On February 28, the UK Financial Conduct Authority (FCA) announced final rules for consumer credit providers, including new protections for consumers in credit transactions. The FCA states that the most drastic changes relate to payday lending and debt management. For example, with regard to “high-cost short-term credit,” the new rules will (i) limit to two the number of loan roll-overs; (ii) restrict to two the number of times a firm can seek repayment using a continuous payment authority; and (iii) require creditors to provide a risk warning. Among other things, the new rules also establish prudential standards and conduct protocols for debt management companies, peer-to-peer lending platforms, and debt advice companies. The policy statement also describes the FCA’s risk-based and proactive supervisory approach, which the FCA states will subject firms engaged in “higher risk business” that “pose a potentially greater risk to consumers” to an “intense and hands on supervisory experience” and will allow the FCA to levy “swift penalties” on violators. The new rules take effect April 1, 2014. The FCA plans next to propose a cap on the cost of high-cost, short-term credit.
On March 3, South Dakota enacted HB 1131, which amends state banking laws to make clear that banks can offer revolving lines of credit not tied to the issuance of a credit card.
Last month, the DOJ announced a settlement with a three-branch, $78 million Texas bank to resolve allegations that the bank engaged in a pattern or practice of discrimination on the basis of national origin in the pricing of unsecured consumer loans. Based on its own investigation and an examination conducted by the FDIC, the DOJ alleged that the bank violated ECOA by allowing employees “broad subjective discretion” in setting interest rates for unsecured loans, which allegedly resulted in Hispanic borrowers being charged rates that, after accounting for relevant loan and borrower credit factors, were on average 100-228 basis points higher than rates charged to similarly situated non-Hispanic borrowers. The DOJ claimed that “[a]lthough information as to each applicant’s national origin was not solicited or noted in loan applications, such information was known to the Bank’s loan officers, who personally handled each loan transaction.”
The consent order requires the bank to establish a $159,000 fund to compensate borrowers who may have suffered harm as a result of the alleged ECOA violations. Prior to the settlement, the bank implemented uniform pricing policies that substantially reduced loan officer discretion to vary a loan’s interest rate. The agreement requires the bank to continue implementing the uniform pricing policy and to (i) create a compliance monitoring program, (ii) provide borrower notices of non-discrimination, (iii) conduct employee training, and (iv) establish a complaint resolution program to address consumer complaints alleging discrimination regarding loans originated by the bank. The requirements apply not only to unsecured consumer loans, but also to mortgage loans, automobile financing, and home improvement loans.
The action is similar to another fair lending matter referred by the FDIC and settled by the DOJ earlier in 2013, which also involved a Texas community bank that allegedly discriminated on the basis of national origin in its pricing of unsecured loans.
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.
On July 12, Missouri enacted SB 254, which increases credit advance fees for open-end credit loans of 31 days or longer. Under current Missouri law, lenders may charge a credit advance fees of up to the lesser of $25 or 5% of the credit advanced from the line of credit. Effective August 28, 2013, lenders may charge a credit advance fee of up to the lesser of $75 or 10%of the credit advanced from the line of credit.
Last week, the Department of Defense (DOD) issued an advanced notice of proposed rulemaking to solicit input on potential changes to the definition of “consumer credit” in the regulations that implement the Military Lending Act (MLA). Currently, the MLA regulations cover certain payday, car title, and refund anticipation loans to servicemembers and their dependents. The DOD notice seeks (i) comment on whether the definition of “consumer credit” should be revised to cover other small dollar loans and (ii) examples of alternative programs designed to assist servicemembers who need small dollar loans. Responses to the DOD notice are due by August 1, 2013. On June 24, a bipartisan group of 13 state attorneys general submitted a comment letter urging the DOD to amend the MLA regulations to close loopholes in the definitions of covered loans and to cover any other type of consumer credit loan presenting similar dangers, such as overdraft loans.
On June 14, Texas enacted SB 1251, which grants the state Finance Commission authority to set maximum amounts for (i) administrative fees charged on consumer loans and (ii) acquisition charges on cash advances. Those maximum amounts have not been updated in the state in more than 10 years and 20 years, respectively. The bill makes certain other changes related to the computation of interest charges on cash advances and the application of an alternate interest charge computation methodology to a borrower’s account. The bill takes effect on September 1, 2013.
On June 20, North Carolina enacted SB 489 to increase from $10,000 to $15,000 the maximum installment loan amount, and to increase the maximum allowable interest rates on installment loans. Under the new tiered rate structure, effective July 1, 2013, lenders may charge 30 percent on loans up to $4,000, 24 percent on loans $4,000 to $8,000, and 18 percent on loans $8,000 to $15,000. The bill also (i) extends the allowable terms of such loans to 96 months, (ii) allows lenders to charge late and deferral fees, and (iii) adds new protections for military servicemembers.
On June 10, Florida enacted SB 282, which amends the Florida Consumer Finance Act to increase by $1,000 the tiered principal amounts subject to maximum allowable interest rates. For loans entered after July 1, 2013, lenders can charge for certain consumer loans up to 30 percent interest on the first $3,000, up to 24 percent on $3,001 to $4,000, and up to 18 percent over $4,000. The bill also increases from $10 to $15 the maximum amount that lenders can charge for payments at least 10 days delinquent.
On April 26, Indiana enacted SB 238, which increases the maximum credit service charge for a consumer credit sale other than one involving a revolving charge account and the maximum finance charge for a supervised loan. Effective July 1, 2013, the bill increases the applicable amounts financed, which are subject to the graduated service charge or loan finance charge percentage, and increases the service charge or loan finance charge percentage that applies if the graduated percentages do not apply. For consumer loans other than supervised loans, the bill increases the permitted loan finance charge from 21% to 25%, provides that the lender may contract for and receive a loan origination fee of not more than 2% of the loan amount (or line of credit, for a revolving loan) in the case of a loan secured by an interest in land, or $50 in the case of a loan not secured by an interest in land. For supervised loans, the bill provides that the lender may contract for and receive a loan origination fee of not more than $50. For both supervised loans and consumer loans other than supervised loans, (i) the permitted minimum loan finance charge may be imposed only if the lender does not assess a loan origination fee, and (ii) in the case of a loan not secured by an interest in land, if a lender retains any part of a loan origination fee charged on a loan that is paid in full by a new loan from the same lender, certain other restrictions apply.
California Supreme Court Overturns Long-standing Rule Limiting Fraud Exception to Parol Evidence Rule
On January 14, the California Supreme Court overturned a long-standing state limitation on the fraud exception to the parol evidence rule. Riverisland Cold Storage, Inc. v. Fresno-Madera Prod. Credit Assoc., No. S190581, 2013 WL 141731 (Cal. Jan. 14, 2013). Generally, the parol evidence rule limits the use of evidence outside a contract itself to contradict or add to the terms of the contract. The exception allows a party to present extrinsic evidence to support a claim of fraud. In California, the Supreme Court in 1935 established a rule in Bank of Am. etc. Assn. v. Pendergrass, 4 Cal. 2d 258 (1935) to limit the fraud exception to evidence that establishes an independent fact or representation, a fraud in the procurement of the instrument, or a breach of confidence concerning its use. That Pendergrass limitation excluded evidence of a promise at odds with the written contract. The instant case involved two borrowers who entered into a restructured debt agreement with a credit association after falling behind on their payments. After the credit association sought to foreclose on the borrowers for failing to perform under the agreement, the borrowers sued the association, claiming that its vice president had promised terms different from those reflected in the written contract. The Supreme Court affirmed the intermediate appellate court’s holding in favor of the borrowers that evidence of an alleged oral misrepresentation of the written terms is not barred by the Pendergrass rule; concluding that Pendergrass was “an aberration,” it overturned the rule. The court determined that the Pendergrass rule was out of step with established state law at the time it was adopted and was improperly supported in the court’s 1935 decision, and reaffirmed that the parol evidence rule was never intended to be used as a shield to prevent proof of fraud. The court did not address whether, in this case, the borrowers had presented evidence of reasonable reliance on the promised terms, particularly given that the borrowers admit to having not reviewed the contract. That issue will need to be first addressed by the trial court on remand.
Beginning September 1, 2012, Idaho and Pennsylvania transitioned to NMLS the state licensing process for certain non-mortgage consumer financial service providers. In Idaho, all money transmitters now have the option of using the NMLS to obtain or renew their licenses. In Pennsylvania, all debt management services, money transmitter, and accelerated mortgage payment providers can begin to use the NMLS for all licensing-related transactions as of September 1, 2012. Effective November 1, 2012, all new applications must be processed through NMLS, and all current license holders must submit a transition request by December 31, 2012.
Recently, the Washington State Department of Financial Institutions finalized two rulemakings to amend existing regulations and adopt new regulations under the Consumer Loan Act and the Mortgage Broker Practices Act. The final rules make numerous changes impacting mortgage and other consumer lenders, including with regard to licensing and reporting. For example, the amendments to the Consumer Loan Act regulations (i) add requirements and prohibitions relating to force-placed insurance, (ii) clarify licensing exemptions for consumer lenders and mortgage originators, and (iii) add new provisions addressing the activities of servicers and third party residential mortgage loan modification services. The amendments under the Mortgage Broker Practices Act include some of the changes made under the Consumer Loan Act and, among other things (i) revise the definition of mortgage broker, (ii) require approval from the Department for an individual to work as a designated broker for more than one licensee, and (iii) clarify application of loan originator requirements to inactive licensees. All of the changes take effect on November 1, 2012.
Illinois Enhances Borrower Protections. On July 25, Illinois enacted SB 1692, which enhances consumer protections related to mortgages and tax refund anticipation loans. The bill amends the state’s High Risk Home Loan Act to (i) update the definition of “high risk home loan” to be consistent with the federal standard, and prohibit prepayment penalties, balloon payments and modification fees for such loans, (ii) revise the definition of “points and fees” and clarify the prohibition on the financing of such fees in connection with high risk loans, and (iii) limit late payment fees to 4% of the amount past due. The bill also amends the state’s Tax Refund Anticipation Loan Disclosure Act to (i) revise certain definitions, (ii) limit the fees that can be charged in connection with tax refund loans and establish other prohibited activities, and (iii) amend the disclosures required for creditors making such loans. These and other changes in the bill are effective January 1, 2013.
Michigan Updates Guidance on Return Check Fees on Installment Sales Contracts. On July 19, the Michigan Office of Financial and Insurance Regulation (OFIR) published a letter to installment seller/sales finance licensees clarifying the regulator’s position on the use of return check fees in installment sales contracts. Previously, the OFIR had taken the position that inclusion of an NSF fee in a vehicle installment sales contract was not permitted because such a fee was not expressly permitted under the state’s Motor Vehicle Sales Finance Act (MVSFA). However, in its July 19 letter the OFIR clarified that the OFIR considers it a violation of state law for a licensee under the MVSFA to charge a fee for returned checks if the motor vehicle installment sales contract does not specifically provide for the assessment of such a fee. The OFIR states that the MVSFA requires a contract contain all of the terms of the agreement between a buyer and a seller, including any default charges. Although the state Credit Reform Act permits regulated lenders to charge return check fees up to a maximum of $25, because a returned check constitutes a default under the contract, a return check fee is considered a default charge and can only be assessed if disclosed in the agreement.
Oregon Adopts Rules to Implement Foreclosure Avoidance Program. Recently, the Oregon Department of Justice adopted temporary rules to implement the Foreclosure Avoidance Mediation Program established earlier this year. The rules establish (i) the accepted methods of notice required to be provided to the state Attorney General, (ii) the minimum training and qualifications for mediators, (iii) the fees and timing of fee payments, and (iv) the form of mediation notice for use in seeking nonjudicial foreclosure. The rules took effect July 11, 2012, and expire January 6, 2013.