On November 16, the FDIC issued FIL-52-2015 to advise financial institutions that it revised its 2005 guidance on payday lending, which established the FDIC’s expectations for prudent risk-management practices in the payday loan industry. The letter emphasizes that the 2005 payday lending guidance, as issued in FIL-14-2005, does not apply to depository institutions offering certain products and services, such as deposit accounts and extensions of credit, to non-bank payday lenders. Specifically, the letter states, “[f]inancial institutions that can properly manage customer relationships and effectively mitigate risks are neither prohibited nor discouraged from providing services to any category of business customers or individual customers operating in compliance with applicable state and federal laws.”
On November 18, the CFPB announced an action against a Delaware-based online payday lender and its CEO for alleged violations of the Truth in Lending Act and the Electronic Fund Transfer Act, and for engaging in unfair and deceptive acts and practices. Specifically, the CFPB alleges that, from May 2008 through December 2012, the online lender (i) continued to debit borrowers’ accounts using remotely created checks after consumers revoked the lender’s authorization to do so; (ii) required consumers to repay loans via pre-authorized electronic funds transfers; and (iii) deceived consumers about the cost of short-term loans by providing them with contracts that contained disclosures based on repaying the loan in one payment, while the default terms called for multiple rollovers and additional finance charges. The case will be tried by an Administrative Law Judge from the CFPB’s Office of Administrative Adjudication.
On August 12, the FTC announced an action against a data broker enterprise for violations of the FTC Act. The FTC’s complaint alleges that, from at least 2011 to 2013, the data broker enterprise (i) sold payday loan applications to Ideal Financial Solutions and other non-lender third party companies for less than market value; and (ii) knew or had reason to know that Ideal Financial used the information to make unauthorized debits from consumers’ bank accounts. The complaint further alleges that the financial information of over 500,000 consumers was provided to Ideal Financial, which resulted in over $7.1 million of unauthorized debits to consumers’ accounts. Three of the defendants have agreed to settle the FTC’s allegations. The proposed settlement orders prohibit all three defendants from selling or otherwise benefitting from consumers’ personal information, and impose a $7.1 million judgment against two defendants and a $3.7 million judgment against the third. The settlement orders are subject to approval by the U.S. District Court for the District of Nevada.
On July 7, the FTC entered into settlement agreements with two individuals and the entities they operate seeking to permanently restrict them from doing business in the consumer lending industry. According to the FTC’s complaint filed in September 2014, the defendants allegedly operated an online payday lending scheme using personal financial information purchased from third-party lead generators or data brokers to make unauthorized deposits and withdrawals into consumers’ bank accounts, regardless of whether or not the consumer applied for a payday loan. Once the loan proceeds were placed into the consumers’ accounts, the defendants would withdraw “finance charges” from the accounts on a recurring basis, but would not credit the loans’ principal balances for those payments. Collectively, the defendants issued $28 million in payday loans, and extracted over $46.5 million from consumers’ bank accounts over an 11-month period. In addition to being banned from the consumer lending industry, the proposed agreements also order the defendants to pay approximately $52 million in restitution (subject to certain conditions), dismiss any consumer debt that may be owed, and prohibit the defendants from reporting such debts to any credit reporting agency or benefiting from the collection of customers’ personal information.
On June 23, the CFPB published its eighth edition of Supervisory Highlights, covering supervisory activities from January 2015 through April 2015. The latest edition identifies issues with dual-tracking at mortgage servicers and the need for improved quality control measures at consumer reporting agencies. The report also provided supervisory observations related to debt collection, student loan servicing, mortgage origination and servicing, and fair lending. Notably, the report reveals that non-public supervisory actions and self-reported violations at banks and nonbanks in the areas of mortgage origination, fair lending, mortgage servicing, deposits, payday lending, and debt collection resulted in $11.6 million in remediation to more than 80,000 consumers during the first four months of 2015.
On June 9, the FTC announced that it has provided to the CFPB its 2014 Annual Financial Acts Enforcement Report. The report highlights the FTC’s enforcement, research, rulemaking, and policy development activities with respect to the Truth in Lending Act (Regulation Z), the Consumer Leasing Act (Regulation M), and the Electronic Funds Transfer Act (Regulation E). Areas detailed within the report include enforcement actions related to non-mortgage credit, including auto finance and payday lending, mortgage loan advertising, and forensic audit scams; and consumer and business outreach related to truth in lending requirements. The report, submitted on May 29, will be used to prepare the CFPB’s Annual Report to Congress. The FTC also submitted a copy of the report to the Federal Reserve Board.
On May 27, Nevada Governor Brian Sandoval signed into law S.B. 242, enacting the Payday Lender Best Practices Act. The legislation requires payday and similar lenders to use various specified best practices – advocated by the Community Financial Services Association of America – to strengthen consumer protections and promote responsible lending. The Act applies to any lender licensed within the state who operates a deferred deposit loan service, high-interest loan service, or title loan service. In addition to requiring lenders to fully comply with federal TILA disclosure requirements, the Act mandates lenders must also, among other things, (i) disclose to and provide borrowers with the option to enter into a repayment plan if the borrower is unable to pay; (ii) include a notice on marketing materials and advertisements advising borrowers that the loan should be used for short-term financial needs, and that borrowers with credit impairments should seek credit counseling; and (iii) report violations of Nevada’s short-term loan law to the state’s Financial Institutions Division.
On April 7, the California Department of Business Oversight announced a new initiative to prevent unlicensed payday lenders from advertising on major Internet search engines, including Microsoft, Google, and Yahoo. In the announcement, DBO Commissioner Jan Lynn Owen labeled unlicensed online payday lenders as “one of the most significant consumer protection threats” to California consumers and stated that curbing advertising of unlicensed lenders is vital to protect vulnerable borrowers from paying unlawful fees. Under the initiative, once the DBO issues a final cease and desist order against an unlicensed online lender, the DBO will notify Internet companies which will in turn block the lenders’ ads.
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.
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.
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.
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.
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.
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.
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.
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.