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.
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.
On June 10, CFPB Director Richard Cordray testified before the Senate Banking Committee in connection with the CFPB’s recently released Semiannual Report to Congress. The hearing covered a broad range of topics, including, among several others, prepaid cards, student loans, small dollar loans, and arbitration clauses.
Director Cordray advised in response to an inquiry from Senator Menendez (D-NJ) that the CFPB’s prepaid card proposed rule, which the CFPB recently indicated could be released this month, likely will not come until the end of the summer. He reassured the Senator that the delay does not indicate any particular problem about the rulemaking, only that certain of the issues raised have been “hard to work through.” Read more…
On April 30, New York Attorney General (AG) Eric Schneiderman announced that four out-of-state companies alleged to have financed retail installment obligations (RIOs) at rates in excess of the state’s usury cap agreed to recast the RIOs at a rate of not more than 16% and provide repayment or credits to impacted New York consumers. The settlements are the latest in a series of actions in New York targeting out-of-state or online lenders and finance companies that make loans in New York without obtaining a license to operate in that state.
The companies financed elective medical and surgical procedures through RIOs offered by medical providers to patients, an activity the AG believes required the companies to obtain a state license to operate as sales finance companies or lenders. The AG’s Health Care Bureau initiated the investigation after it received complaints about an online lead generation site. As described in the AG’s release, that lead generator requested information regarding a consumer’s employment and credit history, automatically set the APR and RIO repayment terms, and submitted the completed application to sales finance companies. The AG explains that once a finance company agreed to purchase the RIO, the medical provider and the patient both signed a financing agreement that the medical provider immediately assigned to the finance company. The finance company then transferred the funds to the medical provider who agreed to accept less than their usual and customary fees in exchange for upfront payments from the finance company. The patient, however, would be required to repay to the financier full fees plus interest, which in this case allegedly exceeded the statutory usury cap, up to 55% in some instances. State law restricts unlicensed lenders to charging an APR of up to 16%, and establishes criminal penalties for unlicensed lenders that charge interest at a rate exceeding 25% APR.
In addition to revising existing loans and providing approximately $230,000 in remediation to 317 consumers, the agreements require the companies to (i) collectively pay $35,000 in penalties; (ii) cease all conduct as unlicensed sales finance companies in New York; and (iii) notify any consumer reporting agencies to which they gave consumer information to delete all references to the transactions from customers’ credit records. The agreements do not include any criminal penalties.
In addition to extending the state’s licensing enforcement focus, this is at least the second financial services case initiated in recent months by the AG’s Health Care Bureau. In June 2013, the AG announced a settlement with a credit card issuer related to alleged illegal deferred interest products offered through medical provider offices.
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.
On April 1, Comptroller Thomas Curry delivered remarks in which he urged banks to offer alternatives to “high cost payday loans.” The Comptroller defended his agency’s guidance on deposit advance products and stated that “properly managed small-dollar loan programs do not exhibit the same level of risks [the OCC] identified with deposit advance products, and that such loans can be made available to consumers.” He added that many of the risks identified with regard to deposit advance guidance, including the product’s short-term balloon payment feature, were specific to that product. He encouraged banks to offer “responsible” small-dollar loan programs comprised of products with reasonable terms, and to report payment information for such products to credit bureaus. In addition to helping consumers, the comptroller believes such programs (i) can be offered at an incremental cost to banks; (ii) can help build banks’ reputations and expand existing customer relationships; and (iii) can potentially be eligible for positive CRA consideration. The remarks did not provide specific guidance on the pricing and other small dollar loan terms that the OCC would consider appropriate.
On March 25, the CFPB released a report and held a field hearing on payday loans. Through both, the CFPB sought to expand the record on which it will formulate new rules to address its concerns about the payday lending market. Director Cordray indicated in his remarks at the field hearing that the CFPB is on the verge of initiating the public phase of a rulemaking.
The report—the first such “Data Point” report from the CFPB’s Office of Research—focuses on “loan sequences,” what the CFPB describes as “a series of loans taken out within 14 days of repayment of a prior loan.” The analysis was performed using the same data obtained from storefront payday lenders through the supervisory process and used by the CFPB in its prior analysis and report. Like the prior analysis, this latest analysis did not include online payday lending data. The CFPB acknowledges certain limitations of the data used, including that data collected from different lenders contain different levels of detail and that some lender data did not include default-related information. (Note that the CFSA challenged, under the Information Quality Act, the CFPB’s prior report and the data on which it relied. The CFPB rejected that challenge.)
The CFPB reports that over 80% of payday loans are rolled over or followed by another loan within 14 days. In addition, the CFPB’s report offers the following findings: Read more…
On March 12, the CFPB announced several new senior officials, as described below. We also have learned that Peter Carroll, the CFPB’s Assistant Director for Mortgage Markets, will be leaving the Bureau later this month.
- Jeffrey Langer has joined the CFPB as the Assistant Director of Installment and Liquidity Lending Markets in the Bureau’s Research, Markets, and Regulations Division. Mr. Langer most recently served as senior counsel at Macy’s, Inc., prior to which he was a lawyer in private practice. Mr. Langer is a founding fellow and treasurer of the American College of Consumer Financial Services Lawyers and is a former chair of the Consumer Financial Services Committee of the American Bar Association Business Law Section.
Mr. Langer will fill a position vacated by Rick Hackett last year. At the time of Mr. Hackett’s departure, Corey Stone, Assistant Director, Credit Information, Collections, and Deposit Markets, took over smaller dollar loan markets on a permanent basis. Rohit Chopra, the CFPB’s Student Loan Ombudsman, took responsibility for auto and student loans on an acting basis. Although Mr. Stone will continue to oversee smaller dollar loan markets, including payday and auto title loans, the addition of Mr. Langer allows Mr. Chopra to focus only on his Ombudsman duties.
- Christopher D. Carroll has joined the CFPB as the Assistant Director and Chief Economist for the Office of Research in the Bureau’s Research, Markets, and Regulations Division, as the CFPB announced last year. Dr. Carroll is a professor of economics at Johns Hopkins University, from which he has taken a leave of absence to serve at the Bureau. He also is a member of the Board of Directors of the National Bureau of Economic Research, and the co-chair of the NBER Research Group on Consumption. Dr. Carroll has served as a senior economist for the Council of Economic Advisors on two separate occasions, and as an economist for the Board of Governors of the Federal Reserve System. Ron Borzekowski, who joined the CFPB at its inception from the Federal Reserve Board, has been serving as the acting head of the Office of Research.
- Daniel Dodd-Ramirez has joined the CFPB as the Assistant Director of Financial Empowerment in the Bureau’s Consumer Education and Engagement Division. Mr. Dodd-Ramirez previously served as the executive director of Step Up Savannah Inc. in Savannah, Ga., from 2005 to 2014. Prior to Step Up, he served as education project director and community organizer for People Acting for Community Together (PACT) in Miami, Florida, and before that was the human resources director for Families First, a social services agency in southern Vermont.
Recently, the North Carolina Department of Revenue issued guidance regarding a new state law that imposes the state’s 4.75% general sales and use tax, as well as applicable local and transit sales and use tax rates, to the sales price of “service contracts.” The law applies to “service contracts” sold at retail by a retailer on or after January 1, 2014 and sourced to North Carolina. “Service contract” includes any warranty agreement, maintenance agreement, repair contract, or similar agreement or contract by which a seller agrees to maintain or repair tangible personal property. The guidance addresses retailer liability, stating that a retailer that sells a covered service contract is liable for the sales and use tax due on the transaction. Further, a retailer that authorizes another person to sell or enter into a covered service contract with a purchaser on behalf of the retailer is encouraged to ensure that any agreement between the parties provides that any sales and use tax collected on the sales price of a service contract must be submitted to the retailer to be remitted to the Revenue Department. A retailer is not relieved of its liability for sales and use tax on the retail sale of a covered service contract due to failure by another person to collect or remit the applicable sales and use tax due on the sale to the retailer of the contract. The guidance also addresses (i) sales and use tax applicable to receipts for certain contracts entered into prior to January 1; (ii) sourcing of service contracts; and (iii) cancellation or refund of a service contract.
On November 27, Pennsylvania enacted HB 1128, which updates and consolidates the state’s Motor Vehicle Sales Finance Act (MVSFA) and Goods and Services Installment Sales Act (GSISA), and includes numerous changes relevant to auto finance companies. Among other things, the bill amends the MVSFA with regard to installment sales contracts, to, among other things: (i) require installment sale contracts to include a statement informing the buyer of possible additional rights under the state Unfair Trade Practices and Consumer Protection Law; (ii) add triggers allowing for an acceleration clause; (iii) require a holder to notify a buyer upon payment in full by specifying the obligation has been paid in full on the instruments which are to be returned to that buyer with delivery in 10 days of the tender date; and (iv) prohibit a buyer from waiving any provisions in the chapter, including any purported waiver affected by a contractual choice of the law of another jurisdiction contained in an installment sale contract. Other MVSFA amendments provide that only costs disclosed at the time of the installment sale can be included in the contract and specifically prohibit costs for repairs that arise after contract execution from being added to the original contract. The bill amends the GSISA to, among other things: (i) add new requirements related to repossession; (ii) specify new standards for closed-end and open-end credit agreements; and (iii) increase certain maximum allowable fees and finance charges. The changes take effect November 27, 2014.
On August 1, six banking industry trade groups submitted a joint comment letter relating to a proposal by the Department of Defense (DOD) to revise protections under the Military Lending Act (MLA), which apply to consumer credit extended to members of the military and their families. Among other things, the MLA caps the annual interest on short-term, small-dollar loans — including certain payday, car title, and refund anticipation loans. The MLA does not currently include credit cards, bank loans secured by funds on deposit, installment loans, or open-end credit.
In June, the DOD issued an advanced notice of proposed rulemaking (ANPR) to solicit input on potential changes to the definition of “consumer credit” in the regulations that implement the MLA, which would significantly broaden its application. The ANPR sought comment on whether the definition of “consumer credit” should be revised to expand coverage of the MLA to additional small-dollar loan products. The trade groups suggest that expanding coverage would be redundant, costly, and confusing in light of the “well-established system of financial protections for consumers [that] exists beyond the [MLA].” In other words, there is no need to create an entirely separate class of credit products for servicemembers and their families not directly related to military service.
The trade groups specifically identify several potential negative consequences of expanded coverage, including reduced access to installment loans and other credit products, and inability to refinance existing credit. On balance, the trade groups view the current rules — adopted after plenary discussion and careful consideration by all stakeholders — to be effective in achieving the proper balance between protecting military families and ensuring their access to credit. Thirteen state attorneys general took an opposing view in a comment letter submitted on June 24.
For additional commentary on the ANPR, please see the recent article from BuckleySandler Partners Kirk Jensen and Valerie Hletko.
On July 24, the Senate Special Committee on Aging held a hearing titled “Payday Loans: Short-term Solution or Long-term Problem?” that included discussion of several short-term, small-dollar credit products. Although the Committee’s jurisdiction is intended to cover policy issues related to older Americans, the hearing reviewed small dollar products more generally. Numerous Senators, including committee Chairman Sen. Bill Nelson (D-FL) and Sen. Elizabeth Warren (D-MA) scrutinized bank deposit advance products and, building off the CFPB’s testimony and earlier white paper, characterized them as payday loans that trap consumers in a cycle of debt. Sen. Nelson suggested that banks have an obligation to provide customers with alternatives and a range of options to meet their needs, while Sen. Donnelly (D-IN) and others repeatedly raised the concept of a 36% national usury cap. Committee members, with the help of a representative from Maine’s financial regulator, tried to build a record in support of federal legislation to address alleged practices of online lenders, including charges that such lenders often avoid state licensing requirements to circumvent state usury caps. Committee members and witnesses also discussed the role of banks in assuring debits from customer accounts are compliant with state law.
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 March 7, Nebraska enacted two bills intended to amend and clarify requirements for installment loan brokers, payday lenders, mortgage bankers, and mortgage loan originators (MLOs). The first, LB 279, makes nonsubstantive clarifications to the definition of a “loan broker” and narrows the exemption for accountants to certified public accountants only. The bill also authorizes the Nebraska Department of Banking and Finance to share examination reports and other confidential information with the CFPB and other state regulators. The second, LB 290, removes many mortgage licensing requirements previously applicable to individuals and separately identifies MLO duties. Those duties include providing notification to the Department (i) within 10 days of events such as bankruptcy, criminal indictments, and suspension/revocation proceedings; and (ii) within 30 days of certain changes, including changes of employer and address. The bill also allows firms to electronically submit certain required reports and provides that the 120-day period for calculating abandonment of a license application runs from the date the Department sends the applicant electronic notice of deficient items. By state rule, both bills take effect three months after the end of the state’s legislative session, which scheduled to conclude May 30, 2013.
On August 20, Illinois enacted House Bill 3935, which amends the state’s Consumer Installment Loan Act and Payday Loan Act to clarify that loans made by unlicensed lenders are considered null and void and that unlicensed lenders have no right to collect on such loans. The amendments take effect on January 1, 2013.