Short-term lending remains in the news at the Consumer Financial Protection Bureau (CFPB or Bureau), with the CFPB proposing to rescind key ability-to-repay provisions of a much-debated payday lending rule and with the announcement of a $100,000 enforcement action settlement with a short-term lender.
In other Bureau news, lawmakers sent a letter expressing concern over recent settlements that lacked restitution, and the CFPB issued an update on its disclosure sandbox program.
What happened
The Original Rule—In 2017, under then-Director Richard Cordray, the CFPB issued the Payday, Vehicle Title and Certain High-Cost Installment Loans Rule (the Rule), creating new consumer protections for a wide variety of short-term loans.
Almost 1,700 pages in length, the Rule declared it “an unfair and abusive practice” for any lender to make covered short-term or longer-term balloon payment loans, including payday and vehicle title loans, before reasonably determining that consumers have the ability to repay (ATR) the loans according to their terms. Pursuant to the ATR provisions of the Rule, before making a covered loan, a lender must make a reasonable determination that the consumer would be able to make the payments on the loan and be able to meet the consumer’s basic living expenses and other major financial obligations without needing to reborrow.
The Rule faced pushback from the beginning, as both the subject of litigation and an attempt to revoke via the Congressional Review Act. When Acting Director Mick Mulvaney took the helm at the CFPB, he announced plans to reconsider the Rule.
Proposed Rulemaking—Current Director Kathy Kraninger made good on Mulvaney’s plan to reconsider the Rule with the Bureau’s publication of two Notices of Proposed Rulemaking (NPRMs). In the first, published February 6, 2019, the CFPB declared its plans to rescind the Rule’s ATR provisions in their entirety. The studies relied on in drafting the Rule do not provide “a sufficiently robust and reliable basis” to support the determination that a lender’s failure to determine a borrower’s ability to repay is an unfair and abusive practice, the CFPB asserted.
Rescinding the requirement “would increase consumer access to credit,” the Bureau added, expressing concern that the mandatory underwriting requirements “would reduce access to credit and competition in states that have determined that it is in their residents’ interests to be able to use such products, subject to state-law limitations.” The NPRM requested input on the Bureau’s decision to rescind, with comments accepted until May 15.
In a second NPRM, published the same date, the CFPB proposed to delay the compliance date for the mandatory underwriting provisions until November 19, 2020. Comments on that proposal will be accepted until 30 days after its publication in the Federal Register.
As for the rest of the Rule—which the Bureau plans to leave unchanged—compliance is required as of August 19, 2019.
“The Bureau will evaluate the comments, weigh the evidence and then make its decision,” Kraninger said in a statement about the NPRMs. “In the meantime, I look forward to working with fellow state and federal regulators to enforce the law against bad actors and encourage robust market competition to improve access, quality and cost of credit for consumers.”
In connection with the changes, on February 20, 2019, the CFPB has likewise issued a “Payday, Vehicle Title and High-Cost Installment Lending Rule: Payment-Related Provisions” compliance guide, a plain-language summary of the current Rule provisions, designed for use by smaller entities. Most interesting here, the CFPB also advises such companies that the guide will likely be amended if and when the ATR provisions are modified, as the Bureau intends.
Enforcement Action—In other short-term lending news, the Bureau announced a settlement with a short-term retail lender that allegedly violated the Consumer Financial Protection Act (CFPA) by failing to take adequate steps to prevent unauthorized charges; neglecting to promptly monitor, identify, correct and refund overpayments by consumers; and making collection calls to third parties named as references on borrowers’ loan applications—including to borrowers’ places of employment and to third parties—that disclosed or risked disclosing the borrowers’ debts.
The lender, which has outlets in Alabama, Florida, Indiana, Kentucky, Louisiana, Mississippi and Tennessee, also misrepresented that it collected third-party references from borrowers for verification purposes when it actually used the information for marketing purposes, the CFPB said, and advertised unavailable services (such as check cashing and phone reconnections).
Adding to the list of purported violations, the Bureau alleged the lender ran afoul of the Gramm-Leach-Bliley Act, Regulation P, the Truth in Lending Act and Regulation Z when it failed to provide initial privacy notices to borrowers and rounded annual percentage rates (APRs) to whole numbers in advertisements.
Pursuant to the consent order with the CFPB, the retail payday lender must pay a civil money penalty of $100,000 and submit a comprehensive compliance plan to ensure that the lender’s marketing, sales, servicing and collection of short-term loans complies with all applicable federal laws as well as the consent order.
Individual Liability—And for those who might assume that individual owners of short-term lending companies have little to worry about from a liability perspective, a recent federal appeals decision is worth a view even if the issue was decided outside the context of CFPB enforcement. In FTC v. Federal Check Processing, the U.S. Court of Appeals, Second Circuit concluded, in a short affirmance, that an owner was personally liable because he had control over the company’s practices, was aware they were illegal and was therefore liable for them.
State Activity—Never mind the CFPB when it comes to short-term lending? States remain active in the area, with a new law taking effect in Colorado that established a 36 percent APR cap on payday loans in the state. Last November, voters overwhelmingly approved a ballot measure establishing the limit.
Roughly 1.4 million voters supported Proposition 111, with just 433,000 voting against the measure, which also eliminated all other finance charges and fees associated with payday lending in the state.
The new law took effect on February 1, adding Colorado to the list of states that have imposed rate caps on short-term loans via voter referendum, including Arizona, Montana, Ohio and South Dakota.
Congressional Scrutiny—In CFPB news not related to short-term lending, Director Kraninger and CFPB employees received an “open” letter from Rep. Maxine Waters (D-Calif.), chair of the House of Representatives Committee on Financial Services, that issued a formal statement expressing concern about recent settlements against entities engaged in unlawful practices that don’t include payment of redress to consumers harmed by the illegal conduct.
The letter referenced deals with a major Ohio-based jewelry store operator that opened credit card accounts and enrolled customers in payment-protection insurance without their consent, an online lender that debited consumers’ bank accounts without effective authorizations and an international group of entities that collected on payday loans made in violation of state law.
None of the actions provided relief to wronged consumers, Rep. Waters noted, despite the fact that the CFPA explicitly authorizes the Bureau to obtain such relief for consumers.
“The Committee has serious concerns about how the Consumer Bureau is exercising its enforcement authority, especially how it is determining whether to require companies to pay redress to consumers that have been harmed,” according to the letter. “The fact that two of the three settlements involve online lending raises serious questions about the Consumer Bureau’s commitment to protecting America’s consumers from predatory online lending practices.”
Rep. Waters directed the Bureau to provide records related to all three agreements, including “all documents and communications referring to or related to the issue of restitution” in each. Further, the committee announced a series of CFPB-related hearings, with the first set for March 7, 2019.
Disclosure Sandbox—Finally, the CFPB updated its blog post about the Bureau’s proposed “Disclosure Sandbox.” Shortly after establishing a new Office of Innovation, the CFPB issued a proposal for the creation of a Disclosure Sandbox aimed at encouraging trial disclosure programs.
Amending a policy established in 2013, the proposal would allow the Bureau to deem a covered entity conducting a trial disclosure program to be in compliance with or exempt from a requirement of a CFPB rule or certain federal laws.
In an update to the proposal, the CFPB clarified an original headline that suggested the Disclosure Sandbox would be open only to fintech companies. “In fact, as the body of the post indicates, any covered entity, regardless of its categorization as ‘FinTech,’ ‘bank,’ ‘credit union’ or otherwise, could apply to test a trial disclosure with the Sandbox,” the Bureau said.
To read the NPRM to rescind certain provisions of the Rule, click here.
To read the NPRM to delay compliance with the Rule, click here.
To view the payday lending compliance guide, click here.
To view the federal appeals decision, click here.
To read the CFPB consent order, click here.
To read Rep. Waters’ letter to the CFPB, click here.
To read the CFPB’s update to its Disclosure Sandbox proposal, click here.
Why it matters
Not surprisingly, consumer groups reacted with displeasure to the CFPB’s NPRMs, but government officials, such as Comptroller of the Currency Joseph Otting (a former senior executive at a subprime lender), unsurprisingly expressed support. Said Otting, the Bureau’s proposal to rescind the ability-to-repay requirements was “an important and courageous step that will allow banks and other responsible lenders to again help consumers meet their short-term small-dollar needs.” Further, he added, the “proposed rule allows lenders to re-enter the market with quality products and services that offer consumers better regulated, priced and structured products.” Last year, the OCC encouraged its supervised entities to enter the short-term lending market. In addition to the Bureau’s enforcement in the area of short-term lending, states also remain very attentive to the issue, and lenders should ensure compliance with Colorado’s new law.