CFPB Monitor

News Guidance Perspectives of CFPB | Ballard Spahr Law Firm Blog

CFPB shows its hand on payday (and title and longer-term high-rate) lending

Posted in Deposit Advance Loans, Payday Lending, Vehicle Loans

The CFPB has moved a step closer to issuing payday loan rules by releasing a press release, factsheet and outline of the proposals it is considering in preparation for convening a small business review panel required by the Small Business Regulatory Enforcement Fairness Act and Dodd-Frank.  The CFPB’s proposals are sweeping in terms of the products they cover and the limitations they impose.  In addition to payday loans, they cover auto title loans, deposit advance products, and certain “high cost” installment and open-end loans.  In this blog post, we provide a detailed summary of the proposals.  We will be sharing industry’s reaction to the proposals as well as our thoughts in additional blog posts.

When developing rules that may have a significant economic impact on a substantial number of small businesses, the CFPB is required by the Small Business Regulatory Enforcement Fairness Act to convene a panel to obtain input from a group of small business representatives selected by the CFPB in consultation with the Small Business Administration.  The outline of the CFPB’s proposals, together with a list of questions on which the CFPB seeks input, will be sent to the representatives before they meet with the panel.  Within 60 days of convening, the panel must issue a report that includes the input received from the representatives and the panel’s findings on the proposals’ potential economic impact on small business.

The contemplated proposals would cover (a) short-term credit products with contractual terms of 45 days or less, and (b) longer-term credit products with an “all-in APR” greater than 36 percent where the lender obtains either (i) access to repayment through a consumer’s account or paycheck, or (ii) a non-purchase money security interest in the consumer’s vehicle.  Covered short-term credit products would include closed-end loans with a single payment, open-end credit lines where the credit plan terminates or is repayable in full within 45 days, and multi-payment loans where the loan is due in full within 45 days.

Account access triggering coverage for longer-term loans would include a post-dated check, an ACH authorization, a remotely created check (RCC) authorization, an authorization to debit a prepaid card account, a right of setoff or to sweep funds from a consumer’s account, and payroll deductions.  A lender would be deemed to have account access if it obtains access before the first loan payment, contractually requires account access, or offers rate discounts or other incentives for account access.  The “all-in APR” for longer-term credit products would include interest, fees and the cost of ancillary products such as credit insurance, memberships and other products sold with the credit.  (The CFPB states in the outline that, as part of this rulemaking, it is not considering proposals to regulate certain loan categories, including bona-fide non-recourse pawn loans with a contractual term of 45 days or less where the lender takes possession of the collateral, credit card accounts, real estate-secured loans, and student loans.  It does not indicate whether the proposal covers non-loan credit products, such as credit sale agreements.)

The contemplated proposals would give lenders alternative requirements to follow when making covered loans, which vary depending on whether the lender is making a short-term or longer-term loan.  In its press release, the CFPB refers to these alternatives as “debt trap prevention requirements” and “debt trap protection requirements.”  The “prevention” option essentially requires a reasonable, good faith determination that the consumer has adequate residual income to handle debt obligations over the period of a longer-term loan or 60 days beyond the maturity date of a short-term loans.  The “protection” option requires income verification (but not assessment of major financial obligations or borrowings), coupled with compliance with specified structural limitations.

For covered short-term loans (and longer-term loans with a balloon payment more than twice the level of any prior installment), lenders would have to choose between:

Prevention option.  A lender would have to determine the consumer’s ability to repay before making a short-term loan.  For each loan, a lender would have to obtain and verify the consumer’s income, major financial obligations, and borrowing history (with the lender and its affiliates and with other lenders.)  A lender would generally have to adhere to a 60-day cooling off period between loans (including a loan made by another lender).  To make a second or third loan within the two-month window, a lender would need to have verified evidence of a change in the consumer’s circumstances indicating that the consumer has the ability to repay the new loan.  After three sequential loans, no lender could make a new short-term loan to the consumer for 60 days.  (For open-end credit lines that terminate within 45 days or are fully repayable within 45 days, the CFPB would require the lender, for purposes of determining the consumer’s ability to repay, to assume that a consumer fully utilizes the credit upon origination and makes only the minimum required payments until the end of the contract period, at which point the consumer is assumed to fully repay the loan by the payment date specified in the contract through a single payment in the amount of the remaining balance and any remaining finance charges.  A similar requirement would apply to ability to repay determinations for covered longer-term loans structured as open-end loans with the additional requirement that if no termination date is specified, the lender must assume full payment by the end of six months from origination.)

Protection option.  Alternatively, a lender could make a short-term loan without determining the consumer’s ability to repay if the loan (a) has an amount financed of $500 or less, (b) has a contractual term not longer than 45 days and no more than one finance charge for this period, (c) is not secured by the consumer’s vehicle, and (d) is structured to taper off the debt.

The CFPB is considering two tapering options.  One option would require the lender to reduce the principal for three successive loans to create an amortizing sequence that would mitigate the risk of the borrower facing an unaffordable lump-sum payment when the third loan is due.  The second option would require the lender, if the consumer is unable to repay the third loan, to provide a no-cost extension that allows the consumer to repay the third loan in at least four installments without additional interest or fees.  The lender would also be prohibited from extending any additional credit to the consumer for 60 days.

Although a lender seeking to utilize the protection option would not be required to make an ability to repay determination, it would still need to apply various screening criteria, including verifying the consumer’s income and borrowing history and reporting the loan to all commercially available reporting systems.  In addition, the consumer could not have any other outstanding covered loans with any lender, rollovers would be capped at two followed by a mandatory 60-day cooling-off period for additional loans of any kind from the lender or its affiliate, the loan could not result in the consumer’s receipt of more than six covered short-term loans from any lender in a rolling 12-month period, and after the loan term ends, the consumer cannot have been in debt for more than 90 days in the aggregate during a rolling 12-month period.

For covered longer-term loans, lenders would have to choose between:

Prevention option.  Before making a fully amortizing covered longer-term loan, a lender would have to make essentially the same ability to repay determination that would be required for short-term loans, over the term of the longer-term loan.  In addition, an ability to repay determination would be required for an extension of a covered longer-term loan, including refinances that result in a new covered longer-term loan.  To extend the term of a covered longer-term loan or refinance a loan that results in a new covered longer-term loan (including the refinance of a loan from the same lender or its affiliate that is not a covered loan), if certain conditions exist that indicate the consumer was having difficulty repaying the pre-existing loan (such as a default on the existing loan), the lender would also need verified evidence that there had been a change in circumstances that indicates the consumer has the ability to repay the extended or new loan.  Covered longer-term loans with balloon payments are treated the same as short-term loans.

Protection option.  The CFPB is considering two alternative approaches for a lender to make a longer-term loan without determining the consumer’s ability to repay.  Under either approach, the loan term must range from a minimum of 45 days to a maximum of six months and fully amortize with at least two payments.

  • The first approach is based on the National Credit Union Administration’s program for payday alternative loans, with additional requirements imposed by the CFPB. The NCUA program would limit the loan’s terms to (a) a principal amount of not less than $200 and not more than $1,000, and (b) an annualized interest rate of not more than 28% and an application fee of not more than $20, reflecting the actual cost of processing the application.  Under the NCUA’s screening requirements, the lender would have to use minimum underwriting standards and verify the consumer’s income.  The CFPB would also require the lender to verify the consumer’s borrowing history and report use of the loan to all applicable commercially available reporting systems and would prohibit the lender from making the loan if the consumer has any other outstanding covered loan or the loan would result in the consumer having more than two such loans during a rolling six-month period.  Under this alternative, a lender that holds a consumer’s deposit account would not be allowed to fully sweep the account to a negative balance, set off from the consumer’s account to collect on the loan in the event of delinquency, or close the account in the event of delinquency or default.
  • The second approach limits each periodic payment to 5 percent of the consumer’s expected gross income over the payment period.  No prepayment fee could be charged.  The lender would also have to verify the consumer’s income and borrowing history and report use of the loan to all applicable commercially available reporting systems.  In addition, the consumer must not have any other outstanding covered loans or have defaulted on a covered loan within the past 12 months and the loan cannot result in the consumer being in debt on more than two such loans within a rolling 12-month period.

Restrictions on  collection practices.  For all covered short-term and longer-term loans, lenders would be subject to the following restrictions:

  • Advance notice of account access.  A lender would be required to provide three business days advance notice before attempting to collect payment through any method accessing an account, including ACH entries, post-dated signature checks, RCCs, and payments run through the debit networks.  The notice would have to include information such as the date of the payment request, payment channel, payment amount (broken down by principal, interest and fees), and remaining loan balance.  Notice by email would generally be permitted.
  • Limit on collection attempts.  If two consecutive attempts to collect money from a consumer’s account made through any channel are returned for insufficient funds, the lender would not be allowed to make any further attempts to collect from the account unless the consumer provided a new authorization.

Condominium unit ILSA sales exemption now effective

Posted in CFPB General

Effective March 25, 2015, the sale of condominium units are no longer subject to the registration requirements of the Interstate Land Sales Full Disclosure Act (ILSA) under a new exemption.  This new exemption applies only to the sale of condominium units on and after March 25, 2015, but also will include condominium units within projects currently registered with the CFPB that are offered for sale on and after March 25.  (Dodd-Frank gave the CFPB rulemaking and other authority under ILSA.)

The new exemption, however, is not a complete exemption from ILSA.  Unless another full exemption applies, the sale of condominium units remains subject to the law’s antifraud provisions.  For more on the sales exemption and how ILSA’s antifraud provisions may continue to apply, see our legal alert.

ABA comments on CFPB prepaid card proposal

Posted in Prepaid Cards

The American Bankers Association has submitted a 46-page comment letter on the CFPB’s proposed prepaid card rule.

In the letter, the ABA makes the following key comments:

  • Additional clarity is needed in the definition of the term “prepaid account” to avoid banks being subject to second-guessing by examiners and plaintiffs’ attorneys.  The ABA recommends that the CFPB narrow the definition of prepaid account to cover an account whose underlying funds are only accessed through a card (or card number) that is processed through the card networks.
  • The proposed treatment of overdrafts linked to prepaid accounts as open-end credit under Regulation Z is contrary to law because TILA’s definition of “credit” clearly excludes overdrafts, which convey no “right to defer” payment, the essential characteristic of credit under TILA.
  • The proposal amounts to an effective ban on offering overdraft services or credit through a prepaid card because of the operational and compliance costs and risks.  As a result, it will harm consumers by limiting consumer access to overdraft services and credit.  The proposal also hobbles efforts of banks to offer small-dollar affordable credit as an alternative to nonbank small-dollar loans such as payday loans.
  • The proposal will even affect prepaid cards that do not offer overdraft services because it transforms prepaid cards into credit cards if any fee is charged when the account is in overdraft status—even if the overdraft is unavoidable, for example, when a deposited check is returned unpaid or the final card transaction exceeds the amount authorized.  Although ABA member banks that offer prepaid cards generally do not offer overdraft or credit services with their prepaid cards, the proposal exposes them to new operational and compliance risks associated with application of the proposed credit and overdraft rules to their current products.  The new regulatory risks and costs may cause these banks to withdraw from the market for prepaid products and the ABA anticipates that the proposal will make other banks, particularly community banks, reluctant to enter the market.
  • By significantly hindering banks’ ability to offer prepaid cards, the proposal will suppress the opportunity for prepaid cards to serve as a promising “bank account” alternative for low-income customers or those without bank accounts.
  • By allowing holders of prepaid accounts to overdraw an  account and avoid not only overdraft fees, but potentially any fee, including those regularly assessed on the account, the proposal will cause prepaid cards to lose their usefulness as a starting ramp to greater financial responsibility and increased access to banking services.  Instead of encouraging customers to improve their financial management skills, the prepaid account contemplated by the CFPB’s proposal would send a message that there are few adverse consequences to overspending or not managing finances.  Consumers, in the long term, will be ill-served by this message as it will lead to poor financial decisions with regard to bank accounts and other financial products.

The ABA also urges the CFPB to set an effective date that is no sooner than 18 months after adoption of a final rule rather than nine months after adoption as the CFPB has proposed.

OIG adds new audit item to work plan

Posted in CFPB General

The Office of Inspector General (OIG) has added a new ongoing CFPB project to its work plan updated as of March 13, 2015.  The OIG is auditing the CFPB’s compliance with the Improper Payments Information Act of 2002, as amended by the Improper Payments Elimination and Recovery Act of 2010 and the Improper Payments Elimination and Recovery Improvement Act of 2012.

The law requires an agency to perform an annual review of its programs and activities and identify those programs and activities that are susceptible to significant improper payments. (An improper payment is generally any payment that should not have been made or that was made in an incorrect amount under statutory, contractual, administrative, or other legally applicable requirements.)  An agency must estimate the amount of improper payments and implement a program to reduce them.  It must also file reports with the President and Congress and the Office of Management and Budget that include the estimates, steps taken by the agency to reduce improper payments, the amount of improper payments the agency expects to recover, and how it plans to go about recovering such amount.

The OIG audit has a second quarter 2015 estimated completion date.

Budget amendment introduced to change CFPB appropriations

Posted in CFPB General

Another Republican CFPB effort to subject the CFPB to the congressional appropriations policy took the form of an amendment to the Senate’s 2015 Budget Resolution introduced last week by Senator David Perdue.  Earlier in March, Republican Congressman Sean Duffy introduced the Bureau of Consumer Financial Protection Accountability Act of 2015 (H.R. 1261) which is also directed at making the CFPB subject to the congressional appropriations process.  (Dodd-Frank entitles the CFPB to receive annual funding through transfers from the Fed that are capped at a fixed percentage of the Fed’s total 2009 operating expenses.)

Another payday loan study finds affordability and rollover limits do not benefit borrowers

Posted in Payday Lending

We recently wrote about three studies that cast serious doubt on the benefit to payday loan borrowers of an ability-to-repay requirement, a payment-to-income (PTI) ratio ceiling, and rollover limits, three potential payday loan restrictions thought to be under consideration by the CFPB.

The findings of these studies find support in another study released this week by Navigant Economics entitled “Small-Dollar Installment Loans: An Empirical Analysis.”   The study was conducted by Dr. Howard Beales, a professor in the George Washington School of Business, and Dr. Anand Goel of Navigant Economics.  Dr. Beales is a former Director of the FTC’s Bureau of Consumer Protection.

The study analyzed 1.02 million installment loans made in 16 states by four companies between January 2012 and September 2013.  55% of these loans were storefront loans and 45% were online loans.  The loans had the following additional characteristics:

  • An average loan amount of $1,192 and a median loan amount of $900
  • An average loan term of 221 days and a median term of 181 days
  • An average APR of 300% and a median APR of 295%
  • Median gross annual income of borrowers was $35,057

The study made the following key findings:

  • Affordability criteria, such as a PTI ratio limit, risks a substantial reduction in credit availability to the small-dollar credit population, which often has few available alternatives.  The study found, for example, that a 5% PTI ratio limit would limit access to credit for 86% of current borrowers.  (Of the loans analyzed for which PTI ratios were available, only 14% had a ratio of less than 5%.)
  • A PTI ratio is a poor metric for predicting loan repayment.
  • Those who borrow repeatedly are more likely to repay their loans on average and repeat borrowers with the same lender are offered lower interest rates, presumably because they are considered less risky than when the initial loan was made.  Thus, additional loans from the same lender appear to reflect a willingness to extend more credit to borrowers who have demonstrated they can handle their obligations rather than a debt trap.
  • The negligible reduction in default rates resulting from a PTI ratio limit is more than offset by the resulting reduction in credit access.

As it moves forward in the payday loan rulemaking process, we hope the CFPB will carefully consider this growing body of research indicating that the payday loan limits typically advocated by consumer groups could be detrimental to borrowers

 

CFPB seeks comments on new information collection plans

Posted in CFPB General

The CFPB has published two Federal Register notices seeking comments on its plans to request approval from the Office of Management and Budget for two new generic information collection plans.  Comments on both plans are due on or before May 22, 2015.

One notice requests comments on a “Generic Information Collection Plan for Surveys Using the Consumer Credit Panel.”  According to a statement submitted by the CFPB in support of the request, the CFPB has acquired a nationally representative sample of de-identified consumer credit records (Consumer Credit Panel or CCP) from one of the three national credit reporting agencies.  The sample includes approximately “5 million de-identified credit records representing the universe of approximately 240 million credit records.”  The credit records are updated quarterly.

The CFPB plans to randomly survey individuals with credit records included in the CCP.  For each survey conducted under the generic clearance, unique record locators assigned to sampled credit records would be sent to the CRA along with a survey instrument designed by the CFPB.  The CRA would identify the consumers associated with each sampled credit record and mail the survey instrument.  Responses will be sent to the CRA’s subcontractor who will then remove any direct identifying personal information in a consumer’s response and send the de-identified data to the CFPB.

A second notice requests information on a “Generic Information Collection Plan to Conduct Cognitive Research and Pilot Testing.”  The generic clearance is intended to allow the CFPB to pretest research instruments on a small scale prior to their use in full-scale research studies.  According to the CFPB’s supporting statement, pretesting will allow the CFPB to develop, test and improve its survey and data collection instruments and methodologies.

Sovern v. Kaplinsky

Posted in Arbitration

In its study of consumer arbitration dated March 10th, the CFPB concluded that relatively few consumer arbitrations have been filed.  In a recent Consumer Law & Policy blog, Professor Jeff Sovern states that he is “skeptical” of my position that the CFPB’s conclusion can be explained, in part, by the fact that most consumers use informal methods for resolving their disputes with companies.  He has invited me to produce “evidence” to substantiate my position.  The following is the evidence requested by Professor Sovern, courtesy of the CFPB itself, along with some additional observations on the subject.

  1. With respect to Professor Sovern’s argument that dissatisfied consumers “mostly … don’t do anything” to complain to companies or external agencies, the CFPB states on its website that “[i]n just over three and a half years, we’ve handled more than 558,800 consumer complaints.”   See http://files.consumerfinance.gov/f/201503_cfpb_complaints-by-the-numbers.pdf.  That data, which covers July 2011 through March 1, 2015, is concrete “evidence” that substantiates my argument that substantial numbers of consumers do take measures to resolve complaints short of litigation or arbitration.  Indeed, the CFPB website continues by stating: “The Bureau’s Office of Consumer Response hears directly from consumers about the challenges they face in the marketplace.  We forward their complaints to companies and work to get them a response – generally within 15 days.”  This is current data.  And it is data supplied by only one agency covering less than four years.  State agencies, including state attorneys general, generally provide their own complaint portals, as do private entities such as the Better Business Bureau.  In any event, the CFPB’s own up-to-the-minute data shows that there is no cause for Professor Sovern to be “skeptical” of my claim.
  2. Professor Sovern further states that even if my claim is true, “it’s hard to see how it helps to defend arbitration.”  More specifically, he writes, “If consumers benefit so much from arbitration …, why do consumers with arbitration clauses in their contracts prefer the Better Business Bureau?  Why don’t they just use arbitration?”  Professor Sovern has missed the point.  Arbitration is faster, cheaper and more efficient than litigation, particularly class action litigation, but there are many informal ways of resolving disputes that are faster, cheaper and more efficient for consumers than either arbitration or litigation.  Is arbitration more beneficial to the average consumer than a lawsuit or a class action?  Absolutely.  But I have never advocated that all consumer disputes should be resolved through arbitration.  Professor Sovern’s argument is a red herring.
  3. Other reasons why “consumers don’t file arbitration claims” (Professor Sovern’s words) are that (a) Professor Sovern and consumer advocates have railed against arbitration for almost two decades, thereby fostering a negative public perception of arbitration, and (b) the CFPB has failed to educate consumers about the many benefits that arbitration can offer as opposed to litigation.
  4. Also interesting is what Professor Sovern did not address in his blog.  He has yet to respond to our detailed showing over the past two weeks that the CFPB’s study is deeply flawed because it did not take into account the actual experiences of consumers in arbitration and class action litigation.  Moreover, as we have established in detail, the statistics that are in the study actually support our position that arbitration is faster, cheaper and more efficient than litigation and more beneficial to consumers than class action litigation.  See our e-Alerts here and here.

KPMG audit finds CFPB budget review controls and corrective action process need improvement

Posted in CFPB General

The CFPB has released a report for FY 2014 prepared by KPMG of its independent audit of selected CFPB operations and budget.  An annual independent audit is required by the Dodd-Frank Act.  The report reflects work performed by KPMG during the period October 1, 2014 to February 16, 2015.

The audit was conducted to evaluate various objectives specified by the CFPB.   KPMG identified the following control deficiencies:

  • The CFPB allows each office to manage its budget and, as a control, conducts mid-year reviews of budget estimates.  Information regarding the impact of program changes that affected budget estimates were not communicated to the Office of Chief Financial Officer.
  • The CFPB did not have a central deficiency log for tracking and/or monitoring deficiencies identified by audits and other means, which could result in duplicate or contradictory efforts to remediate issues and/or identify different responsible officials.  In addition, remediation activities could interfere with each other and corrective actions might include different targeted milestones and completion dates.

The report includes a letter from the CFPB’s Chief Financial Officer indicating that the CFPB agrees with the deficiencies identified by KPMG and KPMG’s recommendations for addressing the deficiencies.  The letter also discusses actions taken by the CFPB to resolve findings and implement recommendations in KPMG’s FY 2013 audit report.

 

Trade groups seek grace period for TILA/RESPA integrated disclosure rule

Posted in Mortgages

A group of 17 trade associations and organizations have written to the CFPB seeking a grace period for enforcement of  the TILA-RESPA Integrated Disclosure (TRID) rule which becomes effective on August 1, 2015.

In their letter, the groups seek written guidance from the CFPB on various situations not addressed by the TRID rule and ask the CFPB to announce and implement a “restrained enforcement and liability” or “grace period” for those seeking to comply in good faith following the provision of such guidance after August 1 through the end of 2015.  The groups propose to use the grace period “to identify pain points with stakeholders” and thereafter meet with CFPB staff to address such issues and allow the CFPB time to provide additional written guidance.

The groups note that there is no opportunity for early compliance with the TRID rule, which means that industry will not be able to test systems, in real-time, in real circumstances, until after August 1.  Accordingly, since industry would still be required to use the new forms and processes during the proposed grace period, the grace period would allow industry and the CFPB to see what actually works and what might need fine tuning or further clarification without costly disruptions to consumers during peak transaction months.  The groups also observe in the letter that a restrained enforcement period is not without precedent, pointing to the approach taken by HUD when it revised the RESPA disclosures in 2010.

As the groups indicate, additional CFPB guidance regarding the TRID rule is needed.  To date, the CFPB has provided guidance only orally, which many industry members consider to be lacking.  The industry has found numerous issues that are not clearly addressed by the rule and will require CFPB guidance, which appears to have been a factor in the trade groups’ request to the CFPB.