January 2014. Following the Governor’s announcement, a group of payday lenders reportedly filed suit in Montgomery County Circuit Court to prevent the state from implementing the database provisions. According to reports, the lenders argue that (i) the Banking Department is trying to create the database by regulation after it failed to obtain legislative authority to do so, (ii) the database is discriminatory because it does not apply to other lenders, such as banks and online lenders, and (iii) the state is unlawfully imposing a tax by charging payday lenders a fee to access the database.

Payday Lending Internet Lending

CFPB Releases Revised Payday Loan Exam Manual Incorporating MLA Requirements

On September 17, the CFPB released revised short-term, small-dollar lending Examination Procedures  that incorporate the regulations issued by the Department of Defense (DoD) to implemente the Military Lending Act (MLA), which addresses alleged predatory lending practices by lenders that operate near military bases. The CFPB was given explicit power to enforce the MLA in the National Defense Authorization Act for Fiscal Year 2013.

The revised Procedures note that the MLA covers active-duty military members and their dependents and applies to “consumer credit,” defined as closed-end loans that are payday loans with a term of 91 days or fewer and an amount financed of $2,000 or less as well as certain vehicle title loans and tax refund anticipation loans.  The revised Manual notes the special requirements of the MLA, including: (i) capping the Military Annual Percentage Rate (the APR under TILA plus other charges such as credit insurance premiums and fees for certain credit-related ancillary products) at 36 percent; (ii) prohibiting a lender from holding a post-dated personal check, debit authorization, or title to a vehicle for repayment or security; (iii) prohibiting mandatory arbitration clauses and waivers of legal rights under the SCRA or other consumer protection laws; (iv) prohibiting lenders from rolling over loans, unless the new transaction results in more favorable terms for the consumer; (v) prohibiting lenders from requiring consumers to pay through the military wage allotment system; and (vi) prohibiting prepayment penalties.

The CFPB’s press release notes  the Bureau’s ongoing coordination with the Department of Defense on servicemember protection, as described in the agencies’ 2012 Joint Statement of Principles on small-dollar lending.

CFPB Payday Lending Examination Servicemembers Military Lending Act Predatory Lending

Director Cordray's Statements Offer Insight Into CFPB Activities

During a September 12 House Financial Services Committee hearing and in a recent interview published in the Washington Post, CFPB Director Richard Cordray made a number of statements that shed light on a wide range of topics related to the agency’s thinking and priorities. As discussed in more detail below, Director Cordray and House committee members touched on, among other things, the status of the CFPB’s small business lending data and HMDA rules, efforts to implement the CFPB’s mortgage rules (in particular the QM rule), small-dollar lending, and the CFPB’s collection and use of consumer information.

In addition, in his interview with the Washington Post, Director Cordray confirmed that the CFPB will be writing rules that apply the Electronic Fund Transfer Act (EFTA) to prepaid cards and govern debt collection practices. He also promised additional enforcement actions against debt collectors and “activity” on payday lending.

Highlights from House Hearing:

• Mortgage Rule/QM Implementation and Impact: A number of committee members from both sides of the aisle raised concerns about the impact of the CFPB’s mortgage rules, particularly its ATR/QM rule. Members are concerned with the complexity and regulatory burden of the rules, and that the ATR/QM rule is drawn too narrowly and will limit credit availability. The concerns of community bankers were again front and center—members stated that the rules unnecessarily burden community bankers and limit their ability to make loans, which may, in turn, force them to exit the mortgage market. Mr. Cordray described the various changes to the ATR/QM rule designed to accommodate community banks, reviewed the CFPB’s implementation process and resources, and pledged to continue to work to inform bankers of those accommodations and resources. More broadly, however, he stated that most institutions have told the CFPB that they will be in substantial compliance when the rules take effect in January 2014 and he did not indicate any intention to delay the effective dates of any of the mortgage rules.

  Rep. Huizenga (R-MI) focused on the ATR/QM rules’ inclusion of affiliate charges in the 3% points and fees cap and asked if the CFPB would support changing it. Director Cordray stated that the CFPB is “happy to think further” about the issue and can provide “technical assistance,” but that the rule reflects congressional intent and any substantive change would require legislation. He also acknowledged discussions with the Representative’s staff about whether title insurance should be treated differently because it is regulated.

• Cumulative Regulatory Burden: Several members raised a broader concern about the cumulative burden of regulations on financial institutions. Rep. Capito (R-WV) asked specifically about the CFPB’s regulations streamlining initiative and for evidence that it actually is moving forward. Mr. Cordray cited the CFPB’s work to eliminate an ATM notice requirement, which was removed by legislation before the CFPB finalized its effort, and explained that the CFPB now is focused on limiting burdens related to Gramm-Leach-Bliley Act privacy notices. He did not identify any other specific efforts to eliminate regulatory burden, but stated generally that the CFPB attempts to address duplicative and unnecessarily burdensome provisions in all of its rulemakings.

• TILA/RESPA Integration Rule: Two members – Reps. Miller (R-CA) and Perlmutter (D-CO) – asked about an aspect of the CFPB’s proposed TILA-RESPA integrated disclosure that would identify title insurance as “optional.” The members expressed concern that identifying it as such would not serve consumers. Mr. Cordray was not familiar with the issue, but pledged to revisit it. He also confirmed, as expected, that the final TILA-RESPA rule will be published this fall. (The CFPB’s recent rulemaking agenda stated more specifically October 2013.) Mr. Cordray promised an adequate implementation period.

• Small Business Lending and HMDA Rules: Rep. Velasquez (D-NY), who also serves as ranking member of the Small Business Committee, asked about the status of a rule to implement Dodd-Frank Act amendments to ECOA that require financial institutions to report information concerning credit applications made by women- or minority-owned businesses and small businesses. Mr. Cordray stated that the Bureau understands the importance of this data but was proceeding carefully because the rulemaking is outside the Bureau’s “comfort zone,” which is addressing consumer issues. In particular, he noted the Bureau was seeking to work with agencies that are more knowledgeable in this area, such as the Small Business Administration. However, he added that the CFPB internally has begun developing a rulemaking to implement changes to HMDA data collection. He explained that the CFPB expects that the HMDA rulemaking will inform its small business lending rule effort, and may overlap in parts.

• Small Dollar or “Payday” Lending: Small-dollar lending, particularly through the Internet, remains an active topic for both Congress and the CFPB. Several members raised a general concern with the growth of online lending and potential consumer protection challenges, while others accused the CFPB and other federal authorities of attempting to eliminate the practice altogether. Director Cordray recited the supervision and enforcement challenges associated with online lending and stated that it is a “subject of some considerable scrutiny right now, by [the CFPB] and by others.” He declined to comment more specifically on the CFPB’s involvement in reported efforts by the DOJ, the FDIC, and state authorities with regard to online lenders and the banks that process payments for them. Mr. Cordray later added that the CFPB considers the challenges of “offshore” lending to differ from those presented by Native American lenders. While both are difficult for state authorities to address, the CFPB does not consider tribal lenders to be “offshore” and believes that it is well established in federal law that the federal government can regulate tribal businesses and activities affiliated with tribes.

  Rep. Luetkemeyer (R-MO) mentioned a bill he first introduced last year to address some of these issues by creating a national charter for qualified non-depository creditors. Mr. Cordray responded that he did not have a position on the proposal at this time. Last year, the proposal met opposition from the OCC, state attorneys general, and state bank regulators.

  In response to Rep. Meeks (D-NY), who expressed concern about borrowers who need access to small dollar loans, Mr. Cordray stated that he believes financial institutions could make small dollar loans cheaply.

• Supervision and Enforcement: Rep. Neugebauer (R-TX) and others inquired about the CFPB’s examination and enforcement programs. Mr. Neugebauer asked about the CFPB’s application of the “abusive” prong in the Dodd-Frank Act “UDAAP” standard and about the scope of the CFPB’s information requests. With regard to “abusive practices,” Director Cordray stated that examiners are looking only at practices that meet the statutory definition. He explained that he has difficulty with the abusive standard, and that, in his view, something that is abusive is likely also unfair and deceptive. He promised that the CFPB will “tread carefully” and will not be “wild and overly aggressive” in its application of the abusive standard. With regard to information requests, Mr. Cordray agreed that the CFPB’s practice should be to only sample data and information in connection with exams, but added that in enforcement situations the CFPB may need much more data. Some members also criticized the salaries paid to CFPB staff, while others complained about the lack of experience of some examiners.

• CFPB Data Collection: Numerous members assailed Mr. Cordray with regard to the CFPB’s collection and use of consumer information, and the CFPB’s alleged failure to respond to information requests submitted by Republican members. Mr. Cordray asserted that the CFPB’s data collection and use is legal and necessary. He objected to the characterization that the CFPB has delayed its response to the committee, and indicated that he will be back to testify on this topic in the coming weeks.

Excerpts from Washington Post Interview:

(For the original Washington Post interview, please click here.)

• Debt Collection:  “We will be undertaking rulemaking in the debt-collection area. The work on that will get started later this fall. Debt collection is an area that is in need of revision and updating. It’s a very problematic area, one of the most complained-about areas by the public. It’s only gotten worse in the wake of the financial meltdown because so many people owe debt. An estimated 30 million Americans have a debt collector chasing after them now, so it’s a very salient issue now for the public. The Fair Debt Collection Act was passed in 1977, and there were never any provisions for rules to be written under it, so it hasn’t kept pace with the times. It’s now 35 years old, and there is room for us to update the act to take account of various court decisions, changes in the industry, changes among the consumer public to improve coverage so people are protected and treated fairly. That’s an important area for us and an area where we’ve already had some activity moving toward rulemaking. We’re also examining debt collectors. We’ve done some enforcement actions involving debt collection, and there will be more. We’ve put out a bulletin on first-party debt collectors, making clear that they’re also covered under existing law. And we’re starting to provide some tools for consumers to use, such as the template letters they can use to try and avoid undue harassment and abuse from debt collectors.”

• Small Dollar or “Payday” Lending:  “We put out the white paper on payday lending and the deposit advance products in late spring. That is leading us toward policy work in the area. There is some follow-up research work we’re doing that has been underway since the first paper came out. But there will be activity in this area in the near future. The issue coming out recently of online payday lenders who are relying on financial banks to be the mechanism for financing and collecting the money really has been interesting. Frankly, the work in that area involves coordination with both federal regulators and state officials, and it can even be international, with some online lenders originating from outside of the United States now. It’s an area where we’ve been building partnerships as well as thinking about the policy work that we need to do, and we’re making progress.” (See our prior post on the CFPB payday lending white paper.)

• Prepaid Cards:  “The fact that prepaid cards are not covered by ­consumer-protection laws at the moment is a compelling need for us to write regulations to get them covered. We’re moving forward to write rules to make sure they are protected under [the Electronic Fund Transfer Act (EFTA)]. It’s a real front-burner issue for us.” (Note that on September 12, the CFPB also issued a bulletin on the application of EFTA to payroll cards.)

• Ability-to-Pay Requirements for Non-Mortgage Products:  “It’s something that we are thinking about. Some of the most interesting issues for me have been the ones where we start to see some of the same philosophical issues extending across different markets, but potentially in different ways. So ability to pay in the mortgage market is arguable at its zenith because it’s a huge dollar transaction. You can justify more demands on the lenders and the borrower to make sure that transaction works. In the credit card context, under the [Credit Card Accountability Responsibility and Disclosure Act of 2009], there is an ability-to-repay provision in there. But it operates in a somewhat different way for credit cards than it should for mortgages. They’re different kinds of transactions, different size, different scope. You can get in and out of credit cards in a hurry. Not so easy to get in and out of mortgages. How it applies to smaller-dollar lending is a further differentiation. It’s something that we’re having to think about. The general principle, though, of ability to repay as the basis for making loans is just common sense. The lender should care about whether the borrower can repay because they’re the ones lending the money. They’re the ones at risk. The market is no longer so straightforward. With mortgages, for example, the ability to repay was arguably lost if you could sell into the secondary market. There are a number of consumer groups that have been pushing [the ability-to-repay model] as a broad principle across markets. There is quite a bit to what they’re saying. How it would apply from one market to another is worth further analysis, and that’s something we’re engaged in analyzing.”

• Supervision:  “We have to institute our supervision program for financial institutions that are used to being regulated, but not necessarily used to being regulated with a focus on consumer protection. It’s an adjustment for them. But in the non-bank sphere, they’re often not used to being regulated at all, or only on the state level. In that area, there has been a real shift toward more of a compliance mentality. And our being on the scene and doing this work has caused that shift.”

• Safety and Soundness:  “It’s the right perspective that an institution needs to merge the short-term and long-term thinking about its business model. It’s not a long-term business model to take advantage of your consumers in ways that are not sustainable. That’s what brings safety and soundness regulation and consumer protection regulation back together and really makes them harmonious."

CFPB Payday Lending Mortgage Origination Internet Lending

Missouri Increases Allowable Short-Term Loan Fees

On September 11, the Missouri General Assembly voted to override the governor’s veto and enact HB 329, which, among other things, increases the allowable fees on short-term loans. The bill increases the maximum fee that a creditor can charge on a loan for 30 days or longer, other than open-end credit, from 5% to 10% of the principal amount of the loan, up to $75. Similarly, for open-end credit contracts tied to a transaction account in a depository institution with a contract that provides for loans of 31 days or longer, the bill increased maximum credit advance fee from the lesser of $25 or 5% of the credit advanced to the lesser of $75 or 10% of the credit advanced. The bill also (i) requires the Division of Finance and the Division of Credit Unions to report annually certain information about state financial institutions in each county or city with a population of more than 250,000, including the number and type of violations, a statement of enforcement actions taken, the names of institutions found to be in violation, the number and nature of complaints received, and the action taken on each complaint, and (ii) allows the division directors to conduct consumer hearings if the director has reason to believe that a violation has occurred, removing the requirement that the director’s decision be based on an examination, an investigation of a complaint that has not been resolved by negotiation, a report by the financial institution, or any public document or information. Governor Jay Nixon sought to halt the legislation in July, citing concerns of the substantial increased cost to consumers.

Payday Lending Consumer Lending

August Beach Read Series: Increasing Scrutiny of Short-Term, Small-Dollar Credit Products

The interest of regulators and enforcement authorities in short-term, small-dollar credit products - including payday loans, advance deposit products, installment loans, and more – has intensified in 2013. State and federal authorities have taken numerous actions to enforce existing law and to develop new rules for these products.

Earlier this year we reported on the DOJ’s prioritization of this area of consumer finance, and we have since reported on many other state and federal developments, including those related to state enforcement of licensing and usury laws against online lenders, federal regulators' scrutiny of advance deposit products and payday loans, congressional interest in small dollar loans (here and here), and the Department of Defense’s potential expansion of the Military Lending Act.

With regard to this last issue, BuckleySandler Partner Valerie Hletko recently examined the DOD’s advance notice of proposed rulemaking related to installment loans used by members of the armed forces and their families. The authors point out that the DOD’s interest in installment loans is emblematic of the scrutiny of short-term, small-dollar credit products, which appear to be increasingly vexing to regulators who recognize widespread demand for them but are concerned that such products may create a high-cost borrowing cycle.

In a 2012 article Partners John Kromer and Valerie Hletko previewed the CFPB’s interest in these products and identified some best practices for short-term, small-dollar lenders.

CFPB Payday Lending DOJ Military Lending Act Internet Lending Deposit Advance Online Lending

New York Joins Ranks of State AGs Suing Internet Payday Lenders

On August 12, New York Attorney General (AG) Eric Schneiderman announced a lawsuit against payday lending firms and their owners for allegedly violating the state’s usury and licensed lender laws in connection with their issuing of personal loans over the Internet. The AG claims that the companies charged annual interest rates from 89% to more than 355% to thousands of New York consumers, which rates far exceed the 16% rate cap set by state law. The AG joins the FTC and other state attorneys general who have acted against some of these and other Internet lending companies. Federal and state authorities more generally have been ratcheting up their scrutiny of online lending, and the AG’s action follows an inquiry initiated last week by the New York Department of Financial Services concerning payday lending. The AG states that his investigation began last fall.  He is seeking a court order prohibiting the companies and individuals from engaging in further illegal lending or enforcing existing usurious loan contracts, cancellation of all outstanding loans, restitution for borrowers of all interest collected above the legal limit of 16% interest, disgorgement of profits, and penalties of up to $5,000 per violation for deceptive acts and practices.

Payday Lending State Attorney General Online Lending

New York Seeks to Halt Online Payday Loans, Collections; Federal Agencies Issue Subpoenas

On August 6, the New York Department of Financial Services (DFS) sent letters to 35 online lenders, including lenders affiliated with Native American Tribes, demanding that they cease and desist offering allegedly illegal payday loans to New York borrowers. The letters demand that within 14 days the companies confirm that they are no longer soliciting or making payday loans in excess of the state usury caps. Under New York law, it is civil usury for a company to make a loan or forbearance under $250,000 with an interest rate exceeding 16% per year, and a criminal violation to make a loan with an interest rate exceeding 25% per year. The letters also remind recipients that it is illegal to collect on loans that exceed the usury cap; a separate letter to third-party debt collectors included the same notice. The DFS previously warned third-party debt collectors about collecting on illegal payday loans in March. In addition, the Department of Financial Services sent letters to 117 banks and NACHA requesting that they work with the DFS to create a set of model safeguard procedures to deny ACH access to the targeted lenders and provide the DFS with information about steps the institutions are taking to halt the allegedly illegal activity.

The role of banks in processing payday loan payments was identified as an enforcement priority earlier this year by the DOJ’s Financial Fraud Enforcement Task Force. The DOJ, the CFPB, and other federal agencies reportedly have issued subpoenas to banks and other entities as part of a broad investigation of online payday lending.

Payment Systems Payday Lending Debt Collection DOJ Enforcement Internet Lending

Banking Industry Trade Groups Oppose Expansion of MLA Covered Loans

On August 1, six banking industry trade groups submitted a joint comment letter relating to a proposal by the Department of Defense (DOD) to revise protections under the Military Lending Act (MLA), which apply to consumer credit extended to members of the military and their families.  Among other things, the MLA caps the annual interest on short-term, small-dollar loans — including certain payday, car title, and refund anticipation loans.  The MLA does not currently include credit cards, bank loans secured by funds on deposit, installment loans, or open-end credit.

In June, the DOD issued an advanced notice of proposed rulemaking (ANPR) to solicit input on potential changes to the definition of “consumer credit” in the regulations that implement the MLA, which would significantly broaden its application.  The ANPR sought comment on whether the definition of “consumer credit” should be revised to expand coverage of the MLA to additional small-dollar loan products.  The trade groups suggest that expanding coverage would be redundant, costly, and confusing in light of the “well-established system of financial protections for consumers [that] exists beyond the [MLA].”  In other words, there is no need to create an entirely separate class of credit products for servicemembers and their families not directly related to military service.

The trade groups specifically identify several potential negative consequences of expanded coverage, including reduced access to installment loans and other credit products, and inability to refinance existing credit.  On balance, the trade groups view the current rules — adopted after plenary discussion and careful consideration by all stakeholders — to be effective in achieving the proper balance between protecting military families and ensuring their access to credit.  Thirteen state attorneys general took an opposing view in a comment letter submitted on June 24.

For additional commentary on the ANPR, please see the recent article from BuckleySandler Partner Valerie Hletko.

Credit Cards CFPB Payday Lending Servicemembers Installment Loans Military Lending Act Deposit Advance

Georgia Attorney General Latest to Sue Tribe-Affiliated Online Payday Lender

On July 29, Georgia Attorney General (AG) Sam Olens announced a lawsuit against a payday lending operation affiliated with a Native American Tribe for allegedly making illegal loans in that state. The AG asserts that the state’s Pay Day Lending Act specifically prohibits the making of payday loans, including the making of payday loans to Georgia residents through the Internet. The AG alleges, based on an investigation conducted after receiving numerous consumer complaints, that (i) the payday lender makes high interest payday loans to Georgia consumers over the Internet despite not having a license to lend in that state, (ii) the lender has continued to electronically withdraw funds from consumers’ bank accounts even after the consumers have repaid the full amount of the principal on the loan, and (iii) the loan servicer has harassed consumers with repeated telephone calls, obscene and abusive language, threats of wage garnishment or other legal action. In his complaint, the AG rejects claims by the defendants that their lending activities are governed solely by tribal laws, stating that only Georgia law governs loan agreements with Georgia borrowers. According to the AG, efforts to resolve the issue without litigation were undermined by the defendants’ continuing illegal activity. The AG is seeking (i) to enjoin the operation from making or collecting on any loans, (ii) a declaration that any pending loans are null and void, and (iii) civil penalties and attorneys’ fees. Georgia is among several states, in addition to the FTC, to take action against this operation. For example, earlier this month Minnesota Attorney Lori Swanson filed suit a similar suit against the same operation targeted by the Georgia suit.

Payday Lending State Attorney General Internet Lending