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CFPB Issues Final Rule on Small-Dollar Lending

On Tuesday, July 7, 2020, the Consumer Financial Protection Bureau (“CFPB”) formally rescinded rules implemented under former CFPB Director Richard Cordray aimed at determining a consumer’s ability to repay small-dollar loans.  In 2017, then Director Cordray instituted mandatory underwriting provisions that would have required payday lenders to assess, as part of the underwriting process, whether borrowers could afford to repay their loans without reborrowing.  Upon review of these mandatory provisions, the CFPB did not find the requisite legal and statutory guidance to further enforce these underwriting standards. 

While small-dollar loans provide for increased consumer access to capital, especially during the COVID-19 pandemic, this renewed focus on small-dollar lending is a noticeable directional turn from the consumer lending advice of prior administrations.  Under the previous presidential administration, regulators were more cautious of banks’ lending in this space and worried about risks, such as high interest rates and perceived repayment risks, associated with lending small-dollar loans to consumers.[1]  In 2013, prudential regulators, including the OCC and the FDIC, went as far to release guidance that essentially discouraged banks from engaging in small-dollar lending activity altogether.[2]   

Regulators under the current administration have signaled that they are more open to reengaging banks in the practice of small-dollar lending, so as to meet the unmet short-term credit needs of the American consumer.[3]  In its press release concerning the repeal of these provisions, the Bureau stated that “rescinding the mandatory underwriting provisions of the 2017 rule ensures that consumers have access to credit and competition in states that have decided to allow their residents to use these small-dollar loan products, subject to state law limitations,” and noted that a subset of consumers might have a particular need for products such as payday loans as a result of the economic downturn brought about by the COVID-19 pandemic.

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The Risks of Assembling Consumer Information

In a case of first impression in its circuit, the Second Circuit held that a business may not be liable under the Fair Credit Reporting Act (FCRA) for publishing false information unless it specifically intended the report to be a “consumer report.” Kidd v. Thompson Reuters, —F.3d — (2019 WL 2292190, 5/30/19). It then held that  defendant Thompson Reuters established it did not have the requisite specific intent by showing that at each step in its processes it instructed its users and potential subscribers that its platform was not to be used for FCRA purposes, such as employment eligibility–but only for the non-FCRA purposes of law enforcement, fraud prevention and identity verification–and required them to affirm their understanding of that restriction. Accordingly, the Second Circuit Court of Appeals affirmed the granting of summary judgment to Thompson Reuters, even though its subscriber had used its inaccurate report to determine a job applicant’s employment eligibility.

The take-away: If your business regularly assembles consumer information, distributes it to third parties, and fears it may be used for a FCRA-related end that is not intended, your business should forbid such uses in its subscriber contract, monitor the actual uses of that information, and take adequate measures to stop FCRA-related uses when it learns of them.  

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Announcing the Consumer Banking Blog

It is with great pleasure that we announce that we have launched a new blog on consumer banking compliance issues.  Authored by Bryan Cave Partner, John ReVeal, the ConsumerBankingBlog provides commentary and perspective on new and proposed consumer compliance regulations, regulatory enforcement actions and trends, and the shenanigans of banking regulators.  With John’s unique, unfiltered, opinions, we think you’ll find the ConsumerBankingBlog to be very different from your typical banking compliance site.

John’s goal for the ConsumerBankingBlog is to foster discussion – an open exchange of ideas between readers and John.  Comments are strongly encouraged… subject to the site’s Rules for Comments, of course.  (We’re still lawyers, after all.)

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CFPB Takes Aim at Indirect Auto Lending

State and federal law enforcement agencies are now taking aim, on both the consumer protection and fraudulent loan securitizations fronts, at what they consider to be questionable practices by automobile lenders.

On the consumer protection front, the Consumer Financial Protection Bureau (CFPB) initially dipped a toe into this area through a bulletin in May 2013, claiming that lenders that offer auto loans through dealerships are responsible for unlawful, discriminatory pricing. According to the CFPB, the main culprits are indirect auto lenders that allow the dealer to charge a higher interest rate than the rate the lender offers the dealer, with the result that the lender shares a portion of this markup with the dealer. Under the Dodd Frank Act, such a practice would be illegal if it involved payments to mortgage brokers that sell their customers into higher rate mortgage loans. The auto lending industry, however, was not similarly regulated by Dodd Frank. The CFPB suggests it will seek to attack such practices in the auto loan industry as illegal discrimination if it finds that protected minorities have been charged higher rates as a result.

In September 2014, the CFPB proposed rules that would extend its supervision authority to the larger participants of the nonbank auto finance market. The proposal would allow the CFPB to supervise finance companies with respect to federal consumer financial laws if those companies make, acquire, or refinance 10,000 or more loans or leases in a year. The CFPB estimates 38 auto finance companies, which originate about 90 percent of nonbank auto loans and leases, would be subject to this new jurisdiction.

On the securitization front, subprime auto lender Consumer Portfolio Services disclosed earlier this month that it had received a subpoena from the U.S. Department of Justice (DOJ) requesting documents relating to its auto lending and securitization activities. In December 2014, Ally Financial Inc. had received a similar request from the DOJ, and in October, the Securities and Exchange Commission (SEC) began an investigation into Ally’s lending and securitization practices. GM Financial announced in November that it had received document requests from the SEC relating to its securitization practices. Santander Consumer USA Holdings Inc. announced in August that it also was under DOJ investigation, and in November the New York Department of Consumer Affairs announced that it was looking into Santander’s lending practices.

It appears that these investigations, which include potential criminal enforcement, are looking into whether these lenders are securitizing and packaging loans for sale to investors without ensuring the quality of loans or fully disclosing their risks. If so, this would suggest that they may be engaging in some of the same practices that were alleged against the mortgage industry. Those ultimately led to numerous settlements between prosecutors and many of the large mortgage lenders.

Auto loan quality and risks could be impacted by lending discrimination, failure to comply with consumer protection regulations, or lax underwriting standards. If these risks are not being appropriately disclosed to investors, auto lenders could face the same enforcement liability as were a number of the mortgage lenders.

The risks to the global economy of risky auto loan securitizations may not be as high as they were for mortgage loan securitizations, given that it is easier to repossess a car than it is to foreclose on a mortgage, and given the generally smaller dollar amounts involved. This time, however, it appears that federal regulators will not be waiting until an economic crash before attempting to address the problems the problems they suspect, and costly criminal and civil actions may be more aggressive and occur more quickly.

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Welcome to 2015: Another Big Year for Consumer Financial Services Regulation

As we begin 2015, it is worth noting the various federal regulations that will or might take effect. This article summarizes the key regulations that took effect late in 2014, that will take effect in 2015, and that have at least some potential of taking effect in 2015. We focus here on those regulations directly impacting consumer financial services.

Rules Taking Effect in 2015 (and Late 2014)

Integrated Disclosures under the Real Estate Settlement Procedures Act (Regulation X) and Truth in Lending Act (Regulation Z)

Perhaps the most significant new consumer regulations to take effect in 2015 are the integrated disclosure regulations under the Real Estate Settlement Procedures Act (Regulation X) and Truth in Lending Act (Regulation Z) (the Final Integrated Disclosure Rule). Released on November 20, 2013, by the CFPB, the Final Integrated Disclosure Rule will be effective on August 1, 2015. 78 Fed.Reg. 79730, December 31, 2013. For loan applications received prior to August 1, 2015, the existing Regulation X and Regulation Z rules would apply and, for loan applications received on or after August 1, 2015, the new disclosure requirements would apply.

The Final Integrated Disclosure Rule consolidated the RESPA and TILA initial disclosures, and the RESPA and TILA loan closing disclosures for most closed-end consumer mortgage transactions, resulting in a single Loan Estimate disclosure and a single Closing Disclosure. The new rules do not apply to home equity lines of credit, reverse mortgages, or loans secured by a mobile home or other dwelling that is not attached to real property.

Countless articles and seminars have provided details of the Final Integrated Disclosure Rule, and vendors have stepped into the breach to provide the forms and systems needed to create new disclosures. This article therefore does not address the new Integrated Disclosure Rules in detail. However, a proposal issued on October 10, 2014, (the “October Proposal”) should be noted.

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April 2014 Client Alerts

Practice groups throughout Bryan Cave often prepare alerts on issues of interest to our clients and friends. Listed below are the Client Alerts published in April 2014.  Please click on the title to read the full text of the Alert.

 U.S. Supreme Court Clarifies Test For Standing to Sue Under Federal False Advertising Statute And Rejects Test Used by Several Circuits to Prohibit Suits Brought By Non-Competitor Businessespublished by the Commercial Litigation, Intellectual Property and Trademarks practice groups on April 1, 2014.

The Australian Privacy Principles:  They don’t apply to me, do they?, published by the Data Privacy and Security team, April 1, 2014.

SEC Convenes Cybersecurity Roundtable:  Highlights Importance of Cybersecurity for Public Companies and Financial Market Participants, published by the Corporate Finance and Securities practice group and Data Privacy and Security Team, April 4, 2014.

Now It Gets Personal:  Department of Justice Obtains its First Ever Extradition on Antitrust Charges, published by the Antitrust and Competition White Collar Defense and Investigations practice on April 8, 2014.

SEC Touts Monetary Benefits of Whistleblowing, published by the White Collar Defense and Investigations, Securities Litigation and Enforcement and Labor and Employment practice groups, April 10, 2014. 

Paving The Way for Increased Data Litigation, Court Refuses to Dismiss FTC’s Use of Deception or Unfairness Authority in Data Breach Cases, published by the Data Privacy and Security Team, April 11, 2014.

$5.15B Cleanup:  Anadarko Environmental Settlement Reveals New Government Tactics, published by the White collar Defense and Investigations and Environmental practice groups, April 11, 2014.

Court of Appeals Issues Opinion in Conflict Minerals Case:  Portion of Rule Violates First Amendment, published by the Corporate Finance and Securities practice group, April 14, 2014.

SEC Staff Responds to Court of Appeals Opinion in Conflict Minerals Case:  Game On, published by the Corporate Finance and Securities group, April 30, 2014.

Will This Be Enough?  Competitors Sharing Cyber Threat Information Will Not Result in Federal Antitrust Prosecutions — Sometimes, published by the National Security, Antitrust and Competition practice groups and the Data Privacy and Security Team

We Know Who You Are:  Companies’ Ability To Deal Confidentially With The CPSC is Further Eroded, published by the Consumer Protection and Data Privacy groups, April 18, 2014.

OCIE Issues Risk Alert Regarding Cybersecurity Preparednesspublished by the Broker-Dealer, Litigation, Arbitration and Regulatory,  and Investment Management groups, April 21, 2014.

Missouri Supreme Court Deals With Trade Secret Issues, published by the Labor and Employment practice group, April 22, 2014.

Missouri Supreme Court Introduces Drastic Change to Workers’ Compensation Retaliation Law, published by the Labor and Employment practice group, April 29, 2014.

New York’s Non-Profit Revitalization Act of 2013 and Its Impact on Non-Profit Organizations, published by the Non Profit Organizations practice on April 1, 2014.

U.S. Expands Sanctions Against Russia By Freezing More Assets and Restricting Exports (IRB No. 522), published by the International Trade group, April 29, 2014.

Partnership Tax Changes:  New Salaried Member Rules from 6 April 2014published by the Tax Advice and Controversy practice group (London) on April 3, 2014.

New Consumer Regulations – Implications for Retailers doing Business in the UK, published by the London Retail team, April 17, 2014.

Sunday Trading Laws in the UK — Is The Customer Still King?, published by the London Retail team, April 17, 2014.

UK Deferred Prosecution Agreements — Key Considerations For Companies Deciding Whether To Self-Report, published by the White Collar Defense and Investigations, Global Anti-Corruption/Foreign Corrupt Practices Act Team, April 2, 2014.

New Consumer Protection Law:  A Reinforced Framework for Distribution Agreements, published by the Paris Consumer Protection and Data Privacy group, April 9, 2014.

New Consumer Protection Law:  A Stricter Regime for Payment Terms, published by the Consumer Paris Protection and Data Privacy group, April 9, 2014.

EU & Competition Law Update – April 2014, published by the European Antitrust and Competition group, April 10, 2014.


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