Special Alert: CFPB Releases Outline of Proposed Rule for Payday, Vehicle Title, and Similar Loans

On March 26, the CFPB announced that it is considering proposing a rule to “end payday debt traps” and released several related documents, including a fact sheet and an outline of the proposal that will be presented to a panel of small businesses pursuant to the Small Business Regulatory Enforcement Fairness Act (SBREFA).  The proposal sets forth ability to repay requirements for “short-term” and “longer-term” loans, and then provides alternative options for lenders to provide both types of loans in lieu of complying with the general ability to repay requirements.

Under the SBREFA process, the CFPB first seeks input from a panel of small businesses that likely will be subject to the forthcoming rule.  A report regarding the input of those reviewers is then created and considered by the CFPB before issuing its proposed rule.

Click here to view the full Special Alert. 

Questions regarding the matters discussed in this Alert may be directed to the lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

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CFPB Releases Winter Issue of Supervisory Highlights, Schedules Date for Field Hearing on Payday Lending

On March 11, the CFPB released its seventh issuance of Supervisory Highlights, which highlights the CFPB’s supervision work completed between July 2014 and December 2014, detailing examination findings and observations in consumer reporting, debt collection, deposits, mortgage origination, and fair lending examinations. The winter issue also reveals recent supervisory resolutions reached in the areas of payday lending, mortgage servicing, and mortgage origination have resulted in remediation of approximately $19.4 million to more than 92,000 consumers during the time reported. Other notable information included within the report is the addition of Credit Card Account Management examination procedures to the CFPB’s Supervision and Examination Manual.  In a separate announcement, the CFPB also announced it will host a field hearing on payday lending, scheduled for Thursday, March 26 in Richmond, VA.

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Missouri Disbands Eight Payday Loan Operations

On March 5, Missouri AG Chris Koster announced an agreement to cease operations with eight unlicensed online payday loan businesses, provide $270,000 in restitution, and forgive all loan balances for Missouri consumers. According to Koster, an individual ran the numerous payday loan businesses from a Native American reservation in South Dakota and sold short-term loans to Missouri consumers, taking advantage of Missouri residents “through outrageous fees and unlawful garnishments.” The judgment obtained “permanently prohibits” the individual and his businesses from “making or collecting on any loans in Missouri, and it cancels existing loan balances for his Missouri customers.” Additionally, the judgment requires that the individual running the businesses inform all credit reporting agencies to remove the information they received on the customers who were negatively affected by the short-term loan sales.

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Pennsylvania Orders Unlicensed Payday Lender to Refund Fees

On March 4, the Pennsylvania Department of Banking and Securities (DOBS) entered into a consent order with four payday loan companies for allegedly violating three Pennsylvania state laws: the Consumer Discount Company Act (CDCA), the Loan Interest Protection Law, and the Money Transmitter Act. From 2007 through January 2015, the companies allegedly acted together to sell short-term loans. According to the DOBS, the interest rate on some of the loans sold exceeded the statutory limit. The consent order also states that the company (i) was not licensed under the CDCA at the time of the marketing or selling of the loans; and (ii) did not have a money transmitter license. Immediately upon issuance of the order, the companies agreed to “cease and desist from engaging in the consumer discount business,” and within ninety days of the issue date of the order, the companies must remit to Pennsylvania consumers the balance of open and active accounts.

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Payday Lender Agrees to Refund $8 Million in Settlement with Pennsylvania AG

On February 11, the Pennsylvania AG announced a settlement with a national payday lender that will pay $8 million in restitution to consumers who were allegedly provided illegal payday loans. According to the state AG, the lender misled consumers by charging a “monthly participation fee” on a loan product, when it was actually interest added on to consumers’ account balances. The state AG charged that the practices violated Pennsylvania’s Consumer Protection Law.  In addition to providing restitution, the lender agreed to (i) forgive $12 million of unpaid principal balances; (ii) pay $1.75 million in total costs to the state AG’s office and the Department of Banking and Securities; (iii) pay $250,000 to a third-party administrator to distribute the restitution to eligible consumers.

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New York DFS Urges CFPB to Adopt ‘Strong’ Payday Loan Rules

On February 4, NY DFS Superintendent Benjamin Lawsky sent a letter to the CFPB urging the agency to adopt strong national rules for the payday loan industry. In his letter, Lawksy highlighted four steps the agency should consider in its drafting of rules including (i) making clear that state laws with stronger anti-payday-lending rules still apply to lenders; (ii) banning payday lenders from using “remotely created checks;” (iii) restricting the sharing of consumers’ personal information by payday lenders, lead generators and other third parties; and (iv) creating a rigorous “ability-to-repay” standard for payday loans.

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Connecticut Banking Regulator Fines Tribal Payday Lenders

On January 6, the Connecticut Department of Banking issued a cease and desist order against the head of an American Indian tribe and two payday loan companies owned by the tribe for allegedly violating a state cap on interest rates. The order requires (i) the two companies pay a combined civil penalty of $800,000 and (ii) that the head of the tribe pay a civil penalty in the amount of $700,000.This action is considered to be the first enforcement action ever against the leader of a Native American tribe.

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District Court Dismisses Class Action Against Payday Lender

On December 29, the U.S. District Court for the District of Delaware dismissed a class action accusing a payday lender of consumer fraud. Zieger v. Advance America, No. 13-cv-1614 (D. Del. Dec. 29, 2014). Filed in 2013, the suit sought damages on behalf of borrowers who obtained loans from the lender on allegedly “unconscionable and incomprehensible” terms. Among these terms, from which the plaintiff had opted out, was a dispute resolution provision that effectively prohibits a borrower’s right to a jury trial. In its order, the Court ruled that the plaintiffs’ claims of the lender’s misrepresentations lacked specificity and that general attacks on payday lending were not sufficient to support fraud claims. The Court granted the lender’s motion to strike the class allegations and also granted the plaintiff leave to amend the complaint with class allegations pertaining to those similarly situated borrowers who may have also opted out of the dispute resolution clause.

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New York Announces Four Institutions Agree to Use DFS Database To Prevent Online Payday Lending

On November 13, Governor Cuomo announced that four additional financial institutions have agreed to use a database created by the State’s Department of Financial Services to “help identify and stop illegal, online payday lending in New York.” The database includes a list of companies that the DFS has identified and taken action against for making illegal internet payday loans to people in New York. The total number of institutions using the database now stands at five.

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Manhattan District Attorney Indicts Payday Lenders

On August 12, Manhattan District Attorney (DA) Cyrus Vance, Jr. announced the indictment of twelve payday lending companies and related individuals for allegedly engaging in criminal usury by making high interest payday loans to Manhattan residents. According to the DA’s press release, between 2001 and 2013, one of the indicted individuals allegedly created multiple companies, including establishing one as a website and offshore corporation, to accept and process online applications for payday loans. The DA also indicted the payday lending business’ chief operating officer and legal counsel. The DA charged the defendants with 38 counts of felony first degree criminal usury and one count of conspiracy in the fourth degree. The defendants are also accused of continuing to extend such loans to New York residents for years, even after, according to the DA, they had been repeatedly warned by New York State officials of the loans’ illegality.

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Court Holds Payday Lender Violated EFTA By Requiring Preauthorization For Electronic Repayment

On July 30, the U.S. District Court for the Northern District of California held that a payday lender whose loan agreements requiredborrowers to consent to electronic withdrawals of their scheduled loan payments violated the federal Electronic Fund Transfer Act’s prohibition on the conditioning of credit on a borrower preauthorizing electronic fund transfers (EFTs) for repayments. De La Torre v. CashCall, Inc., No. 8-3174, 2014 WL 3752796 (N.D. Cal. Jul. 30, 2014). The court previously certified a class seeking to recover actual and statutory damages under the EFTA. The class borrowers claim that the lender required borrowers to agree to electronic transfers of scheduled payments as a condition to obtaining their loans. The borrowers alleged those EFTs caused borrowers to incur insufficient fund fees on the accounts from which the loan payments were withdrawn. On summary judgment, the court rejected the lender’s argument that its promissory notes authorized, but did not require, payment by EFT, and that the EFTA only prohibits the conditioning of the extension of credit upon a requirement to make all loan payments by EFT. The court held that the plain meaning of the statute dictates that a violation of the EFTA occurs “at the moment of conditioning—that is, the moment the creditor requires a consumer to authorize EFT as a condition of extending credit to the consumer.” The court held that by extension, the borrowers also established that the lender violated the Unfair Competition Law. The court granted summary judgment in favor of the borrowers on both their EFTA and UCL claims. However, the court held that whether the EFTA violation caused borrowers to incur the insufficient fund fees is a disputed fact, which should be decided after liability is determined and with the borrowers’ claims for statutory damages and restitution.

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CFPB UDAAP Action Targets Payday Lender’s Collection Activities

This afternoon, the CFPB announced that a nonbank consumer lender will pay $10 million to resolve allegations that it engaged in certain unfair, deceptive, and abusive practices in the collection of payday loans. This action comes exactly one year after the CFPB issued guidance that it would hold supervised creditors accountable for engaging in acts or practices the CFPB considers to be unfair, deceptive, and/or abusive when collecting their own debts, in much the same way third-party debt collectors are held accountable for violations of the FDCPA. Read more…

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Attorney General Vows To Continue Operation Choke Point

On June 23, the DOJ released a transcript of a message delivered by Attorney General Eric Holder in which he pledged to continue investigations of financial institutions “that knowingly facilitate consumer scams, or that willfully look the other way in processing such fraudulent transactions.” These investigations are part of the DOJ’s “Operation Choke Point,” which has faced criticism from financial institutions and their advocates on Capitol Hill, and which payday lenders recently filed suit to halt. Opponents of the operation assert that the DOJ investigations, combined with guidance from prudential regulators, are targeting lawful businesses and cutting off their access to the financial system. In his remarks, the AG promised that the DOJ will not target “businesses operating within the bounds of the law,” but vowed to continue to pursue “a range of investigations into banks that illegally enable businesses to siphon billions of dollars from consumers’ bank accounts in exchange for significant fees.” Mr. Holder stated that he expects the DOJ to resolve some of these investigations in the coming months.

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New York DFS Launches New Database Of Online Payday Lenders

On June 16, the New York DFS launched a new database of online lenders that have been subject to actions by DFS based on evidence of illegal payday lending, and announced that one national bank had agreed to start using the tool. The DFS believes the database will help financial institutions meet “know your customer” obligations with regard to online lenders and will help ensure that electronic payment and debit networks are not used to transmit or collect on allegedly illegal, online payday loans made to New York residents. According to the DFS, the national bank plans to use the information about companies that may be engaged in illegal lending to (i) help confirm that its merchant customers are not using their accounts to make or collect on illegal payday loans to New York consumers; and (ii) identify payday lenders that engage in potentially illegal payday loan transactions with its New York consumer account holders, and, when appropriate, contact the lenders’ banks to notify them that the transactions may be illegal. The bank also agreed to provide DFS with information about payday lending activities by lenders listed in the database, including identifying lenders that continue to engage in potentially illegal lending activities despite the DFS’s previous actions. The database announcement is just the latest step taken by the DFS with regarding to online payday lending. Over the past year, the DFS has opened numerous investigations of online lenders and has scrutinized or sought to pressure debt collectors, payment system operators, and lead generators in an attempt to halt lending practices that the DFS claims violate state licensing requirements and usury restrictions.

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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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