NAFCU Compliance Blog

ICYMI: An Overview of the CFPB's Payday Lending Rule

Written by: André B. Cotten, Regulatory Compliance Counsel

Happy Friday, Compliance Friends! Last fall, one of my colleagues posted a blog about the PAL exemption under the CFPB's Payday Lending Rule. To refresh your memory, the CFPB issued a final rule in early October 2017. This rule is intended to put a stop to what the Bureau coined as,  "payday debt traps", but as written does, impact some credit unions' products. Today's blog will provide a high level overview of what's included in the CFPB's Payday Lending Rule.

Scope of the Rule

Payday loans are typically for small-dollar amounts and are due in full by the borrower's next paycheck, usually two or four weeks. From some providers, they are expensive, with annual percentage rates of over 300 percent or even higher. As a condition on the loan, sometimes the borrower writes a post-dated check for the full balance, including fees, or allows the lender to electronically debit funds from their checking account.

With that being said, the Payday Lending Rule applies to two types of loans. First, it applies to short-term loans that have terms of 45 days or less, including typical 14-day and 30-day payday loans, as well as short-term vehicle title loans that are usually made for 30-day terms, and longer-term balloon-payment loans. The rule also has underwriting requirements for these loans.

Second, certain parts of the rule apply to longer-term loans with terms of more than 45 days that have (a) a cost of credit that exceeds 36 percent per annum; and (b) a form of "leveraged payment mechanism" that gives the credit union a right to withdraw payments from the member's account. The payments part of the rule applies to both categories of loans. Note, at this time, the CFPB is not finalizing the ability-to-repay portions of the rule as to covered longer-term loans other than those with balloon payments.

The rule excludes or exempts several types of member credit, including: (1) loans extended solely to finance the purchase of a car or other member 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) non-recourse pawn loans; (6) overdraft services and lines of credit; (7) wage advance programs; (8) no-cost advances; (9) alternative loans (i.e. meet the requirements of NCUA's PAL program); and accommodation loans.

Ability-to-Repay Requirements and Alternative Requirements for Covered Short-Term Loans

The CFPB has indicated that it is concerned about payday loans being heavily marketed to financially vulnerable members. Faced with other challenging financial circumstances, these borrowers sometimes end up in a revolving cycle of debt.

Thus, the CFPB included ability to repay requirements in the Payday Lending Rule. The rule will require credit unions to determine that a member will have the ability to repay the loans according to the terms of the covered short-term or longer-term balloon-payment loans.

The first set of requirements addresses the underwriting of these loans. A credit union, before making a covered short-term or longer-term balloon-payment loan, must make a reasonable determination that the member would be able to make the payments on the loan and be able to meet the member's basic living expenses and other major financial obligations without needing to re-borrow over the following 30 days. The rule specifically lists the following requirements:

• Verify the member's net monthly income using a reliable record of income payment;
• Verify the member's monthly debt obligations using a national consumer report;
• Verify the member's monthly housing costs using a national consumer report if possible, or otherwise rely on the member's written statement of monthly housing expenses;
• Forecast a reasonable amount of basic living expenses, other than debt obligations an housing costs; and
• Determine the member's ability to repay the loan based on the credit union's projections of the member's residual income or debt-to-income ratio.

Furthermore, a credit union is prohibited from making a covered short-term loan to a member who has already taken out three covered short-term or longer-term balloon-payment loans within 30 days of each other, for 30 days after the third loan is no longer outstanding.

Second, and in the alternative, credit unions are allowed to make a covered short-term loan without meeting all the specific underwriting criteria set out above, as long as the loan satisfies certain prescribed terms, the member meets specified borrowing history conditions, and the required disclosures are provided to the member. Among other conditions, under this alternative approach, credit unions are allowed to make up to three covered short-term loans in short succession, provided that 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, i.e. below $350, and the third loan has a principal amount at least two-thirds smaller than the principal amount on the first loan, i.e. below $167.

In addition, the rule does not permit a credit union to make a covered short-term loan under the alternative requirements if it would result in the member 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. The rule also does not permit credit unions to take vehicle security in connection with loans that are made according to this alternative approach.

Payment Practice Rules

The cycle of taking on new debt to pay back old debt can turn a single, unaffordable loan into a long-term revolving debt cycle. The consequences of this ongoing debt can be severe. For example, a credit union's repeated attempts to debit payments can add significant penalties, as overdue members get hit with insufficient funds fees and may even have their checking account closed.

As a result, the Payday Lending Rule is also intended to prevent credit unions from making multiple attempts to withdraw payment from member's accounts in connection with a short-term, longer-term balloon-payment, or high-cost longer-term loan. The rule prohibits additional attempts after the credit union's second consecutive attempt to withdraw payments from the accounts from which the prior attempts were made have failed due to a lack of sufficient funds, unless the credit union obtains the members' new and specific authorization to make further withdrawals from the accounts.

This prohibition on further withdrawal attempts applies whether the two failed attempts are initiated through a single payment channel or different channels, such as the automated clearinghouse system and the check network. The rule requires that credit unions must provide notice to members when the prohibition has been triggered and follow certain procedures in obtaining new authorizations.

In addition to the requirements related to the prohibition on further payment withdrawal attempts, a credit union is required to provide a written notice, depending on means of delivery, a certain number of days before its first attempt to withdraw payment or before an attempt to withdraw a nonconforming payment. The notice must contain key information about the upcoming payment attempt, and if applicable, alert the member to unusual payment attempts. A credit union is permitted to provide electronic notices as long as the member consents to electronic communications requirements.

Update on the Payday Lending Rule

Recently, the CFPB issued a press release that stated the Bureau intends to engage in a rulemaking process so that the CFPB may reconsider the Payday Rule. The Bureau also indicated that it may waive the April 16, 2018 deadline for preliminary approval to become a registered information system ("RIS") under the Payday Rule. NAFCU will continue to closely monitor the CFPB as its new leadership sets its pace and agenda.

The CFPB's Final Payday Rule: The PAL Exemption

Written by Jennifer Aguilar, Regulatory Compliance Counsel

On October 5, the CFPB announced it had finalized its rule on payday loans. The final rule seeks to provide "common-sense protections" for payday loans, auto title loans, deposit advance products and certain other longer term loans with balloon payments. A key protection under the new rule is that lenders will be required to conduct an ability-to-repay analysis to determine whether the borrower can repay the full amount of the loan without re-borrowing. The final rule also imposes requirements concerning withdrawal practices, disclosures and recordkeeping. The final rule covers a number of different types of loans, but the rule also provides a number of exclusions and exemptions, one of which is of particular importance for credit unions – the PAL exemption.

New section 1041.3(e) exempts "alternative loans" from the payday rule. In the preamble, the CFPB explains that this exemption applies to any loan that meets the conditions outlined in the final rule so that any lender, not just federal credit unions, may qualify for this exemption. The CFPB found that this was the best approach to ensure the rules are applied consistently to all lenders. In order to qualify as an "alternative loan," the loan must meet all of the following conditions:

1. Loan terms: the loan must not be structured as open-end credit; have a term between one and six months; have a principal between $200 - $1,000; be repayable in two or more equal payments due in equal intervals; completely amortize during the term; and no charges may be imposed other than the rate and application fees permissible under 12 C.F.R. 701.21(c)(7)(iii).
2. Borrowing history: the lender must determine that, if the lender made this loan, the borrower would not be indebted on more than three alternative loans within a 180-day period; the lender may make only one alternative loan at a time to a consumer.
3. Income documentation: the lender must have and must comply with policies and procedures for documenting proof of recurring income.

Any loan that meets all these conditions is an "alternative loan" and is exempt from the payday rule. Section 1041.3(e) goes on to provide a safe harbor for federal credit unions. The safe harbor states that any loan made in compliance with NCUA's PAL program is an "alternative loan" for purposes of the payday rule. This means that a federal credit union does not have to separately meet the conditions above for its PALs in order for that loan to be exempt from the payday rule – as long as it’s a PAL, it’s an alternative loan.

So, now that we know all PALs are alternative loans, the next question is . . . What’s a PAL? Section 707.21(c)(7)(iii) lays out the specific requirements that must be met in order for a loan to qualify as a PAL. According to the rule, all the following conditions must be met:

1. The loan must be closed end, have a principal balance between $200 - $1,000, have a maturity between one – six months, and be fully amortizing;
2. The FCU must not make more than three PALs in any rolling six-month period to any one borrower, make more than one PAL at a time to a borrower, nor roll over any PAL;
3. The borrower must be a member of the FCU for at least one month;
4. Any application fee must be charged to all members, must reflect the actual cost of processing the application, and must not exceed $20; and
5. The FCU has a written lending policy that imposes an aggregate dollar limit for PALs of a maximum of 20% of net worth and implements underwriting guidelines to minimize the risks associated with PALs.

In addition to meeting the payday rule's safe harbor for alternative loans, PALs also qualify for a higher interest rate. The rule permits credit union to charge an interest rate of 1000 basis points above the maximum interest rate set by NCUA.

CFPB Kicks Off Payday Lending Rulemaking Process

Written by Brandy Bruyere, Regulatory Compliance Counsel

Happy Monday, today’s blog is a high-level overview of recent developments in the area of payday lending. On March 26^th, 2015 the Consumer Financial Protection Bureau (CFPB) formally announced that it is considering rules that would impact payday loans and certain vehicle title loans. Note—this was not a proposed rule, but rather an indication of where the CFPB may go with future rulemaking.

Generally, the bureau is looking at regulating two kinds of “covered loans”—those with a maturity of 45 days or less as well as longer-term loans that have an “all-in” APR that exceeds 36%. These longer-term loans would be “covered loans” if the lender is either repaid via some kind of authorization to access the borrower’s deposit accounts, or the loan is structured as a vehicle title loan.

For both types of covered loans, the CFPB is considering requiring lenders to follow one of two basic sets of rules. First, “debt trap prevention requirements” that would focus on things like determining the borrower’s ability to repay the loan. Alternatively, the bureau is considering proposals focused on “debt trap protection requirements” which would aim to prevent borrowers from ending up in an “unaffordable, long-term cycle of debt” by limiting rollovers during set timeframes (i.e. six or twelve months) and structuring loans so they amortize. The CFPB is also looking at including 60 day “cooling off” periods between loans. These requirements differ for short term versus longer-term loans, for more details on the specifics, check out this CFPB press release and fact sheet.

So the question is how will this process potentially impact credit unions?

NCUA “PAL” Program

NCUA has its “Payday Alterative Loans” or “PAL loans” (formerly called “short term small dollar amount” or “STS” loans). Under section 701.21(c)(7)(iii), federal credit unions [FCUs] may offer loans with interest rates 10% above NCUA’s usury cap, meaning up to 28%, for loans of at least $200 but no more than $1000 so long as the loan meets several requirements:

• The loan term is at least one month but no more than six months;
• The FCU makes no more than three PAL loans in any rolling six month period to a member;
• The FCU only makes one PAL loan to a member at a time;
• The loan is fully amortized;
• The member has been a member for a least one month;
• Applicants are charged an application fee reflecting processing costs at a maximum of $20; and
• The credit union develops underwriting guidelines to minimize risk and limit this kind of loan to no more than 20% of the credit union’s net worth.

Thus, some PAL loans could fall under the proposals the CFPB is considering. The bureau actually discussed impact on FCUs specifically in its outline.

Impact on Federal Credit Unions According to the CFPB

As one possible option for regulating loans with terms above 45 days, the CFPB indicated that loans may be acceptable if they somewhat follow NCUA’s PAL program. However, unlike the other covered loans, PAL loans may be limited to one rollover instead of two. Here is an excerpt from the outline on p. 48:

“Specific impacts on small entities making longer-term loans

[…]

The proposals under consideration would impose several requirements on [FCUs] that currently offer [PALs]. [FCUs] would be required to access commercially available reporting systems and report covered loans to those systems…Lenders would also not be able to make these loans to consumers who have a covered loan outstanding. The Bureau seeks information on how often this would limit [FCUs’] ability to make these loans. The NCUA [PAL] program allows [FCUs] to make up to three loans in a six-month period and allows loans that are at least 30 days in length. The proposals under consideration would limit lenders to two loans in a six-month period and require that loans be at least 45 days in length…The restriction on the number of loans in a six-month period could have an impact on the revenue of [FCUs] that make these loans; the Bureau believes these impacts would not be substantial.” (Emphasis added).

This seems to indicate that FCUs would not be able to utilize the “short term loan” options for loans with terms under 45 days, but rather the CFPB would seek changes to the existing PAL program. It is not clear why PAL loans, with their lower 28% usury cap, would be targeted for having one rollover less than what the CFPB may permit for other loans, but frankly this outline is not the model of clarity.

In addition to regulating the loan products themselves, the CFPB is also considering regulations relating to certain automatic payment features, credit unions would be required to provide three business days’ notice before drafting a payment from a member’s account or prepaid product.  NAFCU will monitor the CFPB’s activity in this area as the bureau moves forward in its rulemaking process.

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Palate Cleanser. This was rather long for a Monday, so here’s a photo of a very little boy and his very giant dog!

 

CFPB Updates Regulatory Agenda, Compliance Officers Get A Preview Of What Is To Come

Written by Eliott C. Ponte, Law Clerk

I believe the job of a compliance officer is a difficult job: compliance officers must have a working understanding of the vast regulatory landscape, and in addition, be aware of how the various regulators plan to shape the regulatory landscape in the near future.  To make your difficult jobs easier, I have blogged about five areas that the CFPB is planning to change in the near future after reading the CFPB’s recent blog post that highlights its new regulatory agenda.  To save you time, I have copied the relevant portion of the CFPB’s blog in the post below, and put my comments following their post. 

 

Payday Loans and Overdrafts

The CFPB stated the following on its blog:

“We’re researching and considering whether rulemaking is warranted in the areas of payday and deposit advance products, as well as consumer overdraft products. We held a field hearing in March 2014 in Nashville, Tennessee, and  also released a report that analyzed payday lending and found that four out of five payday loans are rolled over or renewed within 14 days. We’re also expecting to build on an Advance Notice of Proposed Rulemaking that we published in 2012 concerning prepaid cards by issuing a proposed rule to strengthen federal consumer protections for these products. We’ve been testing potential disclosures that we may propose to be used on the packaging of prepaid cards.

Payday regulations is not surprising because Director Cordray foreshadowed regulations during his remarks that accompanied a report on payday loans on March 25^th of this year.  The only notable difference is that the CFPB is now “officially” considering whether regulations governing payday loans are possible under its legal authority.  Unfortunately, it is not clear what the CFPB will do at the moment, but Payday regulations might include disclosures to payday borrowers, and/or lending practices in connection with payday loans.

In regards to overdrafts, the CFPB is also considering regulating (1) how consumers opt in to overdraft coverage for ATM and one-time debit card transactions, (2) overdraft coverage limits, (3) transaction posting order, (4) overdraft and insufficient funds fee structure, and (5) involuntary account closures.  This comes after a June 2013 CFPB whitepaper that summarized initial findings form an analysis of overdraft policies from supervisory data from nine large banks.  Unfortunately, it is not clear if the CFPB is interested in prohibiting specific acts or practices, or will be issuing sweeping regulation that affects everyone in the industry.

 

Mortgages

The CFPB stated the following on its blog:

“Our agenda includes a number of rulemakings mandated by the Dodd-Frank Act.  For example, we recently convened a small business review (SBREFA) panel to discuss potential amendments to the Home Mortgage Disclosure Act, some of which were mandated by Section 1094 of the Dodd-Frank Act.  We’re also focusing intensely on supporting the implementation process for our recent rulemaking to implement a Dodd-Frank Act directive to consolidate and streamline federal mortgage disclosures required under the Truth in Lending Act and Real Estate Settlement Procedures Act.  We’re also continuing work with stakeholders to address questions that have arisen with regard to the 2013 mortgage rules, including issuing additional clarifications and amendments as warranted.”

In its blog, the CFPB forgot to include the specific information required by Section 1094 of Dodd-Frank, which expands the scope of information required to be complied by the Home Mortgage Disclosure Act (HMDA).  The CFPB claims Dodd-Frank act requires the following additional information be collected:

1. the ages of loan applicants and mortgagors,
2. information relating to the points and fees payable at origination,
3. the difference between the annual percentage rate associated with the loan and benchmark rates for all loans,
4. the term of any prepayment penalty,
5. the value of the property to be pledged as collateral,
6. the term of the loan and of any introductory interest rate for the loan,
7. the presence of contract terms allowing non-amortizing payments,
8. the application channel, and
9. the credit scores of applicants and mortgagors.

In addition to these additional HMDA requirements, the CFPB is considering adding three additional information categories: (1) identifiers for loans, (2) parcels, and (3) loan originators.  As of now, it is not certain the CFPB will include these three additional reporting requirements in its notice of proposed rulemaking, but it seems more than likely it will.

 

Defining Larger Participants

The CFPB stated the following on its blog:

“We’re also continuing rulemakings to implement our supervisory program for certain nonbank entities by defining “larger participants” in various markets for consumer financial products and services. For example, we’re developing a proposal to identify “larger participants” in the market for auto lending. We’ve previously defined larger participants in the consumer debt collection, credit reporting, and student loan servicing markets and are now in the process of finalizing a rule defining larger participants in the international money transfer market.”

The CFPB is developing a proposal that would identify a market for auto lending and define "larger participants" of that market that would be subject to the CFPB's supervisory authority.  In doing so, the CFPB will seek to amend the regulation defining larger participants of certain consumer financial product and service markets by adding a new section to define larger participants of a market for auto lending.

 

Debt Collection

The CFPB stated the following on its blog:

“We’ve been doing research and outreach to assess issues in various other markets for consumer financial products and services over many months. In November 2013, we issued an advance notice of proposed rulemaking seeking comment, data, and information from the public about debt collection, which is the single biggest source of complaints to the federal government. We received more than 23,000 comments in response to the notice, and in our 2014 annual report on Fair Debt Collection Practices Act, reported that we received more than 30,000 consumer complaints in this area.”

According to the CFPB, the Federal government has received more consumer complaints about debt collectors than about any other industry.  The CFPB has already issued an advance notice of public rule making last year on this topic, and is now considering whether rules governing the collection of debts are warranted under the Fair Debt Collection Practices Act or other CFPB authorities. 

 

CFPB Consumer Response Annual Report, Forum on Mortgage Closing Process, and the Blood Moons

Written by Eliott C. Ponte, Regulatory Law Clerk

CFPB Consumer Response Annual Report

The CFPB recently released its Consumer Response Annual Report.  The report can be found here, which is a summary and highlight of their Consumer Complaint Database for 2013.

The CFPB began to accept complaints on July 21, 2011.  As of March 1st, the CFPB has handled approximately 309, 700 consumer complaints.  Since its inception, consumer complaint volume has steadily increased from about 91,000 complaints in 2013 to 164,000 complaints in 2013. Approximately 54% of all consumer complaints were submitted through the CFPB’s website and 11% via telephone calls. Referrals accounted for 24% of all complaints received. The rest were submitted by mail, email, and fax.  Of the 164,000 complaints, 37% were related to mortgages, 19% were related to debt collection, and 15% were related to credit reporting.

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Forum on Mortgage Closing Process

On Wednesday, the CFPB announced it would host a forum on mortgage closing process in Washington D.C. on Wednesday, April 23 at 1:30 P.M.  The forum will take place at CFPB HQ.  To RSVP, email [email protected] with your full name and organizational affiliation.  People unable to make the trip to Washington can watch a livestream through the CFPB’s blog. 

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The Blood Moon Is Upon Us, Will The CFPB Issue Payday Lending Rules?

Seriously, stargazers and lunar fans will witness the first of four blood moons during the evening hours of April 14^th and 15^th.  While this has little to do with the CFPB issuing regulations, I suspect that the CFPB will make an announcement regarding payday lending in the near future.  The CFPB has not officially said that it is working on payday rules, but Director Richard Cordray came close to acknowledging rules were in the works in his remarks that accompanied a report on payday loans on March 25^th of this year. 

“As we look ahead to our next steps, I will frankly say that we are now in the late stages of our considerations about how we can formulate new rules to bring needed reforms to this market. We continue to grapple with all aspects of these issues. We have always acknowledged that the American consumer has shown a clear and steady demand for small-dollar credit products, which can be helpful for the consumers who use them on an occasional basis and can manage to repay them without becoming mired in a prolonged and costly struggle. So we intend to make sure that consumers who can afford to take out small-dollar loans can get the credit they need without jeopardizing or undermining their financial futures. But we also need to recognize that loan products which routinely lead consumers into debt traps should have no place in their lives.”

Perhaps we will have to wait until the last blood moon before learning about the CFPB’s plans!

NCUA Releases Taxi Medallion Supervisory Letter; NCUA’s “Small Dollar Lending” Webinar; Free Kick; Helpful Webcast

Written by Ricardo Piñeres, Regulatory Compliance Counsel

Last week, the NCUA released Supervisory Letter 14 – 04, Taxi Medallion Lending.  The letter is intended to give NCUA examiners further guidance on how the agency wants them to review taxi medallion loans inside of a credit union’s member business lending portfolio.  Furthermore, the letter also gives credit unions insight into how the agency views the unique risks associated with taxi medallion lending.  The NCUA has released this letter in light of the recent increases to medallion values in several major metropolitan areas, thus leading to increases in medallion lending and the potential risks that go with such lending.

The Supervisory Letter is divided into three main sections: background information on medallions; exam procedures; and additional guidance/resources available to both credit unions and examiners.  The background section is particularly helpful in understanding the NCUA’s view with regards to medallion lending through its discussion of how the medallion business model works and what risks are associated with the medallion’s valuation.  While the bulk of this information is geared towards examiners that may have not encountered much taxi medallion lending during previous examinations, the information is particularly helpful for credit unions to be able to anticipate the questions/concerns from examiners with regards to this unique form of member business lending.

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Next week, on Wednesday, April 16, the NCUA will be hosting a free webinar titled Small Dollar Lending.  The webinar, hosted by Tom Penna, Jr., Economic Development Specialist with NCUA’s Office of Small Credit Union Initiatives, will cover the benefits and requirements of NCUA’s Alternative Payday Loan.

Penna will be joined by Lucinda Johnson, Program Officer in NCUA’s Office of Examination and Insurance, and representatives from two credit unions active in small-dollar lending.  Together, they will discuss how various credit unions have created short-term lending programs that work for their members and factors to consider before starting such a program, including:

• The benefits short-term, small-dollar loans can bring to a credit union’s portfolio mix;
• Regulatory concerns governing this type of product offering; and
• The costs associated with developing or initiating short-term loans.

The webinar will be held at 2:00 pm EDT.  Interested participants must register online in order to participate in the webinar.

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Free Kick.  The Premier League has but one month before it closes its 2013-2014 season.  It has been an exciting season so far that has produced a tight race for the championship, and an equally exciting race for survival at the bottom of the table.  Here are my brief thoughts on how this season will close out.

Bottom Three: While there will inevitably be a surprise or two, I think that Cardiff and Norwich are as good as gone from the Premier League.  I think that Fulham will join them in the Championship, as well.

The Fight for Fourth: A few weeks ago, I said that I thought the top-four had been settled.  Well, sadly, Arsenal has fallen apart these last couple of weeks and they are now in a true dogfight for the final Champions League spot.  While the Gunners have been unable to find any quality, Everton is on a true roll and currently control their destiny by being one point back with one game in hand.  That said, I just have a hard time envisioning Everton maintaining such a strong form over their final six games.  Their run in is just too hard for them to snatch fourth from Arsenal.  I see them dropping at least eight points in three of those matches – at home in the games against Man City and Man U, and away to Southampton.  Arsenal’s final five games are at home to West Ham, Newcastle, and West Brom, and away to Hull and Norwich.  I see them, at most, dropping 5 points over that stretch, and hanging on to fourth.

Top Three: With Liverpool and Man City facing off this coming Sunday, I suspect that the championship race will be defined by what plays out at Anfield that day.  There is just something special happening in that Liverpool clubhouse right now, and I have a feeling that they will find a way to get a positive result on Sunday.  That will put them in the driver’s seat for the last few games, but I don’t think it will be enough.  I see this as another Man City title year with Liverpool a hair behind them in second and Chelsea finishing several points behind in third.

All that said, the Premier League has shown its unpredictability over the last few years, so it would not surprise me at all if the season’s final month takes a few more crazy turns that lead to a completely unforeseen outcome.  No matter what happens, I will just sit back and enjoy the football!

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Webcast.  NCUA & CFPB Updates: What You Need to Know, Now

Get a jump on regulatory preparedness with an update on the most critical upcoming NCUA and CFPB regulations. NAFCU’s Regulatory Affairs team will cover what will be new around capital reform, risk-based capital, interest rate risk, and more.

CFPB's Payday Lending Field Hearing Signals More Regulation To Come

Written by Eliott C. Ponte, Law Clerk

Last week the CFPB released a payday lending report while holding a Payday Field Hearing in Nashville, Tennessee.  Richard Cordray personally announced the report, which built on a previous CFPB white paper, and made the case that short-term loans are not short-term. 

After conducting a yearlong study that involved 12 million payday borrowers, the CFPB found that four out of five payday loans are rolled over or renewed within fourteen days.  The report, which can be found here, also noted that three out of five payday loans are made to borrowers whose fee expense exceeded the amount borrowed, three out of five payday borrowers rolled the payday loan over at least seven times, and cooling-off laws (enacted by state legislatures) have little influence over whether a borrower takes out another payday loan.

While Congress charged the CFPB with ensuring financial markets are fair and transparent for consumers, it is clear that the CFPB is trying to show everyone—especially Congress—that payday lending justifies more regulation and more CFPB power.  

The CFPB’s Payday Field Hearing is a signal that the CFPB is also likely preparing to release new regulations aimed at curbing the practices mentioned above.  It is unlikely that any regulations will exempt smaller payday lenders, as the report seems to blame the entire industry rather than a subset of lenders.

Regular NAFCU Compliance Blog readers will note that we have been monitoring and updating our community on the CFPB’s efforts for some time, and we will continue to provide you with updates as this continues to unfold.  

DOJ’s “Operation Choke Point” Targets Banks’ Indirect Relationships with Payday Lenders

Written by Brandy Bruyere, Regulatory Compliance Counsel

In a move aimed at cracking down on payday lenders, the Department of Justice (DOJ) launched an investigation last year called “Operation Choke Point.” DOJ is probing whether banks allowed third-party payment processors working on behalf of payday lenders to illegally access billions of dollars from consumer checking accounts.

In essence, Operation Choke Point is an attempt to cut off some payday lenders’ “back door” entrance to traditional banking services. Like many merchants, payday lenders often use third-party payment processors to debit their customers’ checking accounts. The third-party payment processors, in turn, establish relationships with financial institutions. This allows payday lenders to indirectly access the Automated Clearing House (ACH) network to receive payments.

So what happens when a bank has an agreement with a third-party payment processor, but that third-party does business on behalf of a payday lender who is breaking the law? As it turns out, without proper due diligence, these agreements could be quite expensive for targeted financial institutions.

In its first Operation Choke Point action, DOJ filed a lawsuit against Four Oaks Bank (Four Oaks) of North Carolina. The various allegations included violations of Customer Identification Program requirements under the Bank Secrecy Act and allowing improper access to the ACH network. According to the complaint, Four Oaks worked with a third-party payment processor called TPPP-TX, which primarily represented payday lenders. Some of these payday lenders had rates of returned transactions that exceeded 30%, over 21 times higher than the national average of 1.38%. DOJ claimed that the Bank went so far as to design its internal policy for third-party payment providers to accommodate TPPP-TX despite these “extraordinarily high” return rates. Four Oaks was also accused of failing to properly identity foreign payday lenders accessing customer accounts via TPPP-TX.

Reports indicate that DOJ and Four Oaks already reached a tentative $1.2 million settlement in this case. Two members of Congress sent a letter to Attorney General Eric Holder expressing concerns about the investigation’s impact on legitimate payday lending business operations. While many credit unions do not work with third-party payment processors, this is a good reminder that third-party relationships come with additional compliance concerns. Here are some resources about managing risks stemming from relationships with third-parties including payment processors:

• NCUA Letter to Credit Unions, “Evaluating Third Party Relationships,” 07-CU-13
• NCUA's Third Party Relationships Questionnaire
• FFIEC’s BSA/AML Examination Manual, “Third-Party Payment Processors Overview”
• FinCen Advisory, “Risk Associated with Third-Party Payment Processors,” FIN-2012-A010
• FDIC Financial Institution Letter, “Payment Processor Relationships,” FIL-3-2012

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Eye on the Olympics. Speaking of choking, I don’t know about the rest of you, but I’m a bit of a sucker for the Olympics. Maybe it’s the combination of patriotism and pageantry. Or maybe it’s that I experience a strange sense of joy watching people careen down a mountain headfirst on a tiny sled. Anyway, while figure skating is not normally my personal favorite, 19-year-old Jason Brown is an athlete to watch. Here is Jason’s impressive performance that helped earn him a trip to Sochi.

CFPB Accepting Payday Loan Complaints; Free NCUA Webinars to Address Remittances and Mortgage Lending Rules; Programming Note

Written by JiJi Bahhur, Director of Regulatory Compliance

Payday Loan Complaints.  As we’ve mentioned on other occasions, payday lending is definitely on the CFPB’s radar.  Yesterday, this was further confirmed through the CFPB’s blog where it announced that consumer complaints regarding payday loans are now being accepted.  From the blog:

“Starting today you can submit a complaint if you have a problem with your payday loan. You can submit a complaint about:

• Unexpected fees or interest
• Unauthorized or incorrect charges to your bank account
• Payments not being credited to your loan
• Problems contacting the lender
• Receiving a loan you did not apply for
• Not receiving money after you applied for a loan."

The CFPB uses this complaint data to identify business practices that may pose risks to consumers, which in turn will pave the way for new payday lending rules and regulations. 

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NCUA Webinars on Remittances and Mortgage Lending Rules.  In a press release yesterday, the NCUA announced that it will host a free, two-part webinar, “New Dodd-Frank Remittances and Mortgage Lending Rules.”  The first part, which will cover remittance transfers, higher-priced mortgage loan appraisals, mortgage servicing, and higher-priced mortgage loan escrows, will take place at 2:00pm Eastern on November 18, 2013.  The second part, which will cover ability-to-repay and qualified mortgages, high-cost mortgage and home ownership counseling, loan originator compensation, and Equal Credit Opportunity Act appraisals and valuations, will take place at 2:00pm Eastern on December 18, 2013. 

Credit unions should take advantage of these free high-level overviews.  Click here to register for the November 18 session and here to register for the December 18 session.

If you are looking for additional compliance assistance on these new rules and regulations, the NCUA also issued regulatory alerts and YouTube videos summarizing the rules and highlighting issues of particular importance for credit unions. 

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Programming Note.  NAFCU’s offices will close today at noon and remain closed until Tuesday for the long holiday weekend.  We’ll be back to blogging next Wednesday!  Have a great weekend!