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 15, 2015.

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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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Payday Lenders Sue Government Over Operation Choke Point

On June 5, the Community Financial Services Association and one of its short-term, small dollar lender members filed a lawsuit in the U.S. District Court for the District of Columbia claiming the FDIC, the OCC, and the Federal Reserve Board have participated in Operation Choke Point “to drive [the lenders] out of business by exerting back-room pressure on banks and other regulated financial institutions to terminate their relationships with payday lenders.” The complaint asserts that the operation has resulted in over 80 banking institutions terminating their business relationships with CFSA members and other law-abiding payday lenders. The lenders claim that the regulators are using broad statutory safety and soundness authority to establish through agency guidance and other means broad requirements for financial institutions, while avoiding the public and judicial accountability the regulators would otherwise be subject to if they pursued the same policies under the Administrative Procedures Act’s (APA) notice and comment rulemaking procedures. The lenders assert that in doing so, the regulators have violated the APA by (i) failing to observe its rulemaking requirements; (ii) exceeding their statutory authority; (iii) engaging in arbitrary and capricious conduct; and (iv) violating lenders’ due process rights. The lenders ask the court to declare unlawful certain agency guidance regarding third-party risk and payment processors and enjoin the agencies from taking any action pursuant to that guidance or from applying informal pressure on banks to encourage them to terminate business relationships with payday lenders.

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CFPB Director Announces Prepaid Card Rule Delay, Discusses Other Initiatives

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.

Prepaid Cards
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…

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House Oversight Committee Choke Point Inquiry Shifts To FDIC

On June 9, Darrell Issa (R-CA), Chairman of the House Oversight Committee, and Jim Jordan (R-OH), an Oversight subcommittee chairman, sent a letter to FDIC Chairman Martin Gruenberg that seeks information regarding the FDIC’s role in Operation Choke Point and calls into question prior FDIC staff statements about the agency’s role. The letter asserts that documents obtained from the DOJ and recently released by the committee demonstrate that, contrary to testimony provided by a senior FDIC staff member, the FDIC “has been intimately involved in Operation Choke Point since its inception.” The letter also criticizes FDIC guidance that institutions monitor and address risks associated with certain “high-risk merchants,” which, according to the FDIC, includes firearms and ammunition merchants, coin dealers, and payday lenders, among numerous others. The letter seeks information to help the committee better understand the FDIC’s role in Operation Choke Point and its justification for labeling certain businesses as “high-risk.” For example, the letter seeks (i) all documents and communications between the FDIC and the DOJ since January 1, 2011; (ii) all FDIC documents since that time that refer to the FDIC’s 2012 guidance regarding payment processor relationships; and (iii) all documents referring to risks created by financial institutions’ relationships with firearms or ammunition businesses, short-term lenders, and money services businesses.

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House Oversight Committee Report Challenges DOJ’s Operation Choke Point

On May 29, the House Oversight Committee released a staff report on Operation Choke Point, DOJ’s investigation of banks and payment processors purportedly designed to address perceived consumer fraud by blocking fraudsters’ access to the payment systems. The report provides the following “key findings”: (i) the operation was created by DOJ to “choke out” companies it considers to be “high risk” or otherwise objectionable, despite the fact that those companies are legal businesses; (ii) the operation has forced banks to terminate relationships with a wide variety of lawful and legitimate merchants; (iii) DOJ is aware of these impacts and has dismissed them; (iv) DOJ lacks adequate legal authority for the initiative; and (v) contrary to DOJ’s public statements, Operation Choke Point is primarily focused on the payday lending industry, particularly online lenders. The findings are based on documents provided to the committee by DOJ, including internal memoranda and other documents that, among other things, “acknowledge the program’s impact on legitimate merchants” and show that DOJ “has radically and unjustifiably expanded its [FIRREA] Section 951 authority.” The committee released the nearly 1,000 pages of supporting documents, which are available in two parts, here and here.

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California Supreme Court Agrees To Hear Tribe-Affiliated Payday Lending Case

On May 21, the California Supreme Court granted the state’s appeal of an appellate court decision that short-term, small-dollar credit businesses owned by certain federally recognized Indian tribes are sufficiently related to their respective tribes to be protected under the doctrine of tribal immunity from state regulation. California v. Miami Nation Enterprises, S216878 (Cal. May 21, 2014). Earlier this year, the California Court of Appeals, Second District, affirmed dismissal of a civil action filed by the Commissioner of the California Department of Corporations seeking to enforce a cease and desist order against five tribe-affiliated online lenders, holding that a business functions as an arm of the tribe if it: (i) has been formed by tribal resolution and according to tribal law, for the purpose of tribal economic development and with the clearly expressed intent by the sovereign tribe to convey its immunity to that entity; and (ii) has a governing structure both appointed by and ultimately overseen by the tribe.

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Updated CFPB Rulemaking Agenda Adds Auto Finance Larger Participant Rule, Updates Timelines For Other Rules

The CFPB recently released its latest rulemaking agenda, which lists for the first time a larger participant rule that would define the size of nonbank auto finance companies subject to the CFPB’s supervisory authority. The CFPB anticipates proposing a rule no sooner than August 2014. Stakeholders will have an opportunity to comment, and a final rule likely would not be issued until sometime in 2015. The CFPB anticipates finalizing its rule for larger participants in the international money transfer market in September 2014. In addition, the agenda pushes back the timeline for the anticipated prepaid card proposed rule from May 2014 to June 2014. The CFPB has been testing potential prepaid card disclosures.

The agenda does not provide timelines for proposed rules related to payday lending, debt collection, or overdraft products, but the CFPB states that additional prerule activities for each of those topics will continue through September 2014, December 2014, and February 2015, respectively. The CFPB substantially extended the timeline for overdraft products; it previously anticipated continuing prerule activities through July 2014. While “prerule activities” is not a defined term, it could include conducting a small business review panel for some or all of those topics. Such panels focus on the impact of anticipated regulations on small entities, but the CFPB typically makes the small business panel materials public, which provides an advance look at the potential direction for a proposed rule.

The agenda does not include a rulemaking implementing the small business fair lending data reporting requirements in the Dodd-Frank Act, though the CFPB previously has indicated it could consider those issues in connection with its HMDA rulemaking.  Prerule activities related to the HMDA rule are ongoing.

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CFPB Report Highlights Nonbank Supervisory Findings

On May 22, the CFPB published its Spring 2014 Supervisory Highlights report, its fourth such report to date. In addition to reviewing recent guidance, rulemakings, and public enforcement actions, the report states that the CFPB’s nonpublic supervisory actions related to deposit products, consumer reporting, credit cards, and mortgage origination and servicing have yielded more than $70 million in remediation to over 775,000 consumers. The report also reiterates CFPB supervisory guidance with regard to oversight of third-party service providers and implementation of compliance management systems (CMS) to mitigate risk.

The report specifically highlights fair lending aspects of CMS, based on CFPB examiners’ observations that “financial institutions lack adequate policies and procedures for managing the fair lending risk that may arise when a lender makes exceptions to its established credit standards.” The CFPB acknowledges that credit exceptions are appropriate when based on a legitimate justification. In addition to reviewing fair lending aspects of CMS, the CFPB states lenders should also maintain adequate documentation and oversight to avoid increasing fair lending risk.

Nonbank Supervisory Findings

The majority of the report summarizes supervisory findings at nonbanks, particularly with regard to consumer reporting, debt collection, and short-term, small-dollar lending: Read more…

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Senate Democrats Lobby CFPB On Forthcoming Payday Lending Proposal

On May 14, six Senate Democrats, including Senate Banking Committee Members Jeff Merkley (D-OR) and Elizabeth Warren (D-MA), sent a letter to CFPB Director Richard Cordray asking that the CFPB consider the proposals included in Senator Merkley’s SAFE Lending Act, S. 172, in developing the forthcoming payday lending proposed regulations. That legislation primarily attempts to address perceived gaps in the regulation of Internet and offshore small dollar lenders—including those lenders affiliated with Native American tribes—and lead generators. The letter also petitions the CFPB to adopt “strong” reforms—such as minimum loan terms, fee and renewal limitations, and a waiting period between loans—that cover all types of small dollar lending. The CFPB highlighted many of these potential reforms in a March 2014 report and field hearing.

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New York Targets Online Lenders Through Debit Card Networks

On April 30, the New York State Department of Financial Services (DFS) again expanded the scope of its activities targeting online payday lenders by announcing that two major debit card network operators agreed to halt the processing of payday loan deductions from bank accounts owned by New York consumers who allegedly obtained illegal online payday loans. The DFS asserts that in response to increased regulatory pressure on online lenders’ use of the ACH network—known as Operation Choke Point—those lenders are using debit card transactions to collect on payday loans originated online to New York residents. The DFS believes such loans violate the state’s usury laws. The DFS also sent cease-and-desist letters to 20 companies it believes are “illegally promoting, making, or collecting on payday loans to New York consumers.” The DFS’s assault on online lenders publicly began in February 2013 when it warned third-party debt collectors about collecting on allegedly illegal payday loans, and was first expanded in August 2013 when the DFS sent letters to 35 online lenders, including lenders affiliated with Native American Tribes, demanding that they cease and desist offering allegedly illegal payday loans to New York borrowers. At the same time, the DFS asked banks and NACHA to limit such lenders’ access to the payment system. DFS subsequently expanded its effort in December 2013 when it began targeting payday loan lead generation companies.

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FTC Settles Suit Against Tribe-Affiliated Lenders; Dispute Over CFPB Investigation Of Tribe-Affiliated Lenders Moves To Federal Court

On April 11, the FTC announced that a tribe-affiliated payday lending operation and its owner agreed to pay nearly $1 million to resolve allegations that they engaged in unfair and deceptive acts or practices and violated the Credit Practices Rule in the collection of payday loans. The FTC alleged that the lenders illegally tried to garnish borrowers’ wages and sought to force borrowers to travel to South Dakota to appear before a tribal court, and that the loan contracts issued by the lenders illegally stated that they are subject solely to the jurisdiction of the Cheyenne River Sioux Tribe. The announced settlement payment includes a $550,000 civil penalty and a court order to disgorge $417,740. The companies and their owner also are prohibited from further unfair and deceptive practices and are barred from suing any consumer in the course of collecting a debt, except for bringing a counter suit to defend against a suit brought by a consumer.

Also on April 11, in a separate matter related to federal authority over tribe-affiliated lending, a group of tribe-affiliated lenders responded in opposition to a recent CFPB petition to enforce civil investigative demands (CIDs) the Bureau issued to the lenders. In September 2013, the CFPB denied the lenders’ joint petition to set aside the CIDs, rejecting the lenders’ primary argument that the CFPB lacks authority over businesses chartered under the sovereign authority of federally recognized Indian Tribes. The lenders subsequently refused to respond to the CIDs, which the CFPB now asks the court to enforce. The CFPB argues that the lenders fall within the CFPB’s investigative authority under the terms of the Consumer Financial Protection Act, which the CFPB argues is a law of general applicability, including with regard to Indian Tribes and their property interests. The lenders continue to assert that they are sovereign entities operating beyond the CFPB’s reach.

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