April 19, 2021 - Of Interest

A&B ABstract:

Innovative partnerships between banks and nonbanks have expanded lending services to consumers and small businesses. These partnerships, known as marketplace lending arrangements, offer non-traditional loan products to consumers and small businesses. Significantly, state laws establishing interest rate caps do not apply to marketplace lending arrangements where the bank is the true lender. But with this innovation has come debate about whether the bank is the true lender. The Office of the Comptroller of the Currency’s “True Lender” rule, which became effective on December 29, 2020, was intended to address uncertainties in these partnerships.

Under the “True Lender” rule, a bank is deemed the true lender if, at the time of origination, it is named as the lender in the loan agreement or funds the loan. Proponents of the “True Lender” rule argue that marketplace lending arrangements expand access and that the rule provides necessary guidance to enable banks and their non-bank partners to comply with the law. Others, however, have sharply criticized the rule, arguing it allows payday lenders to circumvent state laws prohibiting predatory ultra-high interest-loans.

Several state attorneys general are challenging the “True Lender” rule in the courts. Earlier this year, District of Columbia Attorney General Karl. A. Racine joined eight other Attorneys General in filing a lawsuit against the Office of the Comptroller of the Currency to stop implementation of “True Lender” rule. This month, the D.C. Office of the Attorney General has taken its challenge to the parties themselves by filing its first lawsuit involving a marketplace lending arrangement since the “True Lender” rule’s enactment.

District of Columbia v. Opportunity Financial, LLC

On April 5, 2021, the District of Columbia (“the District”), by and through AG Racine, filed a complaint in the Superior Court of the District of Columbia against Opportunity Financial, LLC (“OppFi”), an online lending company. The District alleges in its complaint that OppFi violated the District of Columbia Consumer Protection Procedures Act and title 16 of the District of Columbia Municipal Regulations.

The Complaint

According to the complaint, OppFi has engaged in predatory lending practices that target the District’s most vulnerable citizens. Specifically, the District alleges that OppFi has been deceptively marketing illegal, high-interest loans. In 2018, OppFi partnered with FinWise Bank to launch a bank-sponsored product called “OppLoans,” which it offers to D.C. residents. However, OppFi has never held a money lender license as required by D.C. law. OppFi also offers loans to D.C. consumers at interest rates of up to 198%, a rate which dramatically exceeds D.C.’s interest rate cap of 24%. The District also alleges that OppFi falsely represents OppLoans as more affordable than payday loans, tells consumers that taking out an OppLoan will help improve the borrower’s credit score despite OppFi’s knowledge to the contrary, does not adequately disclose that OppLoans are high cost, risky loans that should only be used for emergencies, and fails to tell consumers that refinancing a current loan is often more expensive than obtaining a second loan.

Despite OppFi’s partnership with FinWise Bank, the District asserts that OppFi is the true lender because it has the predominant economic risk, bears the risk of poor performance, and funds the expenses for the provision of OppLoans. Meanwhile, FinWise’s fees and expenses related to OppLoans are capped per its agreements with OppFi. In support, the District also alleges that OppFi is the servicer for OppLoans, controls and pays for all OppLoans marketing, and owns the OppLoans trademark and associated intellectual property rights. Further, potential borrowers are screened using OppFi’s proprietary scorecard and can only obtain an OppLoan through opploans.com. Interested consumers attempting to obtain an OppLoan directly through FinWise Bank’s website are redirected to OppFi’s website.

The District seeks a court order voiding improperly made loans, as well as injunctive relief, restitution for consumers, civil penalties, and costs.

Takeaway

While states challenge the “True Lender” rule in court, Senate Democrats have mounted an attack aimed at overturning it. President Biden has yet to announce his nominee to lead the Office of the Comptroller of the Currency, which could provide additional insight on the administration’s direction with the rule. Financial institutions involved in marketplace lending arrangements should pay close attention to litigation that can provide insight into the practical effects of the “True Lender” rule’s bright-line test on state litigation.

A&B ABstract: The CFPB’s inconsistent statements about the need for flexibility to address the pandemic suggest a deeper game afoot.

CFPB warns that continued COVID flexibility for financial institutions is not prudent…

On March 31, 2021, the CFPB announced it would be rescinding seven policy statements issued last year that provided financial institutions with flexibilities regarding certain regulatory filings or compliance with consumer financial laws and regulations due to the COVID-19 pandemic. One of the rescinded statements, for example, encouraged financial institutions to “work constructively with borrowers and other customers affected by COVID-19 to meet their financial needs” and to that end, “when conducting examinations and other supervisory activities and in determining whether to take enforcement action, the Bureau will consider the circumstances that entities may face as a result of the COVID-19 pandemic and will be sensitive to good-faith efforts demonstrably designed to assist consumers.”

In explaining the rescissions, Acting CFPB Director Uejio reasoned: “Because many financial institutions have developed more robust remote capabilities and demonstrated improved operations, it is no longer prudent to maintain these flexibilities.” Accordingly, the CFPB provided notice that it “intends to exercise the full scope of the supervisory and enforcement authority provided under the Dodd-Frank Act.”

To further drive home its point, on April 1, 2021, the CFPB issued a press release and compliance bulletin warning mortgage servicers that “unprepared is unacceptable” with regard to the treatment of mortgage borrowers exiting extended forbearances this fall. The CFPB stated it is “committed to using its authorities, including its authority under Regulation X mortgage servicing requirements and under the Consumer Financial Protection Act (CFPA), to ensure that homeowners facing the ongoing economic impact of the Coronavirus Disease (COVID-19) national emergency receive the benefits of critical legal protections and that avoidable foreclosures are avoided.”

…Except when it is!

On March 2, 2021, the CFPB issued a notice of proposed rulemaking (NPRM) to delay the mandatory compliance date of the General Qualified Mortgage (QM) final rule from July 1, 2021 to October 1, 2022. The reason cited by the CFPB for the compliance delay is the “need to provide maximum flexibility [to financial institutions] to address the effects of the pandemic.” In particular, the CFPB’s proposal states:

“The Bureau is concerned that the potential impact of the COVID-19 pandemic on the mortgage market may continue for longer than anticipated at the time the Bureau issued the General QM Final Rule, and so could warrant additional flexibility in the QM market to ensure creditors are able to accommodate struggling consumers.”

Additionally, on April 7, 2021, the CFPB proposed to delay the effective date of two recent debt collection rules by sixty days, from November 30, 2021 until January 29, 2022. The reason cited by the CFPB for its proposed delay is “to give affected parties more time to comply due to the ongoing COVID-19 pandemic.” In particular, the CFPB’s proposal states:

“Since the Debt Collection Final Rules were published, the global COVID-19 pandemic has continued to cause widespread societal disruption, with effects extending into 2021. In light of that disruption, the Bureau believes that providing additional time for stakeholders to review and, if applicable, to implement the final rules may be warranted. The Bureau believes that extending the rules’ effective date by 60 days, to January 29, 2022, may provide stakeholders with sufficient time for review and implementation.”

What is really going on?

Both of the CFPB’s delay NPRMs are curious. With respect to the QM delay proposal, a broad coalition of both housing and mortgage industry and consumer and civil rights groups files a joint comment letter stating that the recent enhancements to the General QM definition will replace loans that were designated QM under the temporary GSE Patch, and as a result, the organizations do not believe that extending the July 1 mandatory compliance date is necessary. And as our colleague Stephen Ornstein explained, recent FHFA actions will effectively sunset the GSE Patch on July 1 with or without the CFPB taking action. Further, with respect to the debt collection delay proposal, it is unlikely that 60 extra days before the rules take effect will make any appreciable difference to most market participants, considering that they were already given a full year to implement the rules, and they still won’t take effect for seven months.

The CFPB clearly has a strong desire to revisit both the underlying QM and debt collection final rules issued last year. For instance, as early as February 4, 2021, Acting Director Uejio stated that the CFPB would “[e]xplore options for preserving the status quo with respect to QM and debt collection rules.” And Diane Thompson, the Biden Administration political appointee now overseeing CFPB rulemaking efforts, publicly declared her hatred for the CFPB’s new General QM rule. If the CFPB does revisit these rules, it makes sense to do so soon; completing new rulemakings before the old ones take effect or require compliance could provide the CFPB a significant advantage in framing its mandatory Section 1022 cost-benefit analysis, depending upon the economic baseline established for analyzing the effects of its proposals. However, delaying rules simply for the purpose of changing them in light of the policy preferences of an incoming administration can be viewed skeptically by reviewing courts, since such actions tend to undermine the purposes of the Administrative Procedure Act. Perhaps that is the reason why the CFPB is disclaiming its plans to revisit the underlying rules in its delay NPRMs and, contrary to its own recent policy pronouncements, is relying instead upon the need for institutional flexibility to deal with the pandemic in the limited context of these two rules alone. Given the time constraints involved, the CFPB can be expected to show its full hand and propose changes to the QM and debt collection rules soon after it finalizes its associated delay rules.

Archives for April 19, 2021