Payday lenders recently received their first peek at what life will be like under the CFPB’s watch, and it’s not a pretty picture. In the Bureau’s recently released examination procedures for payday lenders, the CFPB makes clear that it will examine every aspect of a payday lender’s operation, likely well beyond what most payday lenders have experienced to date with the patchwork of state regulation.
In conjunction with the release of the examination procedures, CFPB Director Richard Cordray made payday lending the topic of the Bureau’s first field hearing on January 19, 2012, stating that the Bureau will give payday lenders “much more attention” through a comprehensive system of federal regulation and oversight. While Cordray recognized that payday lending can be an appropriate financial option for consumers and committed to fostering a “fair, transparent and competitive” payday lending market, his speech left no doubt that payday lenders should expect tough oversight, guided by examination procedures that set forth ambiguous and undefined standards of appropriate conduct. Indeed, the CFPB has also solicited consumers’ stories on payday lending—not formal complaints, but unproven anecdotes—that will, presumably, guide the Bureau’s policymaking.
When examined by the Bureau, payday lenders can expect more than just a box-checking exercise. Sure, portions of the review will be amenable to clear yes-or-no answers, but the examiners’ mandate is much broader, encompassing such vague and subjective questions as: whether a lender’s compensation program “incentives behaviors or practices that result in heightened risk to consumers,” whether a lender “clearly and prominently discloses the material terms of a payday loan,” and whether “in the application and origination process, [a] lender makes statements, representations, or claims … that may mislead the consumer regarding the cost, value, availability, cost savings, benefits, or terms of the product or service.”
The CFPB’s examination procedures for payday lenders are divided over five “modules”:
• Application and origination
• Payment processing and sustained use
• Collections, accounts in default, and consumer reporting
• Third party relationships
Across these modules, the Bureau directs examiners to consider compliance with six federal statutes—Truth in Lending Act, Electronic Fund Transfer Act, Fair Debt Collection Practices Act, Fair Credit Reporting Act, Gramm-Leach-Bliley Act, and Equal Credit Opportunity Act—as well as Dodd-Frank’s UDAAP provision.
In the marketing module, the Bureau identifies two key statutes for examination—TILA and ECOA—as well as a catch-all consideration of “Other Risks to Consumers,” which is largely directed towards the CFPB’s UDAAP authority and includes whether a lender’s marketing practices fail to clearly and prominently disclose the terms of credit. In reviewing a lender’s marketing practices, the examination procedures call on examiners to go beyond simply reviewing published marketing materials, but also to consider, for example, whether a lender’s compensation system “incentives behaviors or practices that result in heightened risk to consumers.” Examiners are also directed to review a lender’s lead generation practices to determine, among other things, if “statements and representations made by a company on another’s behalf are accurate and non-deceptive.”
Application and Origination
In the context of application and origination, the examination procedures identify four federal statutes for review—ECOA, FCRA, TILA, and EFTA—as well as the Bureau’s ever-present, UDAAP-centric “Other Risks to Consumers.” While this portion of the examination involves some relatively straightforward inquiries—such as whether the appropriate TILA disclosures are provided—it is also pointed towards questions that have no simple answer, such as whether “the lender makes statements, representations, or claims … that may mislead the consumer regarding the cost, value, availability, cost savings, benefits, or terms of the product or service.”
Payment Processing and Sustained Use
Here, the Bureau notes two statutes for examination—TILA and EFTA—but devotes considerable attention to the issue of “sustained use” (i.e., allowing a “borrower to modify or ‘roll over’ the loan by paying an additional fee to extend the loan term”). Long a subject of controversy by consumer advocates, and highlighted by Cordray at the field hearing, the examination procedures require examiners to take a long and hard look to determine if a lender has adequate controls on and disclosures concerning “sustained use.”
Collections, Accounts in Default, and Consumer Reporting
In addition to determining compliance with the FDCPA and FCRA, the examination procedures also direct examiners to consider if a lender—or a third party acting on its behalf—contacts borrowers in an appropriate manner, such as by adhering to the FDCPA’s collection practices. Not only does this appear to create potential liability for the lender if a third party debt collector violates the FDCPA, but it seems to impute upon payday lenders the substance of the FDCPA’s practice restrictions even if the FDCPA itself does not apply.
Third Party Relationships
The examination procedures set forth a short—and, not surprising, ambiguous—standard that payday lenders “may be responsible for the activities of third party service providers” and must “appropriately manage their relationships with third parties.” This requirement, which is on top of the obligation to comply with the GLBA and FCRA, appears to open the door to attempts by the Bureau to impute upon payday lenders the actions of third parties over which they have limited or no control.