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TOP 10 WAYS FOR PAYDAY LENDERS TO GET IN TROUBLE WITH THE CFPB November 2, 2012Sonoma, California
Copyright 2012 by Ballard Spahr LLP
Alan S. Kaplinsky, Practice LeaderConsumer Financial Services Group
Much ado about nothing?
• No enforcement actions to date against payday lenders
• Exams seem to have gone well
• CFPB has focused on other priorities
• Before wasting your time with this presentation, you need to ask yourself, in the immortal words of Dirty Harry: “Do [you] feel lucky? Well, do ya punk?”
• For those of you who are not particularly lucky, here are ten behaviors that can get you into trouble....
10. Ignore the lawyers!
• We start here since, after all, this is a meeting of the Payday Loan Bar Association. This seems like the perfect way to butter up our audience.
• Nevertheless, we firmly believe that a corporate culture that lets business and marketing personnel run roughshod over the lawyers is a recipe for disaster.
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9. If a practice is not expressly prohibited by one of the enumerated consumer financial services laws, go ahead and do it.
• Two variants: (1) “Show me where it says we can’t do that!” (2) “Our competitors do it!”
• Dodd-Frank’s UDAAP provisions prohibit unfair, deceptive and abusive acts and practices
• Clarification through notice and comment rulemaking or supervision and enforcement?
8. Use inadequate compliance management and complaint handling systems.
• One of the CFPB's major focus areas is an entity's compliance management system.
• Compliance management is the subject of the CFPB’s initial information requests in both examinations and CIDs, which means the quality of that system forms part of the CFPB’s "first impression" of an entity.
• Complaint handling (including complaints received directly from consumers and complaints received from the BBB or CFPB and/or other government agencies), including the analysis and reporting of complaints to upper level management, is one of the key components of an effective compliance management system.
• Having a sound, well-documented system will assist with the CFPB and will help detect problems before they escalate to litigation or enforcement actions.
7. Ignore limitations on ACH payments.
• Reg E, of course, prohibits lenders from conditioning credit on the borrower’s repayment through preauthorized electronic funds transfers.
• It is unclear what this means but the courts that have looked at the issue so far have interpreted this prohibition against lenders. - Early case applied to a single-payment loan on the theory that it renewed
many times.
- Later Illinois case held that providing another payment option did not suffice.
• Resubmitting ACHs more than twice also entails risk.
6. Engage in or support choice-of-law lending.
• This should largely be a state-law issue.
• However, the CFPB can share information with state enforcement authorities
• Also, the CFPB can assert “piggy-back” claims that systemic violations of state law also violate federal UDAAP law.
• Just as choice of law lending is dangerous, so too is selling leads to choice of law lenders.
5. Don’t worry about fair lending requirements.
• Some underwriting criteria can create disparate impacts on prohibited bases (or worse). - Award fewer points for non-employment income (or monthly-pay
borrowers).
- Fail to gross up tax-exempt income.
- Award fewer points to elderly applicants.
- For title lenders, require all persons on the vehicle title to sign the Note as borrowers.
• Adverse action notice requirements are universally ignored when creditors bid on leads. This gives the CFPB a good hook if it wants to pressure a lender. Full compliance may be impossible but it may be possible to substantially comply.
4. Fail to control collection practices.
• Employees who abuse or harass delinquent customers are an accident waiting to happen.
• Employee incentives for bad behavior and/or inadequate monitoring and control can encourage or allow abuse.
• Inadequate coordination between field and home office collectors can result in excessive contacts with customers.
3. Let management delegate compliance to others.
• The Bureau will expect -- and look for -- involvement of the Board of Directors and top-level management in compliance issues.
• The CFPB has even commented that Board members must receive training on compliance issues.
• Delegating compliance to lower levels in the organization creates two risks: (1) risk to the organization; and (2) risk to Board members and executives who are subject to the CFPB's enforcement authority as "related persons."
2. Fail to control collection personnel or properly secure consumer information.
• Employees who abuse or harass delinquent customers are an accident waiting to happen. Employee incentives for bad behavior and/or inadequate monitoring and control can encourage or allow abuse. Inadequate coordination between field and home office collectors can result in excessive contacts with customers.
• The FTC has pursued numerous companies who allowed hackers to access sensitive customer data. And dumpster diving has created huge problems in the past for the industry and continues to be a concern.
1. Stub your toes on TILA.
• Some lenders engage in practices that got Scott Tucker into trouble—disclosing loans as single-payment loans for purposes of TILA when the note provides for automatic renewals. The resulting understatement of finance charge likely violates Regulation Z and triggers potential TILA restitution and/or statutory penalties under Dodd-Frank.
• It is common practice to quote fees A $X per $100. This violates TILA, which requires verbal rate quotes to be expressed on the basis of the APR. The practice is easy for the CFPB to mystery shop.
