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House Democrats Urge Banks to Limit Online Payday Lender Access to Accounts
On April 2, Representatives Suzanne Bonamici (D-OR) and Elijah Cummings (D-MD) sent letters to the CEOs of five large retail banks urging those institutions to voluntarily adopt certain consumer protections related to online payday lending. Those members and several others recently introduced the SAFE Lending Act, which the letter states would (i) allow consumers to prevent lenders form making automatic withdrawals and debits from their accounts, (ii) require all lenders to abide by state small-dollar lending rules, (iii) ban lead generators and anonymous payday lending, and (iv) increase enforcement authority to address offshore small-dollar lenders. Pending congressional action, the legislators asked the banks to “take every available step to prevent online payday lenders from accessing funds from consumer accounts when they are clearly operating in violation of state law.”
Insights Into The Financial Fraud Enforcement Task Force Priorities for 2013
On March 20, 2013, Michael Bresnick, Executive Director of DOJ’s Financial Fraud Enforcement Task Force gave a speech at the Exchequer Club of Washington, DC highlighting recent accomplishments of the Task Force and outlining its priorities for the coming year. He began by discussing a number of areas of known focus for the Task Force, including RMBS fraud, fair lending enforcement, and servicemember protection. He then outlined three additional areas of focus that the Task Force has prioritized, including (i) the “government’s ability to protect its interests and ensure that it does business only with ethical and responsible parties;” (ii) discrimination in indirect auto lending; and (iii) financial institutions’ role in fraud by their customers, which include third party payment processors and payday lenders.
The third priority, which was the focus of Mr. Bresnick’s remarks, involves the Consumer Protection Working Group’s prioritization of “the role of financial institutions in mass marketing fraud schemes -- including deceptive payday loans, false offers of debt relief, fraudulent health care discount cards, and phony government grants, among other things -- that cause billions of dollars in consumer losses and financially destroy some of our most vulnerable citizens.” He added that the Working Group also is investigating third-party payment processors, the businesses that process payments on behalf of the fraudulent merchant. Mr. Bresnick explained that “financial institutions and payment processors . . . are the so-called bottlenecks, or choke-points, in the fraud committed by so many merchants that victimize consumers and launder their illegal proceeds.” He said that “they provide the scammers with access to the national banking system and facilitate the movement of money from the victim of the fraud to the scam artist.” He further stated that “financial institutions through which these fraudulent proceeds flow . . . are not always blind to the fraud” and that the FFETF has “observed that some financial institutions actually have been complicit in these schemes, ignoring their BSA/AML obligations, and either know about -- or are willfully blind to -- the fraudulent proceeds flowing through their institutions.” Mr. Bresnick explained that “[i]f we can eliminate the mass-marketing fraudsters’ access to the U.S. financial system -- that is, if we can stop the scammers from accessing consumers’ bank accounts -- then we can protect the consumers and starve the scammers.”
Mr. Bresnick stated that the Task Force’s message to banks is this: “Maintaining robust BSA/AML policies and procedures is not merely optional or a polite suggestion. It is absolutely necessary, and required by law. Failure to do so can result in significant civil, or even criminal, penalties under the Bank Secrecy Act, FIRREA, and other statutes.” He noted that banks should endeavor not only to know their customers, but also to know their customers’ customers: “Before they agree to do business with a third-party payment processor, banks should strive to learn more about the processors’ merchant-clients, including the names of the principals, the location of the business, and the products being sold, among other things.” They further should be aware of glaring red flags indicative of fraud, such as high return rates on the processor’s accounts: “High return rates trigger a duty by the bank and the third-party payment processor to inquire into the reasons for the high rate of returns, in particular whether the merchant is engaged in fraud.” (See BuckleySandler’s previous Spotlight on Anti-Money Laundering posts here, here and here.) Mr. Bresnick underscored this point by mentioning a recent complaint filed by the DOJ in the Eastern District of Pennsylvania.
With respect to the financial institutions’ relationships with the payday lending industry, Mr. Bresnick stated that “the Bank Secrecy Act required banks to have an effective compliance program to prevent illegal use of the banking system by the banks’ clients.” He explained that financial institutions “should consider whether originating debit transactions on behalf of Internet payday lenders – particularly where the loans may violate state laws – is consistent with their BSA obligations.” Although he acknowledged that it was not a simple task for a financial institution to determine whether the loans being processed through it are in violation of the state law where the borrower resides, he suggested “at a minimum, banks might consider determining the states where the payday lender makes loans, as well as what types of loans it offers, the APR of the loans, and whether it makes loans to consumers in violation of state, as well as federal, laws.”
In concluding, Mr. Bresnick said, “It comes down to this: When a bank allows its customers, and even its customers’ customers, access to the national banking system, it should endeavor to understand the true nature of the business that it will allow to access the payment system, and the risks posed to consumers and society regarding criminal or other unlawful conduct.”
The agenda outlined by Mr. Bresnick reinforces ongoing efforts by FinCEN and the FDIC, and adds to the priorities recently sketched out by CFPB and the OCC. Together they describe an ambitious, and increasingly aggressive, financial services enforcement agenda for federal regulators and enforcement authorities.
Special Alert: Report on 2013 NMLS Annual Conference
The Nationwide Mortgage Licensing System and Registry (NMLS) held its fifth annual NMLS User Conference and Training in San Antonio, Texas from February 26 through March 1, 2013. The Conference brought together state and federal mortgage regulators, industry professionals, compliance companies, top law firms, and education providers to learn about the latest developments in mortgage supervision and to discuss pressing issues confronting the industry.
The first day of the Conference included the bi-annual NMLS Ombudsman Meeting, which provided an opportunity for NMLS users to raise issues concerning the NMLS, state and/or federal regulation. NMLS Ombudsman Timothy Siwy, Deputy Secretary of Non-Depository Institutions with the Pennsylvania Department of Banking, presided over the meeting, in which specific questions submitted by industry representatives were addressed. Several of the submitted questions focused on the new Uniform State Mortgage Loan Originator (MLO) Exam or Uniform State Test (the UST) of which 24 agencies have already adopted. Concerns were raised by the regulators as some state statutes require that a state’s specific laws be tested as a pre-requisite of MLO licensure. Others, such as regulators from California and Utah, had concerns that MLOs would not adequately learn state specific laws and regulations prior to licensure. In light of these concerns, industry representatives indicated that the UST is only the first step in licensure, and continuing education requirements, monitoring, and examinations would also serve as opportunities to ensure MLOs are well-versed in applicable state specific licensing laws and regulations.
Other areas of focus included NMLS’s expansion to include non-mortgage licenses, such as payday lender and pawn broker licenses. Some industry representatives voiced concern that approval of a license via the NMLS now carries with it an image of legitimacy with the public and expanding licensure to non-mortgage, less regulated industries could undermine that image. Regulators responded that the NMLS is a tracking mechanism—a way for regulators to track licensees state-to-state and industry-to-industry—not an independent licensing credential.
Full details regarding the specific issues submitted for comment, as well as accompanying exhibits, will be available on the NMLS Website, Ombudsman Page. A recording of the Ombudsman Meeting should be posted to the NMLS Resource Center in the near future.
The remaining days of the Conference covered various federal and state regulatory rule implementation, updates for industry, and a look ahead at new initiatives and changes to the NMLS (please refer to the NMLS Conference Agenda, which also includes copies of presentations). Specifically, various sessions covered the following topics, among others:
- The collaboration of the CFPB and state regulators to level the playing field between banks and non-banks with respect to enforcing regulations and conducting examinations. David Liken, the Deputy Director of Supervision and Enforcement with the CFPB, explained that Dodd Frank contemplated a partnership between state regulators and the CFPB, which includes information sharing and joint examinations. The CFPB plans to provide state regulators with training conducted by CFPB personnel at no cost to state regulators.
- The future of the NMLS which includes a goal to initiate three system releases/ enhancements per year. 2013-2014 will include launching an advance change notice function, electronic surety bond management, and a requirement for annual volume reports for non-mortgage entities.
- The state of financial supervision, in particular, concerns about industry diversity and cooperation between state and federal agencies to leverage their resources to address emerging issues and trends in the financial market.
- Regulation of debt collectors as the “larger participant” rule giving the CFPB supervisory authority over debt collectors was issued in October 2012 and took effect on January 2, 2013. The CFPB has started looking at collection practices of creditors when the creditor collects in its own name and through third party collectors.
In addition, the Conference covered major changes to the NMLS and also included a presentation from the CFPB summarizing the CFPB’s final rules:
- Advance Change Notification—The NMLS will launch its Advance Change Notice functionality that will allow licensees to provide notice electronically to NMLS participating states of proposed changes to the company and its branches, including, but not limited to: name changes, address changes, and change of control. The initial roll out of this functionality is slated for June 2013.
- Money Services Regulator Panel—A Money Services Regulator Panel, which included Stephanie Newberg, Deputy Commissioner of the Texas Department of Banking, and Deb Bortner of the Washington Department of Financial Institutions, discussed the benefits and challenges associated with the addition of money services licenses to the NMLS. The NMLS has provided money services business with a streamlined system to apply for licenses and keep regulators updated on license changes; however, licensees continue to struggle with certain aspects of the system (e.g., transmission of materials via the NMLS and confusion with completing certain control person and direct and indirect owner forms, given varying state interpretations).
- The New System of Dual Regulatory Supervision—A panel, which included Charlie Fields, Director, Non-Depository Entities Division, North Carolina Office of the Commissioner of Banks, Calvin Hagins, Program Manager, Supervision, Fair Lending & Enforcement with the CFPB, and various industry representatives, discussed the coordinated efforts of state regulators and the CFPB to conduct licensee examinations. The panel focused on (1) examination selection criteria—i.e., how the Multi-State Examination Committee or CFPB may decide to examine an entity, (2) factors weighed by the Multi-State Examination Committee when deciding whether to join CFPB in an examination, (3) CFPB examination process—i.e., CFPB’s preference to collect date on-site while processing and analyzing data off-site, and (4) encouraging entities to engage in “self-regulation” and “self-review.”
- 2013 Mortgage Final Rules Overview—Kelly Thompson Chochran, Assistant Director for Regulations of the CFPB summarized several recently issued CFPB rules, which are expected to be implemented in the next year, including: the Ability-to-Repay / Qualified Mortgages Final Rule, the Mortgage Servicing Final Rule, and the Loan Originator Compensation, HOEPA, Escrows, and Appraisal Final Rule.
BuckleySandler recently issued detailed summaries of the CFPB rules.
For more information about NMLS, visit the NMLS Resource Center, About NMLS.
State Law Update: Two Nebraska Bills Amend Lender Licensing Rules
On March 7, Nebraska enacted two bills intended to amend and clarify requirements for installment loan brokers, payday lenders, mortgage bankers, and mortgage loan originators (MLOs). The first, LB 279, makes nonsubstantive clarifications to the definition of a “loan broker” and narrows the exemption for accountants to certified public accountants only. The bill also authorizes the Nebraska Department of Banking and Finance to share examination reports and other confidential information with the CFPB and other state regulators. The second, LB 290, removes many mortgage licensing requirements previously applicable to individuals and separately identifies MLO duties. Those duties include providing notification to the Department (i) within 10 days of events such as bankruptcy, criminal indictments, and suspension/revocation proceedings; and (ii) within 30 days of certain changes, including changes of employer and address. The bill also allows firms to electronically submit certain required reports and provides that the 120-day period for calculating abandonment of a license application runs from the date the Department sends the applicant electronic notice of deficient items. By state rule, both bills take effect three months after the end of the state’s legislative session, which scheduled to conclude May 30, 2013.
U.K. OFT Takes Broad Action against Payday Lenders
On March 6, the U.K. Office of Fair Trading (OFT) announced that it will institute enforcement actions and seek to revoke the licenses of payday lenders that do not change certain business practices within 12 weeks. The action applies to the leading 50 payday lenders who account for 90 percent of the U.K. payday market. The OFT action comes in a final report on a broad payday lending investigation, which revealed widespread irresponsible lending and a failure to comply with the standards set out in the OFT’s Irresponsible Lending Guidance. The OFT also proposed to refer the payday lending market to the Competition Commission to investigate competition in that market.
Cordray and Curry Address AGs Regarding Enforcement Initiatives
On February 26, CFPB Director Richard Cordray and Comptroller of the Currency Tom Curry addressed the National Association of Attorneys General. Mr. Cordray’s remarks were largely duplicative of those given a week earlier to the CFPB Consumer Advisory Board, and again identified several “problems” observed by the CFPB. Those problems were (i) deceptive and misleading marketing of consumer financial products and services, (ii) “debt traps” that trigger a cycle of debt, such as short-term credit products, (iii) “dead ends” in markets such as debt collection, loan servicing, and credit reporting where consumers cannot choose their provider and lack typical market influences, and (iv) discrimination. With regard to short-term loans, Mr. Cordray identified as an enforcement challenge lenders that lack a physical presence, and acknowledged ongoing efforts by the CFPB to address “loans that involve off-shore or other jurisdictional issues.” In his remarks, Mr. Curry first stressed the similar objectives of, and close working relationship among, the OCC, the CFPB, and the attorneys general. He then spent the majority of his remarks explaining why most OCC enforcement actions are resolved by settlement, adding that the first enforcement goal of the OCC as a “prudential bank supervisor” is remediation. Mr. Curry also responded to criticisms that OCC enforcement actions are “insufficiently severe,” and noted that the OCC is prepared to litigate if an institution refuses to consent.
New York Warns Payday Loan Debt Collectors
On February 22, the New York Department of Financial Services (DFS) sent letters to all debt collectors in the state to remind them that it is illegal to attempt to collect a debt on a payday loan made in New York, even if such loans were made on the Internet. Under New York law, nonbank lenders and state-charted banks are prohibited from making loans or forbearances under $250,000 at an interest rate of 16 percent or higher. Any loans made in violation of those limitations are void and cannot be collected by a debt collector. The DFS claims that “[l]enders attempt to skirt New York’s prohibition on payday lending by offering loans over the Internet, hoping to avoid prosecution.” The DS states that, regardless of the method used to make the loan, payday loans made in New York are not valid debts and cannot lawfully be collected.
CFPB Director Cordray Outlines CFPB Agenda
On February 20, in remarks during the public portion of the CFPB’s Consumer Advisory Board meeting, CFPB Director Richard Cordray identified four “classes of problems” the CFPB will seek to address in the future. Mr. Cordray stated that the CFPB will focus on (i) deceptive and misleading marketing of consumer financial products and services; (ii) financial products that trigger a cycle of debt; (iii) certain markets – such as debt collection, loan servicing, and credit reporting – where consumers are unable to choose their provider; and (iv) discrimination. While the CFPB has already taken a number of enforcement actions to address the first set of problems, Mr. Cordray noted that with respect to the second class of problems the CFPB is still assessing how to deploy its various tools to best protect consumers while preserving access to responsible credit. Mr. Cordray also noted that loan servicing practices remain a concern, and again drew parallels between the mortgage servicing market and the student loan servicing market, noting that the CFPB is looking to take steps that may address the same kinds of problems faced by student loan borrowers. With respect to discrimination, Mr. Cordray argued that African-Americans and Hispanics have unequal access to responsible credit and pay more for mortgages and auto loans, and reiterated the CFPB’s commitment to utilizing the disparate impact theory of discrimination when pursuing enforcement actions.
Chicago Requires Debt Collector Licensing, Sets Zoning Requirements for Small Dollar Lenders
On January 17, the City of Chicago passed ordinances related to debt collection, small dollar lending, and license enforcement. With the adoption of an ordinance requiring that debt collectors collecting debts from Chicagoans obtain from the City a Regulated Business License, Chicago becomes only the third municipality to require local debt collector licensing. By requiring a license, the ordinance requires that debt collectors follow all state and federal debt collection rules, including for example, providing debt verification. For debt collectors that have their licenses revoked, the ordinance requires a four-year wait period before a new license can be issued. A second ordinance sets new zoning rules for payday and title-secured lending stores. Finally, the City passed an ordinance that, effective June 1, 2013, will allow the Department of Business Affairs and Consumer Protection to initiate license revocation proceedings and refuse to issue or reissue the license of specific business locations convicted within the last five years of violating the Illinois Wage Payment and Collection Act (IWPCA) and the federal FDCPA. The passing of the ordinances follows a recent announcement by the City and the CFPB to enter a first-of-its-kind partnership to share information on consumer financial protection issues.
Senators Ask Regulators to Halt Bank Payday Lending
On January 2, a group of Democratic Senators sent a letter to the Federal Reserve Board, the FDIC, and the OCC seeking action to stop banks from making payday loans. The letter cites the agencies’ “long history of appropriately prohibiting . . . banks from partnering with non-bank payday lenders,” but claims that several banks are currently making payday loans directly to their customers. The products at issue are actually deposit advance loans, which the Senators claim are structured the same as traditional payday loans and put customers in a cycle of debt. The Senators call on the regulators to take “meaningful regulatory action” in response to the problem as they present it, but stop short of identifying specific banks or outlining potential federal legislation.