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Some issues for “longer-term” loans under the CFPB’s contemplated payday/title/high-cost lending proposals

Posted in Payday Lending, Vehicle Loans

In this blog post, we share our thoughts on the 36% “all-in” rate trigger and restrictions for loans considered to be “longer-term” under the CFPB’s contemplated proposals taking aim at payday (and other small-dollar, high-rate) loans (“Covered Loans”).  (Our previous blog posts have looked at the CFPB’s grounds for the proposals, how the proposals will impact “short-term” Covered Loans and the flaws we see in the CFPB’s ability to repay analysis.)

36% “all-in” rate trigger.  CFPB rules under consideration for “longer-term” Covered Loans, with terms exceeding 45 days, are limited to loans that: (1) have “all-in” annual percentage rates (APRs) exceeding 36%; and (2) either create a security interest in the consumer’s motor vehicle or authorize the lender to collect payments by accessing the consumer’s bank account or paycheck.  See Press Release, “CFPB Considers Proposal to End Payday Debt Traps” (Mar. 26, 2015) (“Press Release”), p. 3.  As with short-term Covered Loans, the CFPB contemplates that lenders will be allowed to make longer-term Covered Loans either using an ATR analysis or, at the lender’s option, without an ATR analysis but subject to elaborate restrictions.

The CFPB skates on very thin ice when it chooses to severely restrict longer-term Covered Loans based on “all-in” APRs exceeding 36% while it leaves lower-rate loans outside the coverage of its contemplated rules.  Section 1027(o) of Dodd-Frank explicitly denies the CFPB authority to set usury limits, yet the contemplated proposal does just that.  With the 36% rate trigger, the CFPB is effectively saying that specified longer-term loans are perfectly lawful if the all-in APR is 36% or less but unlawful at a higher rate.

There is one type of higher-rate loan the CFPB apparently intends to leave alone—unsecured “signature” loans payable more than 45 days after origination.  While the CFPB seems to believe—incorrectly, in our view—that it can restrict interest rates when they are coupled with other loan features, there is no obvious way it could regulate signature loans without nakedly addressing rates in isolation.  Conversely, eliminating the rate trigger on longer-term Covered Loans would seriously interfere with credit products for which there is virtually universal support, such as the unsecured installment loans offered through the Lending Club and Prosper online marketplaces.

Restrictions.  As with short-term Covered Loans, the CFPB contemplates two options for longer-term Covered Loans. Press Release, pp. 3-4.  Under the first option, the longer-term Covered Loan would need to pass an ATR analysis.  Under the second option, the lender could make Covered Loans with terms from 45 days to six months (no maximum term applies to longer-term Covered Loans made under ATR authority) provided that debt service is limited to five percent of the borrower’s verified gross income and the lender does not make more than two such Covered Loans within any 12-month period.  (We do not address a third option here, based on an NCUA program, since it does not appear at all viable to us.)

Once again, the contemplated CFPB limitations are severe. For Covered Loans made on the basis of an ATR evaluation, the issues discussed above would apply, although ATR issues are necessarily more severe for short-term Covered Loans than for longer-term Covered Loans.  Only a small segment of longer-term Covered Loans will meet the five percent and six-month limitations contemplated by the CFPB.  Indeed, for Covered Loans studied by the CFPB, only 18 percent had payment to income ratios below five percent and only nine percent had ratios below five percent and terms of six months or less.  See Outline of Proposals under Consideration and Alternatives Considered (Mar. 26, 2015), p. 50.

The materials released by the CFPB do not explain its basis for selecting five percent and six-month thresholds for longer-term Covered Loans that do not utilize ATR authority.  In the absence of any compelling explanation, a rule that threatens to eliminate over 90% of the market seems overly tough.  If one were to accept the CFPB’s theory that it is entitled to regulate on the basis of interest rates—and we do not—should it not be more liberal when rates are at the low end of the regulated range rather than the upper reaches?  If a lender can make a six-month loan at a triple-digit interest rate, we believe it should be able to make a one-year loan at a 37% rate.

In our next blog post, we will look at the CFPB’s contemplated rules for payment collection practices.

Some issues for “short-term” loans under the CFPB’s contemplated payday/title/high-cost lending proposals

Posted in Payday Lending, Vehicle Loans

In this blog post, we share our thoughts on how the CFPB’s contemplated proposals taking aim at payday (and other small-dollar, high-rate) loans (“Covered Loans”) will impact “short-term” Covered Loans and the flaws we see in the CFPB’s ability to repay analysis.  (Our last blog post looked at the CFPB’s grounds for the proposals.)

Impact.  The CFPB plans to provide two options for “short-term” Covered Loans with terms of 45 days or less.  One option would require an ability to repay (ATR) analysis, while the second option, without an ATR evaluation, would limit the loan size to $500 and the duration of such Covered Loans to 90 days in the aggregate in any 12-month period.  These restrictions on Covered Loans made under the non-ATR option make the option plainly inadequate.

Under the ATR option, creditors will be permitted to lend only in sharply circumscribed circumstances:

  • The creditor must determine and verify the borrower’s income, major financial obligations (such as mortgage, rent and debt obligations) and borrowing history.
  • The creditor must determine, reasonably and in good faith, that the borrower’s residual income will be sufficient to cover both the scheduled payment on the Covered Loan and essential living expenses extending 60 days beyond the Covered Loan’s maturity date.
  • Except in extraordinary circumstances, the creditor would need to provide a 60-day cooling off period between two short-term Covered Loans that are based on ATR findings.

In our view, these requirements for short-term Covered Loans would virtually eliminate short-term Covered Loans.  Apparently, the CFPB agrees.  It acknowledges that the contemplated restrictions would lead to a “substantial reduction” in volume and a “substantial impact” on revenue, and it predicts that Lenders “may change the range of products they offer, may consolidate locations, or may cease operations entirely.”  See Outline of Proposals under Consideration and Alternatives Considered (Mar. 26, 2015) (“Outline”), pp. 40-41.  According to CFPB calculations based on loan data provided by large payday lenders, the restrictions in the contemplated rules for short-term.  Covered Loans would produce: (1) a volume decline of 69% to 84% for lenders choosing the ATR option (without even considering the impact of Covered Loans failing the ATR evaluation), id., p. 43; and (2) a volume decline of 55% to 62% (with even greater revenue declines), for lenders using the alternative option. Id., p. 44.  “The proposals under consideration could, therefore, lead to substantial consolidation in the short-term payday and vehicle title lending market.” Id., p. 45.

Ability to Repay Analysis.  One serious flaw with the ATR option for short-term Covered Loans is that it requires the ATR evaluation to be based on the contractual maturity of the Covered Loan even though state laws and industry practices contemplate regular extensions of the maturity date, refinancings or repeat transactions.  Instead of insisting on an ATR evaluation over an unrealistically short time horizon, the CFPB could mandate that creditors refinance short-term Covered Loans in a manner that provides borrowers with “an affordable way out of debt” (id., p. 3) over a reasonable period of time.  For example, it could provide that each subsequent short-term Covered Loan in a sequence of short-term Covered Loans must be smaller than the immediately prior short-term Covered Loan by an amount equal to at least five or ten percent of the original short-term Covered Loan in the sequence.  CFPB concerns that Covered Loans are sometimes promoted in a deceptive manner as short-term solutions to financial problems could be addressed directly through disclosure requirements rather than indirectly through overly rigid substantive limits.

This problem is particularly acute because many states do not permit longer-term Covered Loans, with terms exceeding 45 days.  In states that authorize short-term, single-payment Covered Loans but prohibit longer-term Covered Loans, the CFPB proposals under consideration threaten to kill not only short-term Covered Loans but longer-term Covered Loans as well.  As described by the CFPB, the contemplated rules do not address this problem.

The delays, costs and burdens of performing an ATR analysis on short-term, small-dollar loans also present problems.  While the CFPB observes that the “ability-to-repay concept has been employed by Congress and federal regulators in other markets to protect consumers from unaffordable loans” (Outline, p. 3), the verification requirements on income, financial obligations and borrowing history for Covered Loans go well beyond the ability to repay (ATR) rules applicable to credit cards.  And ATR requirements for residential mortgage loans are by no means comparable to ATR requirements for Covered Loans, even longer-term Covered Loans, since the dollar amounts and typical term to maturity for Covered Loans and residential mortgages differ radically.

Finally, a host of unanswered questions about the contemplated rules threatens to pose undue risks on lenders wishing to rely upon an ATR analysis:

  • How can lenders address irregular sources of income and/or verify sources of income that are not fully on the books (e.g., tips or child care compensation)?
  • How can lenders estimate borrower living expenses and/or address situations where borrowers claim they do not pay rent or have formal leases?  Will reliance on third party data sources be permitted for information about reasonable living costs?
  • Will Covered Loan defaults deemed to be excessive be used as evidence of ATR violations and, if so, what default levels are problematic?  Unfortunately, we believe we know the answer to this question.  According to the CFPB, “Extensive defaults or reborrowing may be an indication that the lender’s methodology for determining ability to repay is not reasonable.” Id., p. 14.  To give the ATR standard any hope of being workable, the CFPB needs to provide lenders with some kind of safe harbor.

In our next blog post, we will look at the CFPB’s contemplated 36% “all-in” rate trigger and restrictions for “longer-term” Covered Loans.

CFPB updates home buying information booklet

Posted in Mortgages

The CFPB has issued an updated version of the home buying information booklet (also known as the special information or settlement cost booklet) required under RESPA and TILA.  The new booklet is entitled “Your home loan toolkit: A step-by-step guide.”  (The booklet it replaces is entitled “Shopping for Your Home Loan: Settlement Cost Booklet.”)  The new booklet or Toolkit is designed to be used with the new TILA/RESPA integrated disclosures required to be provided for applications received on or after August 1, 2015.

Lenders are required to deliver or mail the Toolkit not later than 3 days after receipt of an application.  However, in the Federal Register notice announcing the Toolkit’s availability, the CFPB encourages all market participants (such as realtors) “to provide the [Toolkit] to consumers at any other time, preferably as early in the home or mortgage shopping process as possible.”  The Toolkit is designed to be distributed electronically and has interactive worksheets and checklists.

The goals of the Toolkit are to: (1) inform consumers of the steps they need to take to get the best mortgage for their individual situation, (2) help consumers understand their closing costs and what it takes to buy a home, and (3) give consumers tips on how to be a successful homeowner.  The Toolkit includes the following topics:

Choosing the best mortgage for you

  • Define what affordable means to you. This section includes a worksheet for the consumer to calculate their total monthly home payment.   It includes their mortgage payment but also HOA fees, insurance and taxes. There is also a calculation of the percentage of the consumer’s income spent on their monthly home payment.   Further, there is a worksheet which has the consumer calculate their total monthly income minus all debt payments which in addition to the monthly home payment, has the consumer deduct car payments, student loan payments, credit card payments and other payments such as child support or alimony.
  • Understand your credit
  • Pick the mortgage type that works for you
  • Choose the right down payment for you.  This section takes the consumer through the different down payment options and possibility of having PMI on the loan.
  • Understand the tradeoff between points and interest rate.  This section contains a table that illustrates how different “points” scenarios impact the monthly payment over the life of the loan.
  • Shop with several lenders. This section includes a work sheet that aids the consumer in comparing loan offers.
  • Choose your mortgage
  • Avoid pitfalls and handle problems

Your closing

  • Shop for mortgage closing services.  This section describes the various service providers in connection with the loan closing.
  • Review your revised Loan Estimate
  • Understand and use your Closing Disclosure.  This section takes the consumer through the Closing Disclosure and describes the costs shown on it.

Owning your home

  • Act fast if you get behind on your payments
  • Keep up with ongoing costs
  • Determine if you need flood insurance
  • Understand Home Equity Lines of Credit and refinancing

The Toolkit is focused on the process for purchasing a home and obtaining a purchase money mortgage, and does not address refinances except for a mention at the end.  It emphasizes the consumer’s ability to repay and the mortgage payment’s affordability.  The Toolkit appears to reflect a bias in favor of fixed rate loans, a 20% down payment, and HUD counseling.  It discourages loans with balloon features and prepayment penalties and encourages consumers to shop with at least 3 different lenders.  Curiously, while the list of possible lenders for consumers to consider includes  banks and credit unions, there is no direct mention of “Mortgage Bankers.”  Instead, only Mortgage Brokers are listed.   While the reference to “online lenders” might be intended to include Mortgage Bankers,” many Mortgage Bankers are not online lenders.

 

The CFPB’s contemplated payday/title/high-cost lending proposals: our initial reactions

Posted in Payday Lending, Vehicle Loans

Last Friday, we posted a summary of the contemplated CFPB proposals taking aim at payday (and other small-dollar, high-rate) loans (“Covered Loans”).  In this blog post, we share our thoughts on the CFPB’s grounds for the proposals.  Over the next few days, we will be publishing several additional blog posts to share our reactions to the proposals’ details.

As discussed in our summary, the contemplated rules are sweeping.  We believe that, if they are adopted, the rules will lead to many lenders exiting the business of making Covered Loans and radically contract consumer access to Covered Loans.

The sweeping nature of the rules under consideration is premised on the CFPB’s conclusion that Covered Loans are “debt traps that plague millions of consumer across the country.” See Press Release, “CFPB Considers Proposal to End Payday Debt Traps” (Mar. 26, 2015) (“Press Release”).  In the CFPB’s view, Covered Loans present borrowers with the “risk that they will lose their transportation to work, incur bounced check fees and other charges, or experience other bank account problems if they fall behind.” See Outline of Proposals under Consideration and Alternatives Considered (Mar. 26, 2015) (“Outline”), pp. 3-4.  The CFPB warns that “consumers may take costly measures to avoid reborrowing or defaulting on the loan. A consumer may default on other obligations or forgo basic needs.” Id., p. 9.  Further, “consumers may lose control over their financial choices” if the lender is able to access the consumer’s bank account or take a security interest in the consumer’s vehicle. Id., p. 3.

Consistent with its past statements, the entire CFPB focus is on the dangers of Covered Loans. The reality of the situation is that, without access to Covered Loans, consumers will frequently “default on other obligations or forgo basic needs,” Id., p. 9, whether or not they obtain Covered Loans, and the CFPB has not shown that the frequency of default or severity of financial hardship increases with Covered Loans.  Covered Loans can help borrowers obtain needed car repairs (or medical care) and avoid bank account NSF and overdraft fees, late payment charges and even utility disconnection and reconnection fees.  Thus, the CFPB has not established that any consumer injury resulting from Covered Loans exceeds the benefits provided by Covered Loans.

In fact, the unsupported CFPB belief that Covered Loans are bad for consumers conflicts with a number of recent empirical studies.  (See our blog posts about the Navigant, Toth, and Mann and Priestley studies.)  This is critical from both a policy and legal perspective because, under Dodd-Frank, a practice cannot be “unfair” if any injury it causes is outweighed by countervailing benefits.  And generally, an “abusive” practice must take “unreasonable” advantage of consumers.  It is hard to see how a practice can take “unreasonable” advantage of consumers if the benefits it provides outweigh any injuries it causes.  Accordingly, the cost-benefit analysis the CFPB has thus far eschewed would seem to be a necessary precondition of regulation of the contemplated type.  If the CFPB moves forward based on the current record and without regard to the benefits of Covered Loans, its actions will presumably be challenged in court under the Administrative Procedures Act.

In our next blog post, we will focus on how the proposals will impact “short-term” Covered Loans and the flaws we see in the CFPB’s contemplated ability to repay analysis.

CFPB issues FDCPA 2015 report

Posted in Debt Collection

The CFPB has issued its fourth annual FDCPA report covering the CFPB’s activities in 2014.  The section of the report that reviews consumer complaints about debt collection received by the CFPB in 2014 recycles information contained in the CFPB’s latest Consumer Response Annual Report.

In the section of the report about the CFPB’s supervision of debt collectors that qualify as “larger participants,” the CFPB describes FDCPA violations found by its examiners including:

  • Excessive or inconveniently timed telephone calls
  • Misleading representations in collection litigation, such as findings by CFPB examiners that one or more entities would dismiss 70% of the lawsuits they filed when the consumer filed an answer because the entities could not locate supporting documentation
  • False threats of litigation
  • Prohibited disclosures to third parties, with CFPB examiners finding that one or more collectors had provided faulty training materials that resulted in their representatives regularly identifying their employers to third parties without being expressly requested to do so
  • False and misleading representations in debt collection communications (which included misrepresentations regarding the benefits of participating in a federal student loan rehabilitation program made by debt collectors collecting defaulted student loans for the Department of Education as previously described in the CFPB’s Winter 2015 Supervisory Highlights.)

With regard to the CFPB’s debt collection rulemaking efforts, the report discusses the CFPB’s review of the more than 23,000 comments it received in response to its November 2013 Advance Notice of Proposed Rulemaking.  According to the CFPB, the “broad themes” it has identified from the comments include:

  • The need to address use of newer technologies such as e-mail under the FDCPA
  • Issues relating to the transfer of information when debts are sold, including whether certain types of debt, like medical or student loan debt, should require more or less documentation
  • Whether debt collection rules should apply to first party collectors

While Director Cordray states in his introductory message that the CFPB “is making progress” on developing rules, no timetable is given.  The report indicates only that prior to completing its review of the comments and issuing a notice of proposed rulemaking, the CFPB “may convene” a small business review panel pursuant to the Small Business Regulatory Enforcement Fairness Act.

The report also describes the seven public enforcement actions announced by the CFPB in 2014 “related to unfair, deceptive and abusive debt collection,” and indicates that these actions have so far resulted in over $570 million in consumer relief and over $13 million in civil money penalties.  (Among these enforcement actions are the CFPB’s actions against ACE Cash Express, Fredrick J. Hanna & Associates, Colfax Capital Corporation, and Freedom Stores.)  According to the report, in addition to these seven actions, “the Bureau is conducting a number of non-public investigations of companies to determine whether they engaged in collection practices that violate the FDCPA or the Dodd-Frank Act.”

 

CFPB holds hearing on payday and auto title loans in Richmond, VA

Posted in CFPB General, Deposit Advance Loans, Payday Lending, Vehicle Loans

On March 26, the CFPB held a public hearing on payday and auto title lending, the same day that it released proposed regulations for short-term small-dollar loans. Virginia Attorney General, Mark Herring gave opening remarks, during which he asserted that Virginia is perceived as the “predatory lending capital of the East Coast,” suggesting that payday and auto title lenders were a large part of the problem. He said that his office would target these lenders in its efforts to curb alleged abuses. He also announced several initiatives aimed at the industry, including enforcement actions, education and prevention, legislative proposals, a state run small-dollar loan program, and an expanded partnership with the CFPB. The Commissioner of Virginia’s Bureau of Financial Institutions, E. Joseph Face, also gave brief remarks echoing those of the Attorney General.

Richard Cordray, director of the CFPB, then gave lengthy remarks, which were published online the morning before the hearing took place and are available here. His remarks outlined the CFPB’s new “Proposal to End Payday Debt Traps.” Cordray explained and defended the CFPB’s proposed new regulations. While most of what he said was repetitive of the lengthier documents that the CFPB published on the topic, a few lines of his speech revealed the impetus behind the CFPB’s proposed regulations and one reason why they are fundamentally flawed.

In discussing the history of consumer credit, he stated that “[t]he advantage[, singular] of consumer credit is that it lets people spread the cost of repayment over time.” This, of course, ignores other advantages of consumer credit, such as closing time gaps between consumers’ income and their financial needs. The CFPB’s failure to recognize this “other” advantage of consumer credit is a driving force behind several flaws in the proposed regulations, which we have been and will be blogging about.

Following the opening remarks, the CFPB moderated a panel discussion during which participants from industry and consumer advocacy groups had the opportunity to comment on the proposed regulations and answer questions. The CFPB panel included:

  • Richard Cordray, Director, CFPB
  • Steven Antonakes, Deputy Director, CFPB
  • Zixta Martinez, Assistant Director of Community Affairs, CFPB
  • Kelly Cochran, Assistant Director for Regulations, CFPB.

On the consumer advocate panel were:

  • Paulina Gonzales, Executive Director, California Reinvestment Coalition
  • Michael Calhoun, President, Center for Responsible Lending
  • Dana Wiggins, Director of Outreach, Virginia Poverty Law Center
  • Wade Henderson, President and CEO, The Leadership Conference on Civil Rights and Human Rights

The industry panel included:

  • Lisa McGreevy, President & CEO, Online Lenders Alliance
  • Edward D’Alessio, General Counsel (former), Financial Service Centers of America
  • Lynn DeVault, Board Member, Community Financial Services Association of America
  • Stanley P. Leicester, II, Senior Vice President and CFO, BayPort Credit Union

After the panelists’ opening remarks, they answered questions posed by the CFPB such as: (i) What should the role of “ability to repay” standards be in the payday loan market?; (ii) How do payday loans’ rollover feature impact the ability to repay?; and (iii) “What is the appropriate balance between protecting consumers and ensuring that they have access to credit?”

Not surprisingly, in answering these questions, the consumer advocate panel took every opportunity to condemn payday and auto title products. They generally cited anecdotal evidence of consumers who became financially and emotionally distressed when they found themselves unable to repay their loans. One panelist purported to cite “data” compiled by his own organization in support of the proposed regulations. Unfortunately, these consumer advocates offered no viable alternatives to payday and auto title products to help consumers who find themselves in need of money and with nowhere else to turn.

The industry panelists generally expressed concern over the CFPB’s proposed regulations. Ms. McGreevy, speaking for online lenders, stated that any new regulations should not stifle innovation, rely on outdated underwriting methods, or dictate when consumers would be allowed to take out a loan. All of the industry panelists, in some way or another, expressed concern that new regulations not be implemented in a way that defeats the purposes of payday and auto title products. If, for example, the new regulations dramatically increase the time it takes to get a loan, they may strip away the value that these loans provide to consumers who need them.

After the panel concluded, the CFPB entertained comments from approximately 40 members of the public who had registered in advance. The speakers were each afforded one minute to comment. Employees of payday and auto title loan stores made up the largest group of speakers, followed closely clergy and consumer advocacy groups. A fair number of consumers also made remarks. One consumer claims to have taken out a $300 loan on which she now owes more than $5,000. Others expressed gratitude towards the payday and auto title lenders whose loans allowed them to stay out of financial peril or to respond to an emergency situation.

CFPB 2014 complaints report shows large increase in debt collection and credit reporting complaints

Posted in CFPB General

The CFPB’s Consumer Response Annual Report analyzing complaints handled in 2014 indicates that volume rose 53% from 163,700 complaints in 2013 to 250,200 in 2014.

The report provides data on the most common types of complaints for each product, the handling of complaints, and median monetary relief.  Of the 250,200 complaints received in 2014, approximately 67% were received through the CFPB’s website, 9% via telephone calls, 15% via referrals from other agencies and regulators, and the balance via mail, e-mail and fax.  Based on the CFPB’s breakdown of the number of complaints received in each category, debt collection (88,300), mortgages (51,200), and credit reporting (44,800) accounted for 73% of all 2014 complaints.  Debt collection and credit reporting complaints had the largest increases from 2013 (when the number of complaints received was, respectively, 31,100 and 24,200).  Also, while in 2013 the CFPB received the most complaints about mortgages, it received substantially more complaints in 2014 about debt collection than mortgages.

37% of the debt collection complaints involved continued attempts to collect debts not owed (with many asserting that the amount sought was inaccurate or unfair), 20% involved communication tactics, 13% involved debt validation (such as not receiving enough information to verify the debt), and 12% involved taking or threatening illegal action.  For credit reporting complaints, 77% involved incorrect information on credit reports.

The CFPB provides monetary relief information for companies that reported such relief.  This includes median relief of $363 for 670 debt collection complaints, $475 for 1,000 mortgage complaints, $24 for 200 credit reporting complaints, $105 for 3,060 bank account and service complaints, $121 for 3,140 credit card complaints, $200 for 270 private student loan complaints, and $319 for 70 payday loan complaints.

The 2014 report includes a section entitled “Credit Reporting Case Study” in which the CFPB provides further analysis about the credit reporting complaints it received.  According to the CFPB, the factors that may have contributed to the 85% increase in credit reporting complaints from 2013 to 2014 include “increased consumer access and awareness about credit reporting issues.”  The portion of that section entitled  “Investigator Observations” appears intended to highlight issues on which CFPB examiners are likely to focus.  These issues include:

  • Credit report accuracy.  The CFPB indicates that a large number of complaints concern the accuracy of public records, such as bankruptcies, judgments, and tax liens.  (The CFPB notes that a large portion of judgments involve debt collection lawsuits.)  According to the CFPB, consumers frequently complain that public records contained on their credit reports are not updated in a timely manner and  consumers also emphasize the difficulties that they experience when attempting to remedy errors.
  • Student loan issues.  The CFPB observes that it receives a significant number of complaints about the inaccurate reporting of student loans, with consumers often reporting that the original loans were still reported as open after their loans were transferred from one servicer to the other, conveying the impression that consumers have more student loans than they actually did.  Other issues noted by the CFPB include: forgiven loans not being reported as closed, incorrect loan balances or terms, and incorrect reporting of consolidated loans as multiple individual loans.  The CFPB also highlights complaints by consumers about significant drops in their credit scores when one missed payment resulted in several delinquencies being reported, incorrect disbursement of payments by loan servicers, and
    co-signers not receiving notice that negative information would be reported on their account as a result of the primary borrower’s failure to make payments.

As he did in last year’s report, Director Cordray describes complaints as a “compass to direct our work and help us identify and prioritize problems for potential supervisory, enforcement, and regulatory action.”  Because they are often invalid, complaints do not serve as reliable evidence that the complained about conduct occurred.  The CFPB’s recent decision to publicly disclose consumer narratives only increases the potential for reputational damage from the publication of unverified complaints.   We continue to hope the CFPB will be mindful of the shortcomings of complaints when using them as a “compass” in its decision-making process.

CFSA weighs in on CFPB proposed payday regulations

Posted in Payday Lending

On March 26th, the Community Financial Services Association (“CFSA”) held a press call to address the CFPB’s rulemaking process for developing payday loan regulations.  CFSA Chief Executive Officer Dennis Shaul offered brief opening remarks before answering questions from the press immediately prior to a CFPB field hearing on payday loans being held in Richmond, VA.

In a statement released prior to the call, Shaul emphasized that, “CFSA welcomes the CFPB’s consideration of the payday loan industry and we are prepared to entertain reforms to payday lending that are focused on customers’ welfare and supported by real data.”  Shaul called on the CFPB to develop data indicating what percentage of customers benefit from their use of payday loans and use this number as a basis for comparison against the percentage of customers that experience the “payday debt traps” as described by CFPB Director Richard Cordray.  Shaul expressed concerns about the impact of any CFPB regulations that could negatively impact customers that are well-served by payday loans.

Shaul also called on the CFPB to serve as an “honest umpire” between the payday loan industry and consumer advocates.  Shaul noted that the rulemaking process should not become, “a contest between those who favor and those who oppose payday loans, but what is best for customers.”

The CFPB’s outline of proposals for the upcoming Small Business Advisory Review Panel acknowledges that the CFPB’s proposals will result in lost volume, principal, and revenue for lenders and will likely drive some lenders out of the market or cause substantial consolidation among existing market participants.  Shaul stated that driving choices out of the market does not serve business or customers.

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.