CFPB Issues Guidance to Help Lenders Avoid Fair Lending Risk

On November 19, the CFPB issued a press release highlighting the publication of its compliance bulletin, “Social Security Disability Income Verification.” The compliance bulletin reminds lenders that requiring consumers receiving social security disability income to provide burdensome or unnecessary documentation may raise fair lending issues. The Equal Credit Opportunity Act (ECOA) prohibits lenders from discrimination against “an applicant because some or all of the applicant’s income is from a public assistance program, which includes Social Security disability income,” and the Bureau’s bulletin highlights standards and guidelines intended to help lenders comply with the requirements of ECOA and its implementing regulation, Regulation B.

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NYDFS to Investigate Potential Predatory Practices by Hard Money Lenders

On September 16, the NYDFS announced that they have issued subpoenas to nine “hard money” lenders, groups that originate short-term, high interest loans secured by a borrower’s home or other real estate, as part of a probe into whether such lenders are intentionally structuring loans with the expectation of foreclosing on the property. NYDFS noted that “[w]hile many hard money lenders may be engaged in legitimate financial activities, certain unscrupulous companies appear to be taking advantage of borrowers in tough financial straits by making loans that are designed to fail.” The NYDFS’s investigation is focused on whether the nine lenders are intentionally structuring hard money loans with onerous terms, such as high interest rates, numerous upfront fees, and enormous balloon payments, so that borrowers are driven into to default.

 

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Louisiana Amends Consumer Lending Provisions

On June 12, Louisiana Governor Bobby Jindal signed HB 766, which requires all creditors seeking to conduct any consumer credit transaction or deferred presentment transaction to obtain a license in the state, regardless of whether they maintain an office in the state. Under current law only creditors with an office in the state are required to register. Any credit or deferred presentment transaction conducted by an unlicesened creditor will be deemed null and void. The bill retains an existing requirement that a creditor be licensed in the state before taking assignments of and undertaking direct collection of payments from or enforcing rights against consumers arising from consumer loans, but removes the requirement that such creditors maintain an office in the state. The bill makes corresponding changes to licensee recordkeeping requirements to allow licensed creditors to maintain records outside of the state. In addition, the bill (i) authorizes certain finance charges and fees in conjunction with a deferred presentment transaction or small loan; (ii) removes existing authority that allows a licensee to charge a one-time delinquency charge; (iii) allows a borrower who is unable to repay either a deferred presentment transaction or small loan when due to elect once in any 12-month period to  repay the licensee the amount due by means of installments, referred to as an extended payment plan; and (iv) provides procedures, terms, and requirements for such extended payment plans. The changes take effect January 1, 2015.

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West Virginia Supreme Court Upholds $14 Million Award In Finance Company “True Lender” Case

On May 30, the West Virginia Supreme Court of Appeals affirmed a series of trial court orders requiring a nonbank consumer finance company to pay $14 million in penalties and restitution for allegedly violating the state’s usury and debt collection laws. CashCall, Inc. v. Morrisey, No. 12-1274, 2014 WL 2404300 (W. Va. May 30, 2014). On appeal, the finance company contended, among other things, that the trial court erred in applying the “predominant economic interest” test to determine whether the finance company or the bank that funded the loans was the “true lender.” The trial court held that the finance company was the de facto lender and was therefore liable for violating the state’s usury and other laws because: (i) the agreement placed the entire monetary burden and risk of the loan program the finance company; (ii) the company paid the bank more for each loan than the amount actually financed by the bank; (iii) the finance company’s owner personally guaranteed the company’s obligations to the bank; (iv) the company had to indemnify the bank; (v) the finance company was contractually obligated to purchase the loans originated and funded by the bank only if the finance company’s underwriting guidelines were employed; and (vi) for financial reporting, the finance company treated such loans as if they were funded by the company. The court affirmed the trial court holding and rejected the finance company’s argument that the trial court should have applied the “federal law test” established by the Fourth Circuit in Discover Bank v. Vaden, 489 F3d 594 (4th Cir. 2007). In Discover Bank the Fourth Circuit held that the true lender is (i) the entity in charge of setting the terms and conditions of a loan and (ii) the entity who actually extended the credit. In support of the trial court ruling, the court explained that the “federal law test” addresses “only the superficial appearance” of the finance company’s business model. Further, the court stated that the Fourth Circuit test was established in a case where the non-bank entity was a corporate affiliate of the bank, which was not the case here, and added that if the court were to apply the federal law test, it would “always find that a rent-a-bank was the true lender of loans” like those at issue in this case.

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Louisiana Expands Collection Of Data From Licensed Consumer Lenders

On May 28, Louisiana Governor Bobby Jindal signed SB 241, which expands the information and data the Commissioner of Financial Institutions can collect from licensed non-mortgage consumer lenders. Effective August  1, 2014, the Commissioner is authorized to collect from all such licensees information concerning the operation, function, and extent of all consumer loan activities, including: (i) the total number and dollar amount of consumer loans originated; (ii) the total number and dollar amount of consumer loans outstanding; (iii) the aggregate amount of fees earned including interest, service charges, late fees, origination fees, documentation fees, and insufficient funds fees; (iv) the total number of consumer loans in default or collection status and the balance of those loans as of the reporting date; and (v) the total number of consumer loans reduced to judgment and the principal amount of those judgments. Licensed companies will be required to report this information by March 1 of each year for the prior calendar year.

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Arizona Adjusts Allowable Loan Fees, Finance Charge Structure

On April 17, Arizona Governor Jan Brewer signed HB 2526, which amends certain permissible practices and limitations governing consumer lenders, which include lenders who make closed end or revolving consumer loans under $10,000. The bill (i) increases the maximum allowable loan origination fee on closed end or revolving consumer loans from $75 to $150; (ii) permits a consumer lender to give a borrower a prize, good, merchandise, or tangible property with an aggregate value of up to $25; and (iii) modifies the framework governing permissible finance charges for consumer loans by increasing the applicable original principal amount, credit limit, or outstanding balance thresholds from either $500 or $1,000 to $3,000. The bill also prohibits consumer lenders from (i) increasing the established rate on a loan that was issued prior to the effective date of the bill when modifying or restructuring smaller loans; and (ii) holding a person responsible for a loan that was extended under fraudulent pretenses. Finally, the bill requires a consumer lender to correct any derogatory credit information reported to a consumer reporting agency within 30 days after knowledge that the loan was a result of such theft or fraud. The changes take effect July 24, 2014.

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Tennessee Allows Industrial Banks To Charge Fees For Electronic Payments

On April 4, Tennessee Governor Bill Haslam signed into law SB 1486, which authorizes registered industrial banks, industrial loan and thrift companies, and industrial investment companies to charge a convenience fee to any borrower making payment by credit card, debit card, electronic funds transfer, electronic check, or other electronic means in order to offset actual costs incurred by the lender. The convenience fees cannot exceed the actual costs incurred by the registrant for each payment type, or the average of the actual cost incurred for the various types of electronic payments accepted by the registrant. Registrants who elect to charge a convenience fee must also allow payment by non-electronic means—check, cash, or money order—without the imposition of a convenience fee. The changes take effect July 1, 2014.

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Iowa Amends Mortgage, Consumer Credit Laws

On March 26, Iowa Governor Terry Branstad signed into law HF 2324, which revises the state’s mortgage and consumer credit statutes to align with federal law. The bill amends the current $25,000 loan ceiling applicable to certain consumer credit transactions and replaces it with a “threshold amount” that incorporates by reference limits established under federal Truth in Lending Act. The bill also adopts the federal definition of “points and fees” for mortgage transactions and provides that if a loan is extended with points and fees higher than those specified under federal law the loan is subject to state law, including monetary limits on loan origination or processing and broker fees, a limit on the types of permissible lender charges, and a limit on fees relating to payment of interest reduction fees in exchange for a lower rate of interest. The bill also amends the definition of “finance charge” in the state’s consumer credit code to include an initial charge imposed by a financial institution for an overdrawn account. Finally, the bill adds a new section that allows banks to include in their consumer credit contracts over $25,000 a provision that a consumer is responsible for reasonable attorney fees if the bank is the prevailing party in a lawsuit arising from the transaction. The changes take effect July 1, 2014.

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Washington Amends Provisions Impacting Non-Depository Institutions

Recently, the state of Washington enacted SB 6134, which amends numerous provisions related to the supervision of non-depository institutions. The bill clarifies the statute of limitations applicable to certain violations by non-depository institutions by providing that enforcement actions for violations of the Escrow Act, the Mortgage Broker Practices Act, the Uniform Money Services Act (UMSA), the Consumer Loan Act, and the Check Cashers and Check Sellers Act (CCSA) are subject to a five-year statute of limitations. In addition, the bill provides that licensees under the CCSA and the UMSA that conduct business in multiple states and register through the NMLS must submit call reports to the Department of Financial Institutions. The changes take effect June 12, 2014.

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UK FCA Describes Approach To Consumer Credit Markets, Launches Review Of Credit Card Market

On April 3, Martin Wheatley, Chief Executive of the UK Financial Conduct Authority (FCA), which took over responsibility for overseeing consumer credit markets in the UK on April 1, 2014, identified the FCA’s most “immediate priority” as ensuring “providers of credit, as well as satellite services like credit broking, debt management and debt advice, have sustainable and well-controlled business models, supported by a culture that is based on ‘doing the right thing’ for customers.” He explained that the FCA wants to expand financial service providers’ focus on compliance with specific rules to include “wider FCA expectations of good conduct.” Referencing a paper the FCA published on April 1, the day it began overseeing consumer credit markets, Mr. Wheatley stated that consumer credit providers need to consider how they engage with consumers in vulnerable circumstances. On this issue, the FCA also announced a “competition review” of the UK credit card market to determine, among other things, “how the industry worked with those people who were in difficult financial situations already.”

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California Proposes Rule To Clarify Scope Of Licensing Exemption

Earlier this month, the California Department of Business Oversight (DBO) issued a notice and request for comment on a proposed amendment to regulations that implement the California Finance Lenders Law (CFLL) and the California Residential Mortgage Lending Act (CRMLA). The proposed amendment would clarify  that non-depository operating subsidiaries, affiliates, and agents of federal banks and other financial institutions do not fall within the licensure exemption for a bank or savings association under the CFLL and the CRMLA. The DBO views the proposed amendment as required in light of the Dodd-Frank Act’s elimination of federal preemption over such entities by the OCC. Comments on the proposal are due by May 7, 2014.

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California Eliminates Passive Investor Self-Certification From Finance Lenders Law License Application

Recently, the California Department of Business Oversight (DBO) made a number of changes to the application for a California Finance Lenders Law (CFLL) license that is completed by persons engaged in non-residential lending or brokering.  The changes were made following a 45-day notice and comment period.  (Presumably, these changes also apply, where applicable, to persons engaged in residential lending or brokering and who are thus required to submit applications via the Nationwide Mortgage Licensing System.)

One of the most significant changes to the application relates to which individuals associated with the owners of an applicant are required to submit a Statement of Identity and Questionnaire and fingerprints to the DBO for investigative purposes.  Since 2007, the application specified as follows: Read more…

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Illinois AG Sues To Enforce Dodd-Frank “Abusive” Prohibition

On March 19, Illinois Attorney General (AG) Lisa Madigan announced a suit against a lender for allegedly offering a short-term credit product designed to evade the state’s usury cap. The AG claims the lender offers a revolving line of credit with advertised interest rates of 18 to 24%, and then adds on “account protection fees.” The AG characterizes those fees as interest substantially in excess of the state’s 36% usury cap. According to the AG, after a borrower takes out the short-term loan, the lender allegedly provides a payment schedule and instructs the borrower to make minimum payments, which consumers who filed complaints with the AG’s office believed was a timeline to pay off the full debt. The complaint is the AG’s first under the Dodd-Frank Act and claims that the lender’s practices take unreasonable advantage of consumers and constitute abusive practices. The complaint also alleges violations of the state Consumer Fraud and Deceptive Businesses Practice Act and seeks restitution, civil penalties, disgorgement, and an order nullifying all existing contracts with Illinois consumers and prohibiting the company from selling lines of credit and revolving credit in Illinois.

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Maine Seeks To Halt Unlicensed Consumer Lending

On March 16, Maine enacted legislation that makes it a violation of the Maine Unfair Trade Practices Act for a lender not organized and supervised under the laws of any state or the United States to solicit or make, either directly or through an agent, a loan to a Maine consumer unless licensed under state law. The law also establishes as an unfair or deceptive act or practice for entities other than supervised financial institutions to process a check, draft, other form of negotiable instrument or an electronic funds transfer from a consumer’s financial account in connection with a loan solicited from or made by an unlicensed lender who is not exempt from the licensure requirement. The statute similarly establishes as an unfair or deceptive act or practice for any person or lender to provide substantial assistance to a lender or processor when the person or lender or the person’s or lender’s authorized agent either knows or consciously avoids knowing that the lender or processor is unlicensed and not otherwise exempt from licensure or is engaging in an unfair or deceptive act or practice. The Maine UTPA provides a private right of action and allows the state attorney general to seek injunctive relief and civil penalties for violations of an injunction.

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South Dakota Clarifies Revolving Credit Account Requirements

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.

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