Hackett Hosie Sims Dana Evans - HudCo Conference 2015 PPT

Twelfth Annual Consumer Financial Services Conference

June 15-16, 2015

FEDERAL REGULATORY ENCROACHMENT - SMALL DOLLAR LENDING AND MILITARY LENDING 2015

Lauren Dana-Evans, Richard P. Hackett, H. Blake Sims & Justin B. Hosie

OVERVIEW

• Topic and Panelist Introduction

• Military Loan Act

• Small Dollar Rulemaking Process

• Rulemaking Scope

• Short Term Credit

• Longer Term Credit

• Open End Credit

• Ambiguities

• Winners and Losers

• Questions

MILITARY LOAN ACT – CURRENT SCOPE

Narrow definition of credit

• Closed-end payday loans for no more

than $2,000 and with a term of 91 days

or fewer;

• Closed-end auto title loans with a term

of 181 days or fewer; and

• Closed-end tax refund anticipation loans

MILITARY LOAN ACT – CURRENT SCOPE

Protections provided

• Interest rate cap of 36% (the MAPR)

• Prohibition on requiring servicemembers to submit to arbitration

• Prohibition against secured credit and access to bank accounts

• Restrictions on refinancing covered loans

• Prohibition on requiring servicemembers to waive their right to legal

recourse

• Prohibition on requiring allotments to repay obligation

• Lenders cannot require “unreasonable notice as a condition for legal

action”

Requirement for certain oral and written disclosures

MILITARY LOAN ACT – PROPOSED EXPANSION

Expanded definition would include nearly all credit transactions subject to Regulation Z

• Credit cards• Student loans• Overdraft lines of credit• Personal installment loans• Personal lines of credit• Loans to refinance cars and other personal property (i.e., for

lower interest rate)• Mortgages for real property not yet including a dwelling• Mortgages secured by residential property not owned by

servicemember or servicemember’s dependent


Limited Exceptions• Residential mortgages secured by the covered dwelling (including

home equity loans and lines of credit)• Credit transactions intended to finance the purchase of a motor

vehicle secured by the purchased vehicle• Credit transactions intended to finance personal property when

secured by the purchased property

Identification of covered borrowers• Proposed MLA Database “safe harbor”• Such queries considered conclusive proof of military status unless

creditor has actual knowledge of active duty service


What does the MAPR Cap of 36% include?

• Finance charges

• Any fees to participate in a plan such as annual credit card

fees

• Any application fees

• Any fees from credit-related ancillary products sold as part

of the credit transaction

• MAPR calculation for open-end credit

• Credit Card exclusions from MAPR

SMALL DOLLAR SBREFA: RULEMAKING PROCESS

What is SBREFA?• “Speed bump” applicable to OSHA,

EPA and CFPB 5 USC 609(d)• Triggered if significant economic impact on

a substantial number of small entities,• Requires pre-rule input from small

entity representatives to a Review Panel.

SMALL DOLLAR SBREFA: RULEMAKING PROCESS

What has happened in this process so far?• March: Publication of 57 page “outline” of proposal.

• Selection of SERS from payday, installment, auto title, bank and CU markets

• April 29: “Convened” Panel for hearing with SERs.

• What can we expect next?

• June 29: “Report” of SER comments and discussion of number of affected businesses, scope of compliance impact and alternatives with lesser impact on small businesses.

o While due in 60 days, not published until NPR

• Prognostication:-Q4 2015: Notice of Proposed Rule with 60 day comment period

-Q3-4 2016: Final Rule-Q2-3 2017: Mandatory Compliance deadline.

RULEMAKING SCOPEWhat is explicitly covered?• Payday loans• Deposit advance products• Vehicle title loans• Installment loans with an MAPR above 36%

and either an account access device (check(s), ACH, etc.) or vehicle/title as security

• Open-end lines of credit

RULEMAKING SCOPE

What is explicitly excluded?• Nonrecourse true pawn (take possession, not just

title)• Credit card accounts• Real estate secured loans• Student loans• Deposit account overdraft

RULEMAKING SCOPEWhat wasn’t even considered or addressed?• Business loans • Rule will cover loans for personal, family, or

household purposes)• SBREFA Hearing: “Not business loans”

• RTO• Retail installment sales• Business loans• Letters of credit• Other ideas

RULEMAKING – SHORT TERM CREDIT

Short-Term

• 45 days or less

• Two closed end short term models:

• Ability to Repay Model

OR

• Alternative Model


Short-Term Ability to Repay

• Verify income and determine ability to

cover payment(s) after paying verified major

financial obligations and living expenses for

loan plus 60 days = Only loan the “residual”

• Consumer report to verify

obligations/history and to report payments



• Consider borrowing history within the

previous 18 months

• Reborrowing = “Unaffordable” – Re-

borrowing before a loan payment is due or

shortly after prior pay-off indicates prior

loan was unaffordable



• Presumed inability to repay a 2nd or 3rd

sequential balloon payment loan, unless

verified financial improvement

• 60 day cool-off after third loan in a

sequence

• New collection limitations


Short-Term Alternative

• Verify income

• Consumer report to verify history and

report payments

• No outstanding covered loans with any

lender

• 3 loans total in a rolling 60-day sequence



• 60-day cool off. After completing a 3-loan

sequence within the past 60 days, no

additional credit

• In a rolling 12-month period, limited to 6 short

term loans and indebtedness not more than 90

days

• $500 maximum amount financed



• Term of 45 days or less

• Only one finance charge per period

• No vehicles as collateral

• Off-Ramp: Amortize principal by thirds over 3

loans or provide extended payment plan (4

payments)

• New collection limitations

RULEMAKING – LONG-TERM CREDITAbility to Repay

• Very similar to short term ATR, but no focus on 60 days after last payment

• No serial use limitation, but refinances subject to “improved” ATR if delinquent/defaulted loans or “skip pay” refinances.

RULEMAKING – LONG-TERM CREDITAlternative 1 – NCUA

• Highly structured: -$200-$1000 - Max 6 months

- 28% APR + $20 app fee - Fully amortizing with 2+

payments

• And Screened: - Verify borrowing history + report payments - Max 2 loans any source in rolling

6 months - All other NCUA requirements

RULEMAKING – LONG-TERM CREDITAlternative 2 – Pew/Colorado

• Highly Structured: - Payment $max is 5% of income - Max 6 month - No prepayment fees - Fully amortizing with

2+ payments

• And Screened: - Verify income and debt history + report - No covered loan outstanding - No defaults on covered loan

in 12 months - Max 2 loans in 12 month

rolling period

OPEN-END CREDIT

Short Term:• Assume consumer fully uses the credit upon

origination • Assume consumer makes only the minimum

required payments until the end of the contract period, at which point lender assumes consumer makes a single payment for the remaining balance and outstanding charges

• Other short-term protections (ATR, Alternatives, or Undetermined)

• Collection protections

OPEN-END CREDIT

Long-Term• Assume consumer fully uses the credit upon

origination • Assume consumer makes only minimum

payments until the end of the contract period, at which point the consumer must make a single payment for the remaining balance

• Other long-term protections (ATR, Alternatives, or Undetermined)

• Collection protections

SBREFA OUTLINE ISSUESAccess to bank accounts

• ACH, RCCs, post dated checks, debit cards are obvious

• Timing limitation on “convenience” ACH - after 1st

payment

• No “Incentives”o Rate Discounto Electronic funding for Web loans

• Only covers longer term loans if auto collateral or access

to bank account

SBREFA OUTLINE ISSUES

• Effect limited except for refis

• Unclear how to comply in refi “improved ATR” rule with third

party loans.

How know if there is a third party balloon?

How know what prior ATR was????

• Bureau concedes refi limits nonsensical in some situations

(SBREFA Panel)

SBREFA OUTLINE ISSUES• Bureau promises larger participant rule for installment lenders

• Bureau promises registration rule for all covered lenders

• One open ENF action we know of in installment

• As noted, open end unclear

• For example, unclear how multiple loan rules apply to OE lines. Is

each advance a “covered short term loan?”

Additional ambiguities …

•Bureau says 56% volume reduction for payday; Hackett says 70%•Bureau clearly pushing lenders toward installment, but only 13/33payday states permit at high rates

•Court will ultimately review this new application of “unfair” and “abusive”

IMPACT ON BUSINESS: LOSERS AND WORSE LOSERS

•State licensed lenders and the tribal model

•Installment lenders

•Pawnbrokers

•Banks and overdraft

•Impact on consumers: negative credit reporting, overdraft

fees…

•Impact on marketplace: Commercial landlords and Colorado

•impact, 75% reduction in 4 billion dollars in emergency credit

NOTEWORTHY POINTS

Provide any important points you would like the audience to take away from your presentation.

Questions?

CONTACT INFORMATIONRichard P. HackettHudson Cook, LLPPortland, ME (207) 541-9556 [email protected]

Lauren R. Dana-EvansU.S. BancorpWashington, DC (202) 442-2707 [email protected]

Justin B. HosieHudson Cook, LLPChattanooga, TN (423) 490-7564 [email protected]

H. Blake SimsHudson Cook, LLPChattanooga, TN (423) 490-7563 [email protected]

Documents

Hackett Hosie Sims Dana Evans - HudCo Conference 2015 PPT