On November 18, the California DBO announced that a California-based lender fulfilled its obligation to pay nearly $1 million of restitution to more than 7,000 California consumers and $1 million to the DBO in penalties to resolve allegations that the company used deceptive marketing practices to steer consumers into personal loans exceeding $2,500. California state law limits interest rates at about 30% for loans less than $2,500, but there is no such limit above that amount. According to the DBO, the lender advertised that it provided personal loans of “up to” $2,600, $5,000, or $10,000; in reality, the lender did not offer loans less than $2,600. The lender allegedly told consumers that they could “give back the amount they did not want in the form of a prepayment,” without disclosing that it could then charge borrowers unlimited interest rates since the loan was greater than $2,500. Per the February 5 settlement, in addition to the restitution and penalty fees, the lender must, among other things, ensure that its non-mortgage and non-auto loan ads disclose, in a “clear and conspicuous manner,” that the minimum loan amount is $2,600, that there is a state law interest rate cap on loans of less than $2,500, and that it is lower than the rate charged by the lender.
On December 11, the California Department of Business Oversight (DBO) announced an inquiry into the marketplace lending industry, requesting that 14 lenders complete an online survey to provide five-year trend data on their loan and investor funding programs. In addition, the survey requests that participating firms provide information on their business models and online platforms. Marketplace lenders market themselves as a faster, more accessible source of financing for consumers and small businesses. Due March 9, 2016, the survey responses are intended to assist the DBO assess the state’s licensing and regulatory regime of the industry by: (i) assessing the industry’s size in California and the number of consumers and businesses it affects; and (ii) understanding the various loan and investor funding programs used by marketplace lenders. In four years, the national online lending market reportedly grew from $1 billion in loans to $12 billion; analysts anticipate that by 2020, the total volume will be $122 billion.
Maryland Court of Special Appeals Holds MCSBA Applies to Loan Broker Working with Federally Insured Out-of-State Banks
On October 27, the Maryland Court of Special Appeals held that a loan broker who originates loans in Maryland for a federally insured out-of-state bank and then repurchases those loans days later qualifies as a “credit service business” under the Maryland Credit Services Business Act (MCSBA) and must be licensed accordingly. Md. Comm’r of Financial Reg. v. CashCall, No. 1477, 2015 WL 6472270 (Md. Ct. Spec. App. Oct. 27, 2015). The loan broker argued, citing Gomez v. Jackson Hewitt, Inc., 427 MD. 128 (2012), that it was not a “credit service business” within the meaning of the MCSBA because the MCSBA did not apply to the out-of-state federally insured bank that made the loans and because the loan broker did not receive a direct payment from the consumer. The Commissioner and the court disagreed. In affirming the Commissioner’s decision and in overturning the decision of the Circuit Court for Baltimore, the Court of Special Appeals reasoned that the MCSBA applied because (i) the loan broker was engaged in the very business the MCSBA was intended to apply to (i.e. it was exclusively engaged in assisting Maryland consumers to obtain small loans); and (ii) after repurchasing the loan, the loan broker had the right to receive direct payment from consumers. The Court of Special Appeals remanded the case to the Circuit Court for Baltimore.
On August 7, OCC Comptroller Thomas Curry delivered remarks at the Federal Home Loan Bank of Chicago, which was hosting a conference highlighting the future of financial services. Specifically, Curry discussed innovation in the emerging financial technology industry, or “fintech,” noting the risks and benefits associated with mobile payments, virtual currency, and peer-to-peer lending products within the U.S. banking system. With respect to virtual currency, Curry stressed how important it is for financial institutions to implement adequate procedures to deter money laundering and terrorist financing. Curry also recognized that the OCC is “still early in the process” of evaluating a regulatory framework to examine some new and innovative products and services. Rounding out his remarks, Curry expressed his growing concerns with so called “neobanks,” which operate primarily online but provide similar services to brick and mortar retail branch banks, including the heightened privacy risks that neobanks present in light of recent cybersecurity attacks.
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.