It has been a particularly busy period for the Consumer Financial Protection Bureau (CFPB), which issued a proposed rule governing payday lending, received a mixed decision from a California federal court judge in a lawsuit against a company offering a biweekly payment program, modified the Equal Credit Opportunity Act (ECOA) regulations and requested comment on proposed policy guidance for the Home Mortgage Disclosure Act (HMDA) data set to be shared with the public, and the Bureau itself took further action against a real estate settlement services provider for allegedly steering consumers to a title insurer it was affiliated with.

What happened

1. Payday loans. The CFPB’s final rule on payday, vehicle title and other so-called high-cost installment loans (the “payday loan rule”) creates new consumer protections for a wide variety of short-term loans and provides official staff interpretations of the rules. Nearly 1,700 pages in length, the new rules were issued on Oct. 4, 2017, and basically accomplish five things:

First, the payday loan rule declares 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. A lender, before making a covered short-term or longer-term balloon-payment loan, 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 re-borrow over the ensuing 30 days. Furthermore, a lender is prohibited from making a covered short-term loan to a consumer who has already taken out three covered short-term or longer-term balloon-payment loans within 30 days of each other until 30 days after the third loan is no longer outstanding.

The payday loan rule provides an alternative ATR approach, however. A lender may alternatively make a covered short-term loan without meeting all the specific underwriting criteria set out above if (1) the loan satisfies certain prescribed terms, (2) the lender confirms that the consumer meets specified borrowing history conditions and (3) the lender provides required disclosures to the consumer. Among other conditions, under this alternative approach, a lender may make up to three covered short-term loans in short succession if the first loan has a principal amount no larger than $500, the second loan has a principal amount at least one-third smaller than the principal amount on the first loan, and the third loan has a principal amount at least two-thirds smaller than the principal amount on the first loan. A lender is not allowed to make a covered short-term loan under the alternative requirements if it would result in the consumer having more than six covered short-term loans during a consecutive 12-month period or being in debt for more than 90 days on covered short-term loans during a consecutive 12-month period. A lender is not permitted to take vehicle security in connection with loans that are made according to this alternative approach. As discussed below, in all instances, the rule exempts certain loans from the underwriting criteria prescribed in the rule if they have specific consumer protections.

Second, for the same set of loans along with certain other high-cost longer-term loans, the payday loan rule identifies it as an unfair and abusive practice to make attempts to withdraw payment from consumers’ accounts after two consecutive payment attempts have failed, unless the consumer provides a new and specific authorization to do so.

Third, under the payday loan rule, a lender is required to provide a written notice, depending on means of delivery, a certain number of days before its first attempt to withdraw payment for a covered loan from a consumer’s checking, savings or prepaid account; before an attempt to withdraw such payment in a different amount than the regularly scheduled payment amount, on a date other than the regularly scheduled payment date or by a different payment channel than the prior payment; or before an attempt to re-initiate a returned prior transfer. The notice must contain key information about the upcoming payment attempt and, if applicable, alert the consumer to unusual payment attempts. A lender is permitted to provide electronic notices as long as the consumer consents to electronic communications.

Fourth, the payday loan rule establishes processes and criteria for registration of information systems, requirements to furnish and obtain information from them, and compliance programs and record retention. With respect to compliance programs, the rule requires that lenders establish and follow a compliance program and retain certain records. A lender is also required to develop and follow written policies and procedures that are reasonably designed to ensure compliance with the requirements in this rule. Furthermore, a lender is required to retain the loan agreement and documentation obtained for any covered loan or an image thereof, as well as electronic records in tabular format regarding origination calculations and determinations for a short-term or longer-term balloon-payment loan, and regarding loan type and terms.

Fifth, the rule prohibits an anti-evasion clause and operates as a floor, leaving state and local jurisdictions to adopt further regulatory measures (whether a usury limit or other protections) as the states deem appropriate to protect consumers. In promulgating these provisions, the CFPB is seeking to preclude lenders from avoiding the application of the rule to otherwise covered events. One target of the CFPB is tribal lenders, with whom the Bureau has taken an aggressive position notwithstanding a body of law favoring tribal sovereign immunity.

The controversial new rule will doubtless be subjected to attacks by the short-term lending industry. That said, absent intervention by Congress or by a new CFPB director, the new rule will take effect 21 months after formal publication in the Federal Register (the original proposed rule had an effective date just 15 months out), except for the provision granting a conditional exemption for certain defined loans of a term of between 46 and 180 days, which provision would take effect within 60 days of publication.

The rule excludes or exempts several types of consumer credit, including (1) loans extended solely to finance the purchase of a car or other consumer good in which the good secures the loan, (2) home mortgages and other loans secured by real property or a dwelling if recorded or perfected, (3) credit cards, (4) student loans, (5) nonrecourse pawn loans, (6) overdraft services and lines of credit, (7) wage advance programs, (8) no-cost advances, (9) alternative loans (similar to loans made under the Payday Alternative Loan program administered by the National Credit Union Administration), and (10) accommodation loans.

Despite its many restrictions, the new payday loan rule also has a few pleasant surprises for the industry. In addition to the longer period before the rule becomes effective, the CFPB exempts longer-term high-rate loans (that is, over 36 percent APR) from the ATR provision, following industry comments—perhaps in recognition of the fact that the proposed rules would constitute usury regulation in violation of Dodd-Frank, which forbids the CFPB from setting usury limits for consumers. Better yet for the industry, longer-term loans are largely exempted by the rule, and providers of deposit advance products get a break.

2. Mixed results in California suit. A California-based company offered a financial services product known as the Interest Minimizer (IM) program, in which customers agreed that every two weeks the company would automatically debit from their bank account an amount equal to one-half of their monthly home mortgage payment.

The company forwarded the funds to the lender on a monthly basis. Because this format resulted in 26 debits per year, the customer effectively made one extra mortgage payment, which was applied to the principal of the loan and, the company claimed, provided customers the chance to save thousands of dollars they might otherwise pay in loan interest.

But in a 2015 complaint, the CFPB accused the company of engaging in abusive and deceptive practices by minimizing the existence or amounts of the program’s setup fee, misleading customers about the amount of actual savings they would see and creating a false impression that the company was affiliated with lenders.

Following a seven-day bench trial, U.S. District Court Judge Richard Seeborg issued a mixed decision. While he found that the Bureau adequately showed that some of the defendants’ challenged marketing statements were false or misleading, the CFPB did not meet its burden for all of the counts. The court imposed a civil penalty of almost $8 million, as well as injunctive relief, but declined to order the CFPB’s requested restitution of almost $74 million.

The Bureau argued that the defendants did not adequately disclose the existence of the setup fee (equal to one of the biweekly payments the consumer agreed to make) and/or its amount in promotional mailers, and inadequately disclosed the fee when customers called in response to the mailers. But the court was not persuaded that the defendants’ description of the fee as “one bi-weekly payment” (as opposed to the specific dollar amount) reached the level of a deceptive act or practice in violation of the Consumer Financial Protection Act (CFPA).

“[B]ecause it is the amount a consumer who enrolls in the program will thereafter be expecting to have withdrawn from his or her account every two weeks, any consumer acting reasonably under the circumstances will have that dollar figure well in mind,” the court said. As the Bureau based its request for restitution on a refund of the setup fee for consumers, the court denied it.

However, Judge Seeborg agreed with the CFPB that a reasonable consumer likely would be confused by the net impression created by many of the mailers, implying an affiliation with customers’ lenders as well as the timing and amount of interest savings. The defendants made representations that customers would save as much as $1,500 in the first year and $5,000 after only two years.

“A reasonable consumer is likely not to understand that in terms of actual out-of-pocket dollars being applied as interest each month, the reduction will be minimal until much later in the term of the loan, and that the total ‘savings’ will be even less in light of the fees,” the court said. The defendants’ disclaimers that their savings figures were based on the “life of the loan” were insufficient, Judge Seeborg added.

For these misrepresentations, the court ordered the payment of statutory penalties under the CFPA’s maximum first-tier penalty of $5,000 per day over a five-year period for a total of $7.93 million, declining to adjust the amount up or down.

“The record plainly supports an inference that defendants sought to use the most effective sales tactics possible to market the IM program, and that in doing so they were willing to push up against the legal limits,” the court wrote. “The record also shows, however, that defendants took affirmative steps such as training, quality control, and seeking legal counsel, in an effort to stay on the right side of the line.”

In addition, Judge Seeborg directed the parties to meet and confer to negotiate the form and content of appropriate injunctive relief. “Generally speaking, the injunctive relief should permit defendants to resume operation of the IM program, provided they make changes to the mailers, phone scripts, and promotional videos sufficient to eliminate each of the misleading or deceptive points addressed [in the opinion].”

The court also rejected the defendants’ counterclaims that they were the target of Operation Choke Point or similar backroom pressure tactics by the CFPB, holding that the evidence at trial supported “a conclusion that while the filing of this action itself … may have contributed to the termination of the banking relationships, those relationships were already strained for reasons unrelated to any conduct by CFPB.”

3. Other CFPB developments. In other Bureau news, the agency finalized tweaks to the ECOA regulations that permit lenders to choose on an application-by-application basis between two methods of collecting race and ethnicity data. Lenders may either gather the information in the aggregate or use disaggregated and more expansive categories pursuant to the revisions to Regulation C that take effect next year.

The amendments “will provide greater clarity for mortgage lenders regarding their obligations under the law,” the CFPB said, “while promoting compliance with rules intended to ensure that consumers are treated fairly.”

Regulation B, the CFPB’s rule implementing ECOA, restricts lenders’ ability to ask consumers about their race, color, religion, natural origin or sex, with exceptions for certain circumstances that includes the collection of such information for some mortgage applications.

The CFPB also asked the industry to weigh in on the looming changes to the HMDA. The statute requires many lenders to report and disclose certain information about their mortgage lending activities to the public.

In 2015, the Bureau finalized changes to Regulation C, expanding the required data points. The CFPB is now asking for public comment. While emphasizing the importance of public disclosure of mortgage data as “central to the achievement of HMDA’s goals,” the Bureau expressed concern about applicant privacy and requested public comment on its proposal to balance the competing interests. For example, the CFPB proposed to exclude certain data fields (such as property address and applicant credit score) and modify fields to disclose a range and not a specific number for other information—listing age as 55–64 instead of 57 or property values at the midpoint of $10,000 intervals (reporting $115,000 for a property valued between $110,000 and $120,000). Collection of the information is set to begin in 2018, with public disclosure the following year.

Comments will be accepted on the proposal until Nov. 24.

Finally, the CFPB has taken another action against a real estate settlement services provider for allegedly steering consumers to a title insurer it had ties to. Headquartered in Indiana, the company “routinely selected” for its customers a title insurance underwriter that was owned in part by three of its own executives, and failed to disclose this affiliation to customers, the Bureau alleged.

By choosing the title insurer, the real estate settlement services provider was able to keep extra money beyond the commission it would normally have been entitled to collect, the Bureau said, a violation of the Real Estate Settlement Procedures Act (RESPA), which generally requires disclosure of anything of value pursuant to an agreement or understanding that business will be referred to an affiliated company.

An investigation by the Bureau found that disclosures were not given to more than 7,000 consumers who used the title insurer at the real estate settlement services provider’s suggestion.

Pursuant to a consent order, the real estate settlement services provider must pay $1.25 million in redress to consumers who were referred to and purchased title insurance from the affiliated company but did not receive any disclosures. In addition, the company agreed to refrain from future violations of RESPA as well as implement policies and procedures to ensure that appropriate disclosures are given for applicable referrals.

To read the opinion and order in the CFPB’s action against the biweekly payment provider, click here.

To read the final ECOA rule, click here.

To read the HMDA proposed policy guidance, click here.

To read the CFPB’s consent order with the real estate settlement services provider, click here.

Why it matters

CFPB activity remains a hot-button item for lenders, and the new payday loan rules will certainly draw the attention of the industry, the courts and Congress. Meanwhile, the California court’s order and opinion offered a decidedly mixed result for the CFPB. While the Bureau won a civil money penalty in excess of $7 million and denial of the defendants’ counterclaim that the CFPB acted wrongfully, the Bureau lost out on its attempt to obtain $74 million in restitution. The changes to the ECOA could prove helpful to some lenders, while those affected should consider commenting on the HMDA proposals. And the Bureau remains consistent with its position on referrals under RESPA, bringing another action against a real estate settlement services provider, this time requiring the company to pay $1.25 million in redress.