By Kavitha Subramanian, Regulatory Affairs Counsel
Good Morning, Compliance Colleagues! I hope you all had a relaxing Thanksgiving holiday with family and friends! I, for one, am very thankful to have the opportunity to blog for you all on this wonderful Monday morning.
As you may have seen, a few weeks ago, the CFPB issued its Fall 2015 Rulemaking agenda which highlighted its current regulatory focus for the remainder of 2015 into the beginning of 2016. In particular, the CFPB listed the following regulatory issues on its agenda:
- beginning a rulemaking process to address concerns related to the use of arbitration agreements;
- preparing a rule concerning overdraft programs on checking accounts;
- researching a rulemaking on debt-collection activities;
- developing rules to define larger participants in markets for consumer installment loans and vehicle title loans;
- implementing requirements that financial institutions report information about lending to women-owned, minority-owned and small businesses; and
- supporting implementation of the Home Mortgage Disclosure Act and other mortgage rules.
As far as long-term objectives throughout 2016, CFPB noted potential additional rules or amendments to existing rule on consumer credit reporting and student-loan servicing.
One issue notably missing from the CFPB’s agenda is Online Marketplace Lenders. However, based on the Bureau’s recent enforcement actions this issue is still a high on the Bureau’s enforcement agenda entering into 2016.
On November, 17, 2015, the CFPB issued an enforcement action against online lender Integrity Advance LLC for deceiving consumers about the cost of short-term loans. Of note, the CFPB alleges that the online lender violated TILA and the ETF Act, and that Integrity Advance violated the Dodd-Frank Act’s prohibition against unfair, deceptive, or abusive acts or practices (UDAAP).
CFPB alleges that from May 2008 through December 2012, Integrity Advance offered loans with terms that allowed the loan to roll over four times, causing consumers to accrue more costs before the company applied any part of the payments to principal owed. However, CFPB said the costs disclosed by the lender did not address rollovers, just the costs of repaying in full, with the first payment. This practice, according to the CFPB results in the finance charges becoming more than double the amount originally borrowed.
The Online Marketplace industry is still rapidly evolving, and financial regulators are still struggling to define who the actors in this market are. The Treasury Department has referred to it as “the segment of the financial services industry that uses data-driven online platforms and investment capital to lend to consumers and small businesses.” However, many of these lenders are not clearly covered by existing financial regulations. Many of these actors are peer-to-peer lenders that are not traditional financial institutions with regular reporting requirements and regulatory oversight.
While the loan payment practices used by Integrity Advance are clearly not permissible for a bank or credit union making consumer loans, it will be interesting to see how the CFPB will continue to use its broad UDAAP authority to reign in what it views to be abusive practices in the unregulated online lending market. This method of identifying abusive practices through enforcement instead of rulemaking is increasingly a method that we have seen the CFPB use to address concerns in a particular product market where the Bureau’s legal authority for regulatory action are not quite clear.
NAFCU has been actively following this issue and we firmly believe the growth of the online marketplace lenders necessitates regulatory scrutiny. In August, NAFCU wrote the Treasury Department to highlight our concerns that the lack of regulation for online marketplace lenders could result in decreased consumer protections for borrowers who use their services.
NAFCU plans to work with Treasury and the CFPB to aid in their efforts to carefully study and identify the practices that online lenders are engaging in to circumvent consumer protection laws. If your credit union has any experience with or information regarding how online marketplace lenders have impacted lending activity in your communities, please feel free to reach out to me at [email protected] or 703-842-2212.
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