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Consumer financial services: The road ahead
Alert

Small-dollar loans

In February 2019, the CFPB released the highly anticipated revamp of its Payday Rule, reinforcing its more lenient attitude towards payday lenders. In light of the Bureau’s softer touch, as well as similar developments at the banking agencies, we expect states to step into the void and take further action to curtail payday lending at the state level.

The Bureau is committed to the financial well-being of America’s service members [and] this commitment includes ensuring that lenders subject to our jurisdiction comply with the Military Lending Act.”
CFPB Director Kathy Kraninger1

 

The CFPB’s Payday Rule: An update

Finalized in 2017, the Payday Rule4 sought to subject small-dollar lenders to strict criteria for underwriting short-term, high-interest loans, including by imposing enhanced disclosures and registration requirements and an obligation to determine a borrower’s ability to repay various types of loans.5 Shortly after his interim appointment, former Acting Director Mulvaney announced that the Bureau would engage in notice and comment rulemaking to reconsider the Payday Rule, while also granting waivers to companies regarding early registration deadlines.6 Consistent with this announcement, CFPB Director Kraninger recently proposed to overhaul the Bureau’s Payday Rule, contending that substantive revisions are necessary to increase consumer access to credit.7 Notably, this proposal would rescind the Rule’s ability-to-repay requirement as well as delay the Rule’s compliance date to November 19, 2020.8 The proposal stops short of the entire rewrite pushed by Treasury and Congress,9 retaining provisions governing payments and consecutive withdrawals.

The Bureau will evaluate comments [received to the revised Payday Rule], weigh the evidence, and then make its decision. 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.”
CFPB Director Kathy Kraninger2

 

CFPB ceases supervision of Military Lending Act (MLA) creditors

In line with former Acting Director Mulvaney’s intent that the CFPB go “no further” than its statutory mandate in regulating the financial industry,10 he announced that the Bureau will not conduct routine examinations of creditors for violations of the MLA,11 a statute designed to protect servicemembers from predatory loans, including payday, car title, and other small-dollar loans.12  The Dodd-Frank Act, former Acting Director Mulvaney argued, does not grant the CFPB statutory authority to examine creditors under the MLA.13 The CFPB, however, retains enforcement authority against MLA creditors under TILA,14 which the Bureau intends to exercise by relying on complaints lodged by servicemembers.15 This decision garnered strong opposition from Democrats in both the House16 and the Senate,17 as well as from a bipartisan coalition of state AGs,18 urging the Bureau to reconsider its supervision policy change and commit to military lending examinations. New Director Kraninger has so far been receptive to these concerns, and requested Congress to provide the Bureau with “clear authority” to conduct supervisory examinations under the MLA.19 While it remains unclear how the new CFPB leadership will ultimately proceed, we expect Rep. Waters (D-CA), in her capacity as Chairwoman of the House Financial Services Committee, to press the Bureau further on its interpretation and its plans vis-à-vis servicemembers.

[The FDIC is] trying to make an informed opinion on how to proceed with short-term lending. [W]e are able to work with the banks on how to ensure the consumer protection protocols are in place and compliant while making sure that the consumers’ needs are met.”
FDIC Chairwoman Jelena McWilliams3

 

Federal banking regulators encourage banks to offer small-dollar loans

Alongside a wave of new leadership appointments at the federal banking regulators came an attitude shift towards Obama-era policies governing banks’ and credit unions’ ability to offer small-dollar loans.20 The OCC set the tone in May 2018 when it released new guidelines inviting national banks to offer small short-term loans to subprime consumers.21 Shortly thereafter, the National Credit Union Administration (NCUA) proposed a rule creating a new loan product to accompany its preexisting payday loan alternative.22 The Federal Deposit Insurance Corporation (FDIC) also signaled a similar interest by issuing a request for information seeking input on how it can encourage its supervised institutions to offer small-dollar credit products.23

Stakeholders supporting this deregulatory push emphasize consumer benefits resulting from the offering of diversified small loan products subject to more direct oversight by the federal banking regulators. Critics, on the other hand, question these regulators’ commitment to enforce adequate safeguards to protect subprime borrowers.24 Despite a clear desire by the federal banking regulators to make small-dollar lending at banks commonplace, financial institutions remain hesitant to enter this market, notwithstanding certain early-movers.25 This trend is likely to continue in the absence of further regulatory clarity as to what would constitute “responsible” and “prudent” underwriting for such loans.

 

Enforcement

In 2018, former Acting Director Mulvaney started his interim directorship by dropping certain actions initiated by the previous CFPB leadership against payday lenders. In addition to dismissing a suit against four tribal lenders for alleged deceptive collection practices,26 former Acting Director Mulvaney also terminated at least one probe into another payday lender resulting from a 2014 civil investigative demand.27 In spite of these early decisions, the Bureau continued to litigate actions previously brought under former Director Cordray and resolved a number of cases against in-person and online payday lenders that charged illegal interest rates and fees, and employed deceptive lending and debt collection practices.28 The Bureau, however, resolved certain of these actions by imposing lower penalties than were previously sought under the former CFPB leadership,29 in line with former Acting Director Mulvaney’s intent not to “push the envelope” on enforcement activities.30

Director Kraninger is likely to take a similar approach to payday lending enforcement during her tenure.31 We anticipate that the new CFPB leadership will continue litigating active cases against payday lenders, including one notable pending action, filed under former Acting Director Mulvaney, against a company that offered pension advance products.32 The Bureau also recently settled a 2015 enforcement action against offshore payday lenders for deceptive marketing tactics and collecting on loans void under state laws.33  We do not, however, expect the Bureau to prioritize payday lending enforcement in the year ahead due to the low number of payday loan-related complaints the CFPB received relative to other areas.34 Payday lenders will nonetheless remain subject to strict scrutiny by the Federal Trade Commission (FTC), which continues to crack down on payday lending schemes35 pursuant to its authority under Section 5 of the Federal Trade Commission Act (FTCA).36


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Fintech outlook

Fintech companies continue to gain stronger footing in the small-dollar lending industry, targeting prospective borrowers online with damaged—or no—credit history. Using AI-driven scoring products and non-traditional analytics, fintechs are able to offer lower rates than traditional payday lenders, as well as flexible solutions for subprime borrowers to improve their credit scores and, potentially, gain access to lower rates. New market entrants are also changing the traditional pay cycle by offering small earned-wage advances and financing to employees unwilling, or unable, to wait until the next payday.37 While the use of AI and alternative data for assessing creditworthiness continues to raise fair lending risks, the Bureau’s increased openness to tech-driven approaches and emphasis on increasing credit access for so-called “credit invisibles”38 may facilitate increased regulatory certainty for fintechs operating in this space.


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54,927
consumer complaints directed at payday lenders (between Nov. 2016 and Nov. 2018)46

 

State spotlight

In 2018, states continued to take aim at payday lenders through ballot initiatives, legislation and AG actions to fill any perceived gaps in the CFPB’s oversight of the industry. This trend does not show any sign of waning—we anticipate that some states will take further actions to restrict or eliminate payday lending at the state level in light of the Bureau and federal bank regulators’ shifting stances on the small-dollar loan industry.

  • Ballot initiatives. In November 2018, Colorado voters overwhelmingly approved Proposition 111, a ballot measure to cap the state’s interest rate on deferred deposit and payday loans at 36 percent per annum.39 Proposition 111 also makes it an unfair or deceptive act or practice, under Colorado law, for any person to offer or assist a consumer with obtaining a deferred deposit or payday loan with rates in excess of 36 percent. In particular, Proposition 111 applies regardless of a lender’s physical location and, therefore, affects both traditional lenders as well as bank partnerships and lead generators doing business with Colorado residents.
  • New legislation. In July 2018, the Ohio legislature passed the “Fairness in Lending Act”40 in an effort to curtail predatory payday lending. The new law addresses perceived loopholes in the state’s existing payday law, and requires most short-term loans of US$1,000 or less to abide by the state’s interest rate cap. The new law further introduces additional protections for Ohio borrowers, including limits on origination and maintenance fees.
  • Enforcement. The Virginia AG revamped his consumer protection section in March 2017 to include a special Predatory Lending Unit dedicated to tackling suspected violations of state and federal consumer lending statutes.41 Since then, the Virginia AG has announced several settlements against high-cost online lenders for charging rates in excess of Virginia’s usury limit and misrepresenting their licensure status.42 The Virginia AG has brought other enforcement actions for similar allegations.43 Other state regulators have also been active in this area. In January 2019, the California Department of Business Oversight (DBO) entered into a US$900,000 settlement with a payday lender that steered consumers into getting higher loan amounts to avoid the state’s interest cap.44 This settlement is part of a broader effort by the DBO to crack down on small-dollar lenders charging excessive interest rates in violation of state usury limits.45

 

2019 outlook

  • While we expect the Bureau to continue litigating active cases against payday lenders, the new CFPB leadership will likely prioritize other market segments due to the overall low volume of small-dollar-related consumer complaints.
  • The CFPB’s proposal to rescind the mandatory underwriting provisions of the Payday Rule will likely be finalized, resulting in less onerous underwriting requirements for the payday lending industry. It bears watching as to whether a second proposal to reform the Payday Rule’s payment provisions will be forthcoming. 
  • In 2018, state regulators targeted payday lenders for operating fraudulent lending schemes to evade interest limits and using deceptive loan marketing tactics. We expect this momentum to continue in light of the CFPB’s policy changes on payday lending and the federal banking regulators’ call for banks to offer small-dollar credit products.

 

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Consumer financial services: The road ahead

 

1 CFPB Seeks Clear Authority to Supervise for MLA Compliance, ABA Banking Journal (Jan. 17, 2019), https://bankingjournal.aba.com/2019/01/cfpb-seeks-clear-authority-to-supervise-for-mla-compliance/.
2 CFPB, Consumer Financial Protection Bureau Releases Notices of Proposed Rulemaking on Payday Lending (Feb. 6, 2019), https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-releases-notices-proposed-rulemaking-payday-lending/.
3 Rachel Witkowski, FDIC Takes First Step Toward Altering Small-Dollar Lending Policy, American Banker (Nov. 14, 2018), https://www.americanbanker.com/news/fdic-takes-first-step-toward-reversing-small-dollar-lending-policy.
4 CFPB, Payday, Vehicle Title, and Certain High-Cost Installment Loans (Oct. 5, 2017), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201710_cfpb_final-rule_payday-loans-rule.pdf.
5 Id.
6 CFPB, Statement on Payday Rule (Jan. 16, 2018), https://www.consumerfinance.gov/about-us/newsroom/cfpb-statement-payday-rule.
7 CFPB, Consumer Financial Protection Bureau Releases Notices of Proposed Rulemaking on Payday Lending (Feb. 6, 2019), https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-releases-notices-proposed-rulemaking-payday-lending/.
8 The Payday Rule's original compliance date of August 19, 2019 was stayed by court order in Texas District Court. See Community Fin. Services Ass'n of America, Ltd. et al v. Consumer Fin. Protection Bureau et al, No. 1:18-cv-00295 (W.D. Tex., Apr. 9, 2018).
9 See US Dep't of the Treasury, A Financial System That Creates Economic Opportunities Nonbank Financials, Fintech, and Innovation (Jul. 31, 2018) (arguing that the Payday Rule should be rescinded due to redundancy with state laws), https://home.treasury.gov/sites/default/files/2018-08/A-Financial-System-that-Creates-Economic-Opportunities---Nonbank-Financials-Fintech-and-Innovation_0.pdf. See also S.J. Res. 56 (Mar. 22, 2018) (joint resolution to nullify the Payday Rule under the Congressional Review Act (CRA), which failed to materialize as the 60-day period allotted under the CRA expired), https://www.congress.gov/bill/115th-congress/senate-joint-resolution/56/actions.
10 CFPB, Written Testimony of Mick Mulvaney Acting Director, Bureau of Consumer Financial Protection, Before the Senate Committee on Banking, Housing and Urban Affairs (Apr. 12, 2018), https://www.consumerfinance.gov/about-us/newsroom/written-testimony-mick-mulvaney-acting-director-before-senate-committee-banking-housing-urban-affairs/.
11 10 U.S.C. § 987.
12 For example, the MLA imposes a 36% annual percentage interest rate cap on loans for active-duty military members and their dependents. 10 U.S.C. § 987(b).
13 Sections 1024(b)(1)(A) and 1025(b)(1)(A) of the Consumer Financial Protection Act (CFPA), 12 U.S.C. §§ 5481 et seq., provide that the CFPB shall conduct examinations of covered persons to assess compliance with the requirements of "Federal consumer financial laws," defined as the provisions of the CFPA and the "enumerated consumer laws." Section 1002(12), which lists such "enumerated consumer laws," does not, however, include the MLA.
14 15 U.S.C. §§ 1601 et seq.
15 Glenn Thrush, Mulvaney Looks to Weaken Oversight of Military Lending, The New York Times (Aug. 10, 2018), https://www.nytimes.com/2018/08/10/us/politics/mulvaney-military-lending.html.
16 US House of Representatives, Committee on Financial Services (Dec. 14, 2018), https://www.consumerfinancemonitor.com/wp-content/uploads/sites/14/2018/12/12.14.2018_cfpb_mla_letter.pdf.
17 Press Release, Sen. Jack Reed (D-RI), As Trump Admin Seeks to Quietly Weaken Financial Protections for U.S. Troops, Senate Democrats Sound the Alarm & Demand Trump Admin Uphold its Duty to Shield U.S. Troops from Predatory Lending & Financial Fraud (Aug. 15, 2018) https://www.reed.senate.gov/news/releases/as-trump-admin-seeks-to-quietly-weaken-financial-protections-for-us-troops-senate-democrats-sound-the-alarm-and-demand-trump-admin-uphold-its-duty-to-shield-us-troops-from-predatory-lending_financial-fraud.
18 Press Release, Attorney General Josh Stein Leads Coalition to Urge CFPB to Protect Military Servicemembers from Financial Exploitation (Oct. 23, 2018), https://ncdoj.gov/Files/News/CFPBLetter-reMLA.aspx.
19 H.R. 442, 116th Congress (2019-2020).
20 Treasury, A Financial System That Creates Economic Opportunities Nonbank Financials, Fintech, and Innovation (Jul. 31, 2018), https://home.treasury.gov/sites/default/files/2018-08/A-Financial-System-that-Creates-Economic-Opportunities---Nonbank-Financials-Fintech-and-Innovation_0.pdf.
21 See OCC, Bulletin on Core Lending Principles for Short-Term, Small-Dollar Installment Lending (May 23, 2018), https://www.occ.gov/news-issuances/bulletins/2018/bulletin-2018-14.html.
22 NCUA, Payday Alternative Loans (May 24, 2018), https://www.ncua.gov/files/press-releases-news/AG20180524Item3b.pdf. ince 2010, federally chartered credit unions can offer payday loan alternatives that benefit from a full exemption by the CFPB from the Payday Rule. Under the proposed rule, federally chartered credit unions would be able to offer small installment loans up to $2,000 with a maximum term of 12 months.
23 FDIC, Request for Information on Small-Dollar Lending (Nov. 14, 2018), https://www.fdic.gov/news/news/press/2018/pr18084a.pdf. Comments period ended on January 22, 2019.
24 Rachel Witkowski, FDIC Takes First Step towards Altering Small Dollar Lending Policy, American Banker (Nov. 14, 2018), https://www.americanbanker.com/news/fdic-takes-first-step-toward-reversing-small-dollar-lending-policy.
25 See, e.g., Press Release, U.S. Bank, U.S. Bank Launches Simple Loan to Meet Customers' Short-term Cash Needs (Sept. 10, 2018), https://www.usbank.com/newsroom/news/us-bank-launches-simple-loan-to-meet-customers-short-term-cash-needs.html.
26 CFPB v. Golden Valley Lending, Inc., et al., case no. 1:17-cv-03155 (N.D. Ill. Apr. 27, 2017).
27 Kate Berry, CFPB Drops Probe Into Lender That Gave to Mulvaney's Campaigns, American Banker (Jan. 23, 2018), https://www.americanbanker.com/search?query=drops+probe+into+lender.
28 See CFPB v. Security Group, Inc., 2018-BCFP-0002 (Jun. 13, 2018), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/bcfp_security-group-inc_consent-order_2018-06.pdf; CFPB v. Triton Mngt Group, Inc., 2018-BCFPB-0005 (Jul. 19, 2018), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/bcfp_triton-management-group_consent-order_2018-07.pdf; Consumer Fin. Prot. Bureau v. Richard F. Moseley, SR., et al, case no. 4:14-cv-00789-SRB (W.D. Mo., Aug. 10, 2018), https://files.consumerfinance.gov/f/documents/bcfp_hydra_stipulated-final-judgment-order_2018-08.pdf; CFPB v. Cash Express, LLC, 2018-BCPF-0007 (Oct. 24, 2018), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/bcfp_cash-express-llc_consent-order_2018-10.pdf.
29 See, e.g., CFPB v. Triton Mngt Group, Inc., 2018-BCFPB-0005 (Jul. 19, 2018) (ordering the payday lender to return $500,000 to consumers instead of the $1.5 million previously sought by former Director Cordray); Consumer Fin. Prot. Bureau v. Richard F. Moseley, SR., et al, case no. 4:14-cv-00789-SRB (W.D. Mo., Aug. 10, 2018) (imposing only a $1 fine due to the defendants' "limited ability to pay").
30 Mick Mulvaney, Internal Memorandum to CFPB Employees (Jan. 23, 2018), https://www.documentcloud.org/documents/4357880-Mulvaney-Memo.html.
31 In February 2019, the CFPB entered into a $100,000 consent order with a payday lender for improper debt collection practices and failures to implement required consumer disclosures. CFPB v. CMM, LLC, et al., 2019-BCFP-0004 (Feb. 5, 2019), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_cash-tyme-consent-order_2019-02.pdf.
32 Consumer Fin. Prot. Bureau v. Future Income Payments, LLC, case no. 8:18-cv-01654 (C.D. Cal., Sept. 13, 2018), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/bcfp_future-income-payments_complaint_2018-09.pdf.
33 Consumer Fin. Prot. Bureau v. NDF Fin. Corp., et al., case no. 1:15-cv-05211-CM (S.D.N.Y. Feb. 2, 2019), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_ndg-financial-corp_consent-order_2019-02.pdf.
34 CFPB, Semi-Annual Report of the Bureau of Consumer Protection (Spring 2018) at 16, https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/bcfp_semi-annual-report-to-congress_spring-2018.pdf.
35 Federal Trade Commission, FTC and DOJ Return a Record $505 Million to Consumers Harmed by Massive Payday Lending Scheme (Sept. 26, 2018) https://www.ftc.gov/news-events/press-releases/2018/09/ftc-doj-return-record-505-million-consumers-harmed-massive-payday.
36 15 U.S.C. § 45.
37 Jeff Kauflin, VCs Bet $40 Million on Money App for for Those Living Paycheck to Paycheck, Forbes (Jul. 19, 2018) https://www.forbes.com/sites/jeffkauflin/2018/07/19/payday-loans-be-gone-a-growing-set-of-startups-are-gunning-to-unseat-them/#3376f73f6850.
38 CFPB, Data Point: The Geography of Credit Invisibility (Sept. 17, 2018), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/bcfp_data-point_the-geography-of-credit-invisibility.pdf.
39 Colorado Proposition 111, Limits on Payday Loan Charges Initiative (2018), https://ballotpedia.org/Colorado_Proposition_111,_Limits_on_Payday_Loan_Charges_Initiative_(2018).
40 Ohio, H.B. 123, Gen. Assemb. (Ct. 2018), https://www.legislature.ohio.gov/legislation/legislation-summary?id=GA132-HB-123.
41 Press Release, Predatory Lending Unit, https://www.oag.state.va.us/consumer-protection/index.php?option=com_content&view=article&id=38.
42 See, e.g., Press Release, Attorney General Herring Sues Allied Title Lending, LLC for Making Open-End Credit Loans to Violate Consumer Statutes (Sept. 13, 2017), https://www.oag.state.va.us/media-center/news-releases/1032-september-13-2017-attorney-general-herring-sues-allied-title-lending-llc-for-making-open-end-credit-loans-alleged-to-violate-consumer-statutes; Press Release, Attorney General Herring Reaches Settlement with Internet Lender (Oct. 25, 2017), https://www.oag.state.va.us/media-center/news-releases/1072-october-25-2017-ag-herring-reaches-settlement-with-internet-lender; Press Release, Virginia Consumers to Receive $2.7 Million in Relief from Settlement with Internet Lender (Feb. 7, 2018), https://www.oag.state.va.us/media-center/news-releases/1122-february-7-2018-virginia-consumers-to-receive-2-7-million-in-relief-from-settlement-with-internet-lender.
 43 See, e.g., Press Release, Attorney General Herring Alleges Illegal Predatory Loans in Suit Against One of Virginia's Largest Online Lenders (May 4, 2018), https://www.oag.state.va.us/consumer-protection/index.php/news/282-may-4-2018-herring-alleges-illegal-predatory-loans-in-suit-against-one-of-virginia-s-largest-online-lenders.
44 California Dep’t of Bus. Oversight v. California Check Cashing StoresDep't of Bus. Oversight v. California Check Cashing Stores, LLC, FSD #1003304 (Jan. 22, 2019), http://www.dbo.ca.gov/ENF/pdf/2019/CCCS-Consent-order-1-22-19.pdf.
45 See, e.g., California Dep't of Bus. Oversight v. Speedy Cash, FSD #603F589 (Oct. 5, 2018), http://www.dbo.ca.gov/ENF/pdf/2018/Speedy-Cash.pdf; California Dep't of Bus. Oversight v. Quick Cash Funding, LLC, FSD # 605-3535 (Dec. 12, 2017), http://www.dbo.ca.gov/ENF/pdf/2017/Quick%20Cash%20Funding%20LLC.pdf; California Dep't of Bus. Oversight v. Check Into Cash of of California, Inc., FSD # 603I709 (Dec. 11, 2017), http://www.dbo.ca.gov/ENF/pdf/2017/Check%20Into%20Cash%20of%20California%20Inc.pdf.
46 CFPB, Complaint Snapshot: Mortgage (January 2019), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_complaint-snapshot-mortage_2019-01_liwsYNV.pdf.

 

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