On June 2, the CFPB released a report with various analyses of payday loans, payday installment loans, vehicle title loans, and deposit advance products. The report’s six chapters examine: (i) consumer usage and default patterns for vehicle title installment loans and payday installment loans; (ii) consumer account activity before and after the discontinuation of deposit advance products, analyzing whether consumers who used such products “overdrew their accounts or took out payday loans more frequently after banks stopped offering the products”; (iii) the impact of varying state laws on storefront payday lending in Texas, Colorado, Washington, and Virginia; (iv) the share of payday loans that are reborrowed across states, comparing it to varying limits on renewals and requirements for cooling-off periods between the loans; (v) borrower and default patterns for storefront payday loans for three alternative definitions of the loan sequence concept; and (vi) a series of simulations regarding the estimated impacts of certain requirements on the payday, payday installment, and vehicle title loan markets. On June 2, the CFPB simultaneously released its Proposed Rule on Payday, Title, and Installment loans; to review BuckleySandler’s full coverage on the proposal, please see the Special Alert: CFPB’s Proposed Rule Regarding Payday, Title, and Certain Other Installment Loans.
On June 21, North Carolina AG Roy Cooper, together with Commissioner of Banks Ray Grace, announced a $9,375,000 settlement with two online lenders to resolve allegations that they violated state usury laws. According to the complaint, the lenders offered North Carolina consumers personal loans of $850 to $10,000 and charged annual interest rates of approximately 89 to 342 percent, significantly exceeding the rates allowed under state law. In 2015, Special Superior Court Judge Gregory P. McGuire issued a preliminary injunction to ban the companies from making or collecting loans in North Carolina. In addition to permanently barring the companies from collecting on loans made to North Carolina borrowers, the consent judgment requires the companies to (i) cancel all loans owed by North Carolina consumers; (ii) have the credit bureaus remove negative information on consumers’ credit reports related to the loans; (iii) pay $9,025,000 in refunds to North Carolina consumers, with the remaining $350,000 of the settlement allocated to covering the costs of the investigation, lawsuit, and administering the settlement; and (iv) cease unlicensed lending in North Carolina. The settlement represents North Carolina’s first successful action to ban an online payday-type lender that used affiliation with an Indian tribe in an effort to evade state usury laws.
On June 2, 2016, the CFPB published its proposed rule (the “Proposed Rule”) addressing payday loans, vehicle title loans, and certain other installment loans (collectively “covered loans”). This alert summarizes the Proposed Rule and compares the Proposed Rule to the CFPB’s March 26, 2015 outline released pursuant to the Small Business Regulatory Enforcement Fairness Act (SBREFA). Those wishing to comment on the Proposed Rule must do so by September 14, 2016.
Summary of the Proposed Rule
The Proposed Rule is issued pursuant to the CFPB’s authority under section 1031 of the Dodd-Frank Act to identify and prevent unfair, deceptive, and abusive acts and practices. It defines two types of covered loans: (1) “short-term” loans that have terms of 45 days or less; and (2) “longer-term” loans with terms of more than 45 days that have a “total cost of credit” exceeding 36% and either a “leveraged payment mechanism” or a security interest in the consumer’s vehicle. A “leveraged payment mechanism” includes a right for the lender to initiate transfers from the consumer’s account and certain other payment mechanisms. The Proposed Rule would exclude (i) credit extended for the sole and express purpose of financing a consumer’s initial purchase of a good when the credit is secured by the property being purchased; (ii) credit secured by any real property or by personal property used or expected to be used as a dwelling; (iii) credit cards; (iv) student loans; (v) non-recourse pawn loans; and (vi) overdraft services and lines of credit.
The Proposed Rule would make it an abusive and unfair practice for a lender to make a covered short-term or longer-term loan without determining upfront that the consumer will have the ability to repay the loan (the “full-payment test”). For both types of covered loans, the Proposed Rule would require a lender to determine whether the consumer can afford the full amount of each payment of a covered loan when due and still meet basic living expenses and major financial obligations. As a practical matter, the full-payment test imposes restrictions on rollovers, loan sequences, and refinancing by preventing the offering of short-term loans fewer than 30 days after payoff without a showing that the borrower’s financial situation is materially improved (and capping successive short-term loans at 3 before requiring a 30-day cooling off period), and preventing the refinancing of longer-term loans without a showing that payments would be smaller or would lower the total cost of credit. The Proposed Rule also would provide conditional exemptions for certain covered loans meeting specified criteria, as discussed further below. These conditional exemptions essentially provide alternative compliance options to the Proposed Rule’s full-payment test. Additionally, the Proposed Rule would require lenders to use and furnish information to registered information systems established to track covered loans.
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Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
On June 9, the CFPB will hold its next Consumer Advisory Board meeting in Little Rock, AR. According to the meeting’s agenda, the Board will discuss (i) an auto lending education initiative; (ii) trends and themes; and (iii) payday lending. Director Cordray and Assistant Director for Regulations Kelly Cochran are among the CFPB personnel who are scheduled to speak at the meeting. The event is open to the public.
NYDFS Announces First Settlements to Provide Restitution to Consumers Affected by Alleged Unlawful Payday Lending Practices
The NYDFS recently announced that it entered into consent orders with two debt buyers, one based out of Kansas and the other out of Virginia. According to the Department, the debt buyers “improperly purchased and collected on illegal payday loans from New York consumers,” with the Kansas-based debt buyer allegedly attempting to collect on more than 7,000 payday loan debts of New York consumers and collecting payments on more than 4,000 of those debts between 2007 and 2014. The NYDFS’s press statement further alleges that the Kansas-based debt buyer repeatedly called New York consumers at work and at home, threatened to call consumers’ employers, and called family members to pressure consumers into paying their alleged payday loan debts. Pursuant to the consent order with the Kansas company, the debt buyer will (i) discharge more than $2.26 million in consumers’ payday loan debts; (ii) contact credit reporting bureaus and request that they remove any negative information that it previously provided associated with New Yorkers’ payday loan accounts; (iii) move to vacate judgments it obtained on New Yorkers’ payday loan accounts; and (iv) release pending garnishments, levies, liens, restraining notices, or attachments associated with judgments on New York consumers’ payday loan accounts. The Kansas debt buyer will issue almost $725,000 in refunds to more than 3,000 New Yorkers.
The Virginia-based debt buyer will provide refunds totaling more than $66,000 to 52 New Yorkers allegedly affected by its lending practices, and discharge almost $53,000 in payday loan debts to 106 New Yorkers. The two settlements are the first NYDFS settlements to provide consumer restitution to New Yorkers affected by payday loans.