The CFPB marketed its latest set of supervisory highlights as the “Junk Fees Special Edition.” The splashy headline is consistent with the agency’s recent focus on fees that it asserts are hidden from the competitive process. In speeches, press releases, and blog posts (and now a single proposed rule), the CFPB has
Small Dollar Loans
California DFPI Affirms Employer-Integrated Earned Wage Access Is Not a Loan
In February 2022, a legal opinion issued by the California Department of Financial Protection and Innovation (“DFPI”) concluded that employer-provided earned wage access (“EWA”) transactions are not loans under the California Financing Law and California Deferred Deposit Transaction Law. The DFPI’s legal opinion stands to provide significant clarity to the EWA industry and should encourage the continued adoption of earned wage access as a solution to employees’ needs for low-cost temporary liquidity.
Before diving into the DFPI legal opinion, we briefly remind readers of the basic structure of EWA programs. Earned wage access is a service that allows workers to obtain wages that they have earned, but have not yet been paid, prior to the worker’s regularly scheduled payday. Although the exact structure of each program differs, EWA programs generally fall into two broad categories:
- Direct To Consumer Models are offered directly to workers, without the employer’s involvement. Any eligible worker can access EWA from a direct to consumer model, as the worker’s employer offering the service is not a prerequisite. Because direct to consumer models do not integrate with employers, recoupment of EWA advances is typically effected through a single-use automated clearinghouse transaction from the employee’s personal bank account on the employee’s payday.
- Employer Integrated Models involve the EWA provider entering into a contract with an employer to offer the service as an employee benefit to the employer’s employees. An EWA provider using the employer integrated model may integrate with the employer’s payroll and time card systems to receive data about the amount of earned wages that an employee has accrued as of a certain date. Employer integrated programs typically fund an earned wage advance through the employer’s payroll system and then recoup the advance through a payroll deduction facilitated by the employer on the employee’s next regular payday.
Some EWA providers charge fees for use of the service, which are typically either flat transaction fees or “participation” fees for use of the program.
As an innovative and emerging product, EWA programs present novel financial regulatory issues. The most significant of these issues is the status of an EWA transaction as a non-credit transaction. …
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CFPB Payday Rule Upheld
Nearly four years after the Consumer Financial Protection Bureau (“CFPB”) first promulgated its rule regulating payday loans, a federal district court in Texas upheld the payment provisions of the rule against various constitutional and other challenges. The court, which had previously stayed the rule’s original compliance date, also provided that the provisions would become effective in 286 days—on June 13, 2022.
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CFPB Announces its Fall 2019 Regulatory Agenda
Along with other federal agencies, the Consumer Financial Protection Bureau recently released its Fall 2019 regulatory agenda, announcing its intentions over the next several months to address the GSE QM Patch, HMDA, payday/small dollar loans, debt collection practices, PACE financing, business lending data, and remittances. Over the longer-term, the CFPB indicated it may even address feedback on the Loan Originator Compensation Rule under the Truth in Lending Act.
- Qualified Mortgages. As we have previously described, the CFPB must in short order address the scheduled expiration of the temporary Qualified Mortgage status for loans eligible for purchase by Fannie Mae or Freddie Mac (often referred to as the “Patch”). The Patch is set to expire on January 10, 2021, leaving little time to complete notice-and-comment rulemaking, particularly on such a complex and arguably controversial issue. The CFPB has indicated that it will not extend the Patch, but will seek an orderly transition (as opposed to a hard stop). The CFPB asked for initial public input over the summer, and announced that it intends to issue some type of statement or proposal in December 2019.
- Home Mortgage Disclosure Act. The CFPB intends to pursue several rulemakings to address which institutions must report home mortgage data, what data they must report, and what data the agency will make public. First, the CFPB announced previously that it was reconsidering various aspects of the 2015 major fortification/revamping of HMDA reporting (some – but not all – of which was mandated by the Dodd Frank Act). The CFPB announced its intention to address in one final rule (targeted for next month) its proposed two-year extension of the temporary threshold for collecting and reporting data on open-end lines of credit, and the partial exemption provisions for certain depository institutions that Congress recently enacted. The CFPB intends to issue a separate rule in March 2020 to address the proposed changes to the permanent thresholds for collecting and reporting data on open-end lines of credit and closed-end mortgage loans.
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CFPB Announces Proposal to Revoke (Most of) the Payday/Small Dollar Lending Rule
On February 6, 2019, the CFPB issued a proposal to reconsider the mandatory underwriting provisions of its pending 2017 rule governing payday, vehicle title, and certain high-cost installment loans (the Payday/Small Dollar Lending Rule, or the Rule).
The CFPB proposed and finalized its 2017 Payday/Small Dollar Lending Rule under former Director Richard Cordray. Compliance with that Rule was set to become mandatory in August 2019. However, in October 2018, the CFPB (under its new leadership of former Acting Director Mick Mulvaney) announced that it planned to revisit the Rule’s underwriting provisions (known as the ability-to-repay provisions), and it expected to issue proposed rules addressing those provisions in January 2019. The Rule also became subject to a legal challenge, and in November 2018 a federal court issued an order staying that August 2019 compliance date pending further order.
The 2017 Rule had identified two practices as unfair and abusive: (1) making a covered short-term loan or longer-term balloon payment loan without determining that the consumer has the ability to repay the loan; and (2) absent express consumer authorization, making attempts to withdraw payments from a consumer’s account after two consecutive payments have failed. Under that 2017 Rule, creditors would have been required to underwrite payday, vehicle title, and certain high-cost installment loans (i.e., determine borrowers’ ability to repay). The Rule also would have required creditors to furnish information regarding covered short-term loans and covered longer-term balloon loans to “registered information systems.” See our previous coverage of the Rule here and here.
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BCFP’s Fall 2018 Regulatory Agenda
On October 17, the Bureau of Consumer Financial Protection (“BCFP” or “Bureau”) issued its Fall 2018 regulatory agenda. Notable highlights include:
- Payday Lending Rule Amendments. In January 2018, the Bureau announced that it would engage in rulemaking to reconsider its Payday Lending Rule released in October 2017. According to the Bureau’s Fall 2018 agenda, the Bureau expects to issue a notice of proposed rulemaking by January 2019 that will address both the merits and the compliance date (currently August 2019) of the rule.
- Debt Collection Rule Coming. The Bureau expects to issue a notice of proposed rulemaking addressing debt collection-related communication practices and consumer disclosures by March 2019. The Bureau explained that debt collection remains a top source of the complaints it receives and both industry and consumer groups have encouraged the Bureau to modernize Fair Debt Collection Practices Act (“FDCPA”) requirements through rulemaking. The Bureau did not specify whether its proposed rulemaking would be limited to third-party collectors subject to the FDCPA, but its reference to FDCPA-requirements suggests that is likely to be the case.
- Small Business Lending Data Collection Rule Delayed. The Dodd-Frank Act amended the Equal Credit Opportunity Act (“ECOA”) to require financial institutions to submit certain information relating to credit applications made by women-owned, minority-owned, and small businesses to the Bureau and gave the Bureau the authority to require financial institutions to submit additional data. In May 2017, the Bureau issued a Request for Information seeking comment on small business lending data collection. While the BCFP’s Spring 2018 agenda listed this item as in the pre-rule stage, the Bureau has now delayed its work on the rule and reclassified it as a long-term action. The Bureau noted that it “intends to continue certain market monitoring and research activities to facilitate resumption of the rulemaking.”
- HMDA Data Disclosure Rule. The Bureau expects to issue guidance later this year to govern public disclosure of Home Mortgage Disclosure Act (“HMDA”) data for 2018. The Bureau also announced that it has decided to engage in notice-and-comment rulemaking to govern public disclosure of HMDA data in future years.
- Assessment of Prior Rules – Remittances, Mortgage Servicing, QM; TRID up next. The Dodd-Frank Act requires the Bureau to conduct an assessment of each significant rule adopted by the Bureau under Federal consumer financial law within five years after the effective date of the rule. In accordance with this requirement, the Bureau announced that it expects to complete its assessments of the Remittance Rule, the 2013 RESPA Mortgage Servicing Rule, and the Ability-to-Repay/Qualified Mortgage Rule by January 2019. At that time, it will begin its assessment of the TILA-RESPA Integrated Disclosure Rule (TRID).
- Abusiveness Rule? Consistent with recent statements by Acting Director Mick Mulvaney that while unfairness and deception are well-established in the law, abusiveness is not, the Bureau stated that it is considering whether to clarify the meaning of abusiveness through rulemaking. The Bureau under former Director Richard Cordray rejected defining abusiveness through rulemaking (although the payday rule relied, in part, on the Bureau’s abusiveness authority), preferring instead to bring abusiveness claims in enforcement proceedings to establish the contours of the prohibition. Time will tell if the Bureau will follow through on this.
CFPB’s Final Payday Lending Rule: The Long and Short of It
On October 5th, the CFPB finalized its long-awaited payday lending rule, reportedly five years in the making. The final rule is substantially similar to the proposal the Bureau issued last year. However, the Bureau decided not to finalize requirements for longer-term high-cost installment loans, choosing to focus only on short-term loans and longer-term loans with a balloon payment feature.
The final rule will become effective in mid-summer 2019, 21 months after it is published in the Federal Register (except that provisions facilitating “registered information systems” to which creditors will report information regarding loans subject to the new ability-to-repay requirements become effective 60 days after publication).
The final rule identifies two practices as unfair and abusive: (1) making a covered short-term loan or longer-term balloon payment loan without determining that the consumer has the ability to repay; and (2) absent express consumer authorization, making attempts to withdraw payments from a consumer’s account after two consecutive payments have failed.
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Money Services Businesses Call Report Q1 Submission Deadline Quickly Approaching
The NMLS Money Services Businesses (MSB) Call Report, described by the Conference of State Bank Supervisors (CSBS) as “a new tool within the Nationwide Multistate Licensing System (NMLS) that will streamline MSB reporting, improve compliance by the industry, and create the only comprehensive database of nationwide MSB transaction activity,” is now live in the NMLS, and the initial report is due May 15, 2017.
Since state regulators decided to transition the licensing of money services businesses on to the NMLS, they have been developing a more uniform report, which standardizes a number of definitions and the categorization of transactions, by which MSBs could report on their money service-related activities through the NMLS. Further, with the development and use of a more standardized MSB report, the need for MSBs to have additional tracking and reporting systems that can slice and dice transactions into each state’s unique buckets is reduced or eliminated.
Consequently, the new MSB Call Report was adopted by CSBS and released in NMLS on April 1, 2017. As a former Assistant Commissioner with the State of Maryland, I served on both the MSB Call Report Working Group and the NMLS Policy Committee (NMLSPC). The NMLSPC was responsible for recommending the approval of the Report, which was envisioned to operate along the lines of the Mortgage Call Report required of mortgage finance licenses, to CSBS.
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Ninth Circuit Affirms CFPB Authority to Investigate Tribal Lenders
On January 20, the Ninth Circuit handed the Consumer Financial Protection Bureau (CFPB) a victory in one of the first cases challenging the CFPB’s investigative authority — although that victory seems tied to the particular facts of the case.
The court held that the CFPB has the authority to investigate the activities of for-profit, small-dollar lenders created by three Indian tribes (the Tribal Lending Entities). Given the unique facts of the case, however, the decision may provide scant guidance for the other pending cases challenging the CFPB’s authority to issue administrative subpoenas known as Civil Investigative Demands (CIDs).
The case before the Ninth Circuit involved CIDs issued to the Tribal Lending Entities as part of an investigation into whether small-dollar online lenders were violating federal consumer financial laws. Unlike the other pending challenges to the CFPB’s investigative authority, the Tribal Lending Entities did not claim that the nature of their activities (lending money) was outside the scope of the CFPB’s authority. Instead, they argued that the CFPB’s investigative powers – which are limited to sending CIDs to “persons” – did not authorize the agency to send such demands to tribal entities. The Ninth Circuit disagreed.
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New Military Lending Act Regulations Effective October 3, 2016
New regulations under the federal Military Lending Act (“MLA”) that become effective next week will prohibit consumer loans to covered US Service members if those loans have a “military annual percentage rate” (“MAPR”) greater than 36 percent. The Defense Department’s regulations will impose that MAPR limit on additional types of consumer credit transactions (beyond just…