CFPB Issues Report on Payday and Installment Loans; Director Cordray Weighs in on Online Lending Industry

On April 20, the CFPB issued a report titled “Online Payday Loan Payments,” which covers an 18-month period in 2011 and 2012 and examines how online lenders’ attempts to recover debts are affecting consumers. Also on April 20, the CFPB held a press call during which Director Cordray delivered remarks regarding the small-dollar lending market, specifically focusing on findings included in the simultaneously released report. According to Director Cordray, online payday lenders have considerable power over consumers’ bank accounts because they use automated networks to deposit loans and collect payments, which often results in banks or credit unions charging consumers overdraft and non-sufficient funds fees. Director Cordray further summarized key findings from the report, including, but not limited to: (i) half of online consumers incurring an average of $185 in bank penalties – in addition to the penalties imposed by the lenders and the average annualized interest rate of 300% to 500% – as a result of reoccurring failed debits made by online payday lenders; (ii) one-third of online consumers losing their checking or savings accounts due to overdraft and non-sufficient funds fees; and (iii) consumers facing “hefty bank fee[s]” due to lenders’ repeated debit requests, despite the fact that second payment requests have a 70% failure rate, with third or subsequent payment attempts failing at an even higher rate. Director Cordray concluded by emphasizing that the CFPB’s “process of reforming the market for small-dollar loans” is ongoing, and that the CFPB will consider the data from the report as it prepares new regulations to address the industry.

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CFPB Orders Subsidiary of Peer-to Peer Lending Company to Provide $700,000 in Restitution over Practices Related to its Health Care Loan Product

On August 19, the CFPB announced a consent order against a subsidiary of an online lending company, ordering the subsidiary to provide $700,000 in monetary relief to affected consumers. According to the CFPB, the subsidiary marketed two loan products at dental offices as part of its health-care services financing program – an installment loan and a deferred-interest loan – to assist consumers in paying for dental services. The CFPB contended that consumers were provided inaccurate information related to the terms and conditions of the deferred-interest loan product, finding that, in certain instances, the loan product was marketed as a “no-interest” loan. However, the dental service providers who marketed the loan product failed to note that the 22.98 percent interest rate would be added to the principal if consumers failed to pay the loan in full before the end of the promotional period.

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North Dakota Grants Attorney General Power to Enforce Retail Installment Provisions

On March 12, the Legislative Assembly of North Dakota approved legislation H.B. 1346 amending the North Dakota Retail Installment Sales Act to grant enforcement authority to a state attorney or to the North Dakota Attorney General. Under the new law, the Attorney General has all powers provided under the Act, in addition to powers provided under the state’s Unlawful Sales or Advertising Practices law. The law as amended will be effective August 1, 2015.

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Missouri Assembly Overrides Governor’s Veto Of Installment Lending Bill

On September 10, the Missouri General Assembly voted to override Governor Jay Nixon’s veto of SB 866, which defines traditional installment loans as “fixed rate, fully amortized, closed-end extensions of direct consumer loans” and preempts certain local government actions that would affect lenders who only make such installment loans and who operate under a consumer installment loan license or a consumer credit loan license. The preemption provisions do not apply to ordinances in a home rule city with more than four hundred thousand residents and located in more than one county, i.e., Kansas City, or to a charter provision or valid ordinance as of August 28, 2014, that expressly applies to traditional installment loan lenders.

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Ohio Supreme Court Holds Registered Mortgage Loan Act Lenders May Make Single-Installment Loans

On June 11, the Ohio Supreme Court held that single-installment, interest bearing loans are permitted under the Mortgage Loan Act (MLA), and that the Short-Term Lender Act (STLA) does not prohibit registered MLA lenders from making such loans. Ohio Neighborhood Finance, Inc. v. Scott, 2013-0103, 2014 WL 2609830 (Ohio Jun. 11, 2014). In this case, an MLA-registered lender sued a borrower seeking to recover the unpaid principal balance on a single-installment loan, as well as interest and fees. The appellate court held that the MLA does not authorize payday-like single-installment loans and that, by enacting the STLA, the General Assembly intended to prohibit all loans of short duration outside the confines of the STLA. The Ohio Supreme Court reversed, holding that the MLA’s definition of “interest-bearing loan” does not require that such loans be multiple installment loans, and that here the loan agreement expressed the debt as the principal amount, and the interest was computed based upon the principal balance outstanding daily, in compliance with the MLA. The court also held that, although the STLA would not permit the loan at issue here because its terms would violate the STLA’s restrictions on the loan term, interest, and fees, the lender was not registered under the STLA, and nothing in the STLA limits the authority of MLA registrants to make loans permitted by the MLA.

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