Today, January 16, 2018, officially marks the effective date of the Consumer Financial Protection Bureau’s final rule targeting what it refers to as “payday debt traps” (the “Rule”). As outlined in our previous publications (found here and here), the Rule marks a significant change in the landscape for lenders offering short-term loans or longer-term loans with balloon payments, including payday and vehicle title loans. Looming large is the new requirement that lenders determine a borrower’s ability to repay prior to originating covered loans.
On June 2, 2016, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) proposed a new rule under its authority to supervise and regulate certain payday, auto title, and other high-cost installment loans (the “Proposed Rule” or the “Rule”). These consumer loan products have been in the CFPB’s crosshairs for some time, and the Bureau formally announced that it was considering a rule proposal to end what it considers payday debt traps back in March 2015. Over a year later, and with input from stakeholders and other interested parties, the CFPB has now taken direct aim at these lending products by proposing stringent standards that may render short-term and longer-term, high-cost installment loans unworkable for consumers and lenders alike. At a minimum, the CFPB’s proposal seriously threatens the continued viability of a significant sector of the lending industry.
To read the full alert, click here.
By: David L. Beam, Christopher Shelton*
*Mr. Shelton is a law clerk and not admitted to the practice of law.
The Internet has been with us for about two decades, and financial service companies have been offering products over the Internet for nearly as long. One would have thought that there would be final resolution by now on the question of whether, and under what circumstances, a state may regulate an online lender with no physical presence in the state. However, this issue continues to be a thorny one.
A recent decision by the United States District Court for the Southern District of New York touches on this issue. In Otoe-Missouria Tribe of Indians v. New York State Department of Financial Services, 2013 U.S. Dist. LEXIS 144656, 2013 WL 5460185 (S.D.N.Y. Sep. 30, 2013), the State of New York successfully argued that it can regulate online loans made by Native American tribes to New York residents. The case primarily involved the question of whether a state could regulate an enterprise owned by a Native American tribe located in another state. But the decision potentially has implications for other situations where a company offers financial services over the Internet. Moreover, it is part of a wider campaign by New York authorities to target online lenders for alleged usury.
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. Read More