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CFPB publishes fall 2019 rulemaking agenda
On November 20, the Office of Information and Regulatory Affairs released the CFPB’s fall 2019 rulemaking agenda. According to a Bureau announcement, the information released represents regulatory matters it “reasonably anticipates having under consideration during the period from October 1, 2019, to September 30, 2020.”
Key rulemaking initiatives include:
- Property Assessed Clean Energy (PACE) Financing: As previously covered by InfoBytes, the Bureau published an Advanced Notice of Proposed Rulemaking (ANPR) in March 2019 seeking feedback on the unique features of PACE financing and the general implications of regulating PACE financing under TILA. The Bureau notes it is currently reviewing comments as it considers next steps.
- Small Business Rulemaking: On November 6, the Bureau held a symposium on small business lending to gather information for upcoming rulemaking (previously covered by InfoBytes here). The Bureau emphasized it will focus on rulemaking that would not impede small business access to credit by imposing unnecessary costs on financial institutions. According to the Bureau, materials will be released prior to convening a panel under the Small Business Regulatory Enforcement Fairness Act to consult with businesses that may be affected by future rulemaking.
- HMDA/Regulation C: The Bureau plans to finalize the permanent thresholds for reporting data on open-end lines of credit and closed-end mortgage loans in March 2020, and expects to issue a Notice of Proposed Rulemaking (NPRM) to govern the collection of HMDA data points and the disclosure of this data in July 2020. Both initiatives follow an NPRM and an ANPR issued by the Bureau in May (previously covered by InfoBytes here).
- Payday, Vehicle Title, and Certain High-Cost Installment Loans: As previously covered by InfoBytes, the Bureau published two NPRMs related to certain payday lending requirements under the final rule titled “Payday, Vehicle Title, and Certain High-Cost Installment Loans.” Specifically, the Bureau proposed 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, and to delay the rule’s compliance date for mandatory underwriting provisions. The Bureau notes it is currently reviewing comments and expects to issue a final rule in April 2020.
- Debt Collection: Following an NPRM issued in May concerning debt collection communications, disclosures, and related practices (previously covered by InfoBytes here), the Bureau states it is currently “engaged in testing of consumer disclosures related to time-barred debt disclosure issues that were not addressed in the May 2019 proposal.” Once testing has concluded, the Bureau will assess the need for publishing a supplemental NPRM related to time-barred debt disclosures.
- Remittance Transfers: The Bureau expects in December to issue a proposed rule to address the July 2020 expiration of the Remittance Rule’s temporary exception for certain insured depository institutions from the rule’s disclosure requirements related to the estimation of fees and exchange rates. (Previously covered by InfoBytes here.)
- GSE Patch: The Bureau plans to address in December the so-called GSE patch, which confers Qualified Mortgage status for loans purchased or guaranteed by Fannie Mae and Freddie Mac while those entities operate under FHFA conservatorship. The patch is set to expire in January 2021, or when Fannie and Freddie exit their conservatorships, whichever comes first. (See Buckley Special Alert here.)
The Bureau further notes in its announcement the addition of entries to its long-term regulatory agenda “to address issues of concern in connection with loan originator compensation and to facilitate the use of electronic channels of communication in the origination and servicing of credit card accounts.”
District Court certifies payday lending class action
On October 31, the U.S. District Court for the District of New Jersey certified two classes of consumers alleging a payday lender and its subsidiaries charged usurious, triple-digit interest rates on short-term loans originated by a nonparty entity run by a member of a federally recognized Indian tribe. The lawsuit—which alleges, among other things, usury and consumer fraud in violation of New Jersey law, common law restitution and unjust enrichment, and violations of the Racketeer Influenced and Corrupt Organizations Act—was filed in 2016 with the defendants arguing that the claims were subject to an arbitration provision accompanying the loan agreement. However, as previously covered by InfoBytes, the U.S. Court of Appeals for the Third Circuit upheld the district court’s decision that the tribal arbitration forum referenced in the loan agreement does not actually exist and, “because the loan agreement’s forum selection clause is an integral, non-severable part of the arbitration agreement,” the entire arbitration agreement is unenforceable.
According to the plaintiffs, the defendants evaded state law usury limits by attempting to use the sovereignty of an Indian tribe, with most loans carrying an annual percentage interest rate of 139 percent. While the defendants challenged the notion that common questions about the loan agreements predominated over the individual concerns of each class member, the court determined that the loan agreements at issue have an identical structure of interest amortized over a fixed payment schedule. “Plaintiffs have therefore shown that they can use common evidence to prove their [Consumer Fraud Act] claims, and that common questions predominate,” the court stated. “Namely the nearly identical, allegedly usurious loan agreements, which caused an out of pocket loss in the form of usurious interest.” The court also dismissed the defendants’ argument that the plaintiffs’ suit was inferior to a 2018 CFPB action, which resulted in a $10.3 million civil money penalty but no restitution (previous InfoBytes coverage here), stating that “[i]ncredibly, [d]efendants argue that this CFPB action, which denied any recovery to the putative class members here, is a superior means for them to obtain relief.”
NCUA approves additional payday loan alternative
On September 19, the NCUA announced the approval of a final rule creating a new payday alternative loan product (PAL II). As previously covered by InfoBytes, in June 2018, NCUA proposed the PAL II as an additional offering to the current payday alternative loan product (PAL I), which has been available since 2010. PAL II includes most features of PAL I except that it (i) eliminates a loan minimum and sets the maximum at $2,000; (ii) requires a minimum loan term of one month and a maximum of 12 months; and (iii) does not contain a requirement for the minimum length of a membership. Moreover, federal credit unions are restricted to offering only one type of PAL loan to a member at any given time. All prior requirements of PAL I loans, such as the prohibition against rollovers, the limit on the number of loans a single borrower can take in a given period, and full amortization, remain in effect. The final rule will be effective 60 days after publication in the Federal Register.
11th Circuit: Payday lenders’ agreements unenforceable under Georgia policy
On August 28, the U.S. Court of Appeals for the 11th Circuit held that a district court did not err when it denied a group of lenders’ motion to dismiss class action claims alleging that their loan agreements violated Georgia’s Payday Lending Act (PLA), the Georgia Industrial Loan Act (GILA), and state usury laws. According to the opinion, the plaintiffs entered into agreements for loans generally amounting to less than $3,000 that were to be repaid from recoveries received by the plaintiffs in their individual personal injury lawsuits. The defendants moved to dismiss the complaint and strike the class allegations, arguing that the loan agreements’ forum-selection clause required the borrowers to bring their lawsuit in Illinois, and that the class action waiver provision in the agreements prevented the plaintiffs from being able to file any class action against them. The plaintiffs maintained, however, that these provisions in the loan agreements were unenforceable because they violated Georgia public policy, and the district court agreed.
On appeal, the 11th Circuit affirmed the district court because it also concluded that the loan agreements’ forum-selection and class action waiver provisions were unenforceable as against Georgia public policy. Regarding the forum-selection clause, the appellate court held that the PLA “establish[es] a clear public policy against out-of-state lenders using forum selection clauses to avoid litigation in Georgia courts.” Regarding the class action waiver, the appellate court noted that both the PLA and the GILA specifically authorize class action suits; that the district court did not consider whether the waivers were procedurally or substantively unconscionable did not matter because the fact that the waivers violate public policy is an independent and sufficient basis to hold them unenforceable. The defendants also noted that the statutes did not prohibit class action waivers or create a statutory right to pursue class actions, but a contractual provision “need not literally conflict with Georgia law to contravene public policy.” (Citing Langford v. Royal Indemnity Co.) Instead, the appellate court agreed with the district court that “enforcement of the class action waivers in this context would eliminate a remedy contemplated by the Georgia legislature and undermine the purpose of the PLA and the GILA.”
Illinois updates Consumer Installment Loan Act and Payday Loan Reform Act
On August 23, the Illinois governor signed SB 1758, which amends the state’s Consumer Installment Loan Act and the Payday Loan Reform Act. Generally, payday loans must be repayable in substantially equal and consecutive installments. The amendment clarifies that a “‘substantially equal installment’ includes a last regularly scheduled payment that may be less than, but not more than 5% larger than, the previous scheduled payment according to a disclosed payment schedule agreed to by the parties.” The amendments take effect immediately.
CFPB delays underwriting compliance of Payday Rule
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.
Oregon requires consumers to repay title, payday loans before lender makes new loan
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.
FDIC resolves Operation Chokepoint lawsuit
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.
25 state AGs reject CFPB payday proposal in comment letter
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.
House committee examines CFPB’s proposal to repeal payday rule
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.”