Alston & Bird Consumer Finance Blog

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HELOCs On the Rise: Is Your Servicing CMS Ready?

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A&B ABstract:

The Consumer Financial Protection Bureau (“CFPB” or “Bureau”) has moved to clarify its regulatory authority at a time when the economic climate is ripe for a resurgence in HELOC lending. In an amicus brief filed by the CFPB on November 30, 2022 (the “Amicus Brief”), the Bureau acknowledged that its Mortgage Servicing Rules, which, in 2013, amended Regulation X, RESPA’s implementing regulation, and Regulation Z, TILA’s implementing regulation, do not apply to home equity lines of credit (“HELOCs”).  This is consistent with the Bureau’s guidance in the preamble to the CFPB Mortgage Servicing Rules under RESPA, wherein the Bureau recognized that HELOCs have a different risk profile, and are serviced differently, than first-lien mortgage loans, and that many of the rules under Regulation X would be “irrelevant to HELOCs” and “would substantially overlap” with the longstanding protections under TILA and Regulation Z that apply to HELOCs.

During this past refinance boom, consumers refinanced mortgage loans at record rates. Moreover, according to a recent report by the Federal Reserve, consumers are sitting on nearly 30 trillion dollars in home equity.  HELOCs allow consumers the opportunity to extract equity from their homes without losing the low interest rate on their first-lien loan. Generally, a HELOC is a revolving line of credit that is secured by a subordinate mortgage on the borrower’s residence that typically has a draw period of 5 or 10 years.  At the end of the draw period, the outstanding loan payment converts to a repayment period of 5 to 25 years with interest and principal payments required that fully amortize the balance.

Issues to Consider in Servicing HELOCs

Servicing HELOCs raise unique issues given the open-end nature of the loan, the typical second lien position, and the different regulatory requirements.  HELOC servicers will need to ensure their compliance management systems (“CMS”) are robust enough to account for a potential uptick in HELOC lending. Among many other issues, servicers will want to ensure their operations comply with several regulatory requirements, including:

Offsets: In the Amicus Brief, the CFPB argues that HELOCs accessible by a credit card are subject to the provisions of TILA and Regulation Z that prohibit card issuers from using deposit account funds to offset indebtedness arising out of a credit card transaction.

Disclosures: Long before the CFPB Mortgage Servicing Rules, TILA and Regulation Z contained disclosures applicable to HELOCs. As a result, the provisions of the CFPB Mortgage Servicing Rules under Regulation Z governing periodic billing statements, adjustable-rate mortgage (ARM) interest rate adjustment notices, and payment crediting provisions do not apply to HELOCs as these provisions are specifically limited to closed-end consumer credit transactions. However, the payoff statement requirements under Regulation Z are applicable both to HELOCs and closed-end consumer credit transactions secured by a dwelling. In addition to certain account-opening disclosures, a HELOC creditor (or its servicer) must make certain subsequent disclosures to the borrower, either annually (e.g., an annual statement) or upon the occurrence of a specific trigger event, such as the addition of a credit access device, a change in terms or change in billing cycle, or a notice to restrict credit. It is also worth noting that Regulation Z’s mortgage transfer notice (commonly referred to as the Section 404 notice) applicable when a loan is transferred, sold or assigned to a third party, applies to HELOCs. In contrast, RESPA’s servicing transfer notice does not apply to HELOCs.

Periodic Statements: TILA and Regulation Z contain a different set of periodic statement requirements, predating the CFPB Mortgage Servicing Rules, which are applicable to HELOCs. Under TILA, a servicer must comply with the open-end periodic statement requirements. That is true even if the HELOC has an open-end draw period followed by a closed-end repayment period, during which no further draws are permitted. Such statements can be complex given that principal repayment and interest accrual vary based on draws; there will be a conversion to scheduled amortization after the draw period ends; and balloon payments may be required at maturity, resulting in the need for servicing system adjustments.

Billing Error Resolution: Instead of having to comply with the Regulation X requirements for notices of error, HELOCs are subject to Regulation Z’s billing error resolution requirements.

Crediting of Payments: A creditor may credit a payment to the consumer’s account, including a HELOC, as of the date of receipt, except when a delay in crediting does not result in a finance or other charge, or except as otherwise provided in 12 C.F.R. § 1026.10(a).

Restrictions on Servicing Fees: Regulation Z restricts certain new servicing fees that may be imposed, where such fees are not provided for in the contract, because the credit may not, by contract or otherwise, change any term except as provided in 12 C.F.R § 1026.40.  With the CFPB’s increased focus on fees, this provision may be an area of focus for the Bureau and state regulators.

Restriction on Changing the APR: The creditor may not, by contract or otherwise, change the APR of a HELOC unless such change is based on an index that is not under the creditor’s control and such index is available to the general public.  However, this requirement does not prohibit rate changes which are specifically set forth in the agreement, such as stepped-rate plans or preferred-rate provisions.

Terminating, Suspending or Reducing a Line of Credit: TILA and Regulation Z restrict the ability of the creditor to prohibit additional extensions of credit or reduce the credit limit applicable to an agreement under those circumstances set forth in 12 C.F.R § 1026.40.  Similarly, TILA and Regulation Z impose restrictions on when the creditor may terminate and accelerate the loan balance.

Rescission: Similar to closed-end loans, the consumer will have a right of rescission on a HELOC; however, the right extends beyond just the initial account opening. During the servicing of a HELOC, the consumer has a right of rescission whenever (i) credit is extended under the plan, or (ii) the credit limit is increased. But there is no right of rescission when credit extensions are made in accordance with the existing credit limit under the plan. If rescission applies, the notice and procedural requirements set forth in TILA and Regulation Z must be followed.

Default: Loss mitigation and default recovery actions may be limited by the firstien loan. That’s because default or acceleration of the first-lien loan immediately triggers loss mitigation and default recovery to protect the second-lien loan.  The protection of the second-lien loan may involve advancing monthly payments on the first-lien loan.  Foreclosure pursued against the first-lien loan will trigger second lien to participate and monitor for protection and recovery. Even though not applicable to HELOCs, some servicers may consider complying with loss mitigation provisions as guidelines or best practices.

ECOA and FCRA: Terminating, suspending, or reducing the credit limit on a HELOC based on declining property values could raise redlining risk, which is a form of illegal disparate treatment in which a lender provides unequal access to credit or unequal terms of credit because of a prohibited characteristic of the residents of the area in which the credit seeker resides or will reside or in which the residential property to be mortgaged is located. Thus, lenders and servicers should have policies and procedures in place to ensure that actions to reduce, terminate or suspend HELOCs are carried out in a non-discriminatory manner.  Relatedly, the CFPB’s authority under the Dodd-Frank Act to prohibit unfair, deceptive or abusive acts or practices will similarly prohibit certain conduct in connection with the servicing of HELOCs that the CFPB may consider to be harmful to consumers.  It is also important to remember that ECOA requires that a creditor notify an applicant of action taken within 30 days after taking adverse action on an existing account, where the adverse action includes a termination of an account, an unfavorable change in the terms of an account, or a refusal to increase the amount of credit available to an applicant who has made an application for an increase.  Similar to ECOA, FCRA also requires the servicer to provide the consumer with an adverse action notice in certain circumstances.

State Law Considerations: And let’s not forget state law issues. While most of the CFPB’s Mortgage Servicing Rules do not apply to HELOCs, many state provisions may cover HELOCs.  As most HELOCs are subordinate-lien loans, second lien licensing law obligations arise. Also, sourcing, processing and funding draw requests could implicate loan originator and/or money transmitter licensing obligations. Also, at least one state prohibits a licensee from servicing a usurious loan.  For HELOCs, the issue is not only the initial rate but also the adjusted rate (assuming it is an ARM).  There may also be state-specific disclosure obligations, as well as restrictions on product terms (such as balloon payments or lien releases), fees, or credit line access devices, to name a few.

Takeaway

The servicing of HELOCs involve many of the same aspects as servicing first-lien residential mortgage loans.  However, because of the open-end credit line features and the typical second-lien position, there are several unique aspects to servicing HELOCs.  And, because there are no industry standard HELOC agreements, the terms of the HELOC (e.g., the length of draw and amortization periods, interest-only payment features, balloon, credit access, etc.) can vary greatly.  The economic climate is poised for a resurgence in home equity lending.  Now is the time to ensure your CMS is up to the task.

 

CFPB Publishes Fall 2022 Supervisory Highlights

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A&B ABstract:

On November 16, 2022, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) released its Fall 2022 Supervisory Highlights (Issue 28) (the “Supervisory Highlights”), which, among other things, announces the creation of a Repeat Offender Unit and highlights supervisory observations from examinations conducted by the Bureau in the first half of 2022.  Below we discuss some of the key takeaways from the Supervisory Highlights.

The Supervisory Highlights

CFPB’s New Repeat Offender Unit

The CFPB announced the creation a Repeat Offender Unit (“ROU”) to focus its supervision on repeat offenders with the intent to recommend specific corrective actions to stop recidivist behavior. The ROU intends to engage in closer scrutiny of repeat offenders’ compliance with certain orders, along with the following activities:

  • Reviewing and monitoring the activities of repeat offenders;
  • Identifying the root cause of recurring violations;
  • Pursuing and recommending solutions and remedies that hold entities accountable for failing to consistently comply with federal consumer financial law; and
  • Designing a model for review of orders and monitoring that reduces the occurrences of repeat offenders.

The creation of the ROU is not surprising given Director Chopra’s prior statements signaling that the Bureau would focus its efforts on reining in corporate recidivism in the financial services industry. For example, in March 2022, Director Chopra delivered a speech to the University of Pennsylvania Law School, entitled Reining in Repeat Offenders, in which the Director noted that “[a]t the CFPB, we have plans to establish dedicated units in our supervision and enforcement divisions to enhance the detection of repeat offenses and corporate recidivists and to better hold them accountable…[and that] for serial offenders of federal law, the CFPB will be looking at remedies that are more structural in nature, with lower enforcement and monitoring costs…[including] seek[ing] ‘limits on the activities or functions’ of a firm for violations of laws, regulations, and orders.”

Supervisory Observations

The Supervisory Highlights identifies numerous supervisory observations pertaining to consumer reporting, debt collection, mortgage origination, mortgage servicing, and payday lending, among other topics. We discuss several of the Bureau’s notable observations below.

Consumer Reporting

With respect to credit reporting, the CFPB found violations of the Fair Credit Reporting Act and/or Regulation V involving the following issues:

  • Certain nationwide consumer reporting agencies failed to provide reports to the CFPB regarding consumer complaints received from consumers that the Bureau transmits to the credit reporting agency if those complaints are about “incomplete or inaccurate information” that a consumer “appears to have disputed” with the agency;
  • Some furnishers, including third-party debt collection furnishers, continue to: (1) inaccurately report information despite actual knowledge of errors; (2) fail to correct and update furnished information after determining such information is not complete or accurate; and (3) fail to establish and follow reasonable procedures to report the appropriate date of first delinquency on applicable accounts; and
  • Some furnishers also continue to fail to establish and implement reasonable written policies and procedures regarding the accuracy and integrity of furnished information, such as by verifying random samples of furnished information, and fail to conduct reasonable investigations of direct disputes by neglecting to review relevant information and documentation.

Debt Collection

In recent examination activity, the CFPB has identified certain violations of the Fair Debt Collection Practices Act, such as:

  • Examiners found that certain larger participant debt collectors engaged in conduct intended to harass, oppress, or abuse consumers during telephone calls by continuing to engage in conversation even after consumers stated that the communication was causing them to feel annoyed, harassed, or abused.
  • Examiners found that debt collectors engaged in improper communication with third parties about a consumer’s debt when communicating with a person who had a similar or identical name to the consumer.

Mortgage Origination

Regarding mortgage origination, the CFPB found violations of Regulation Z and deceptive acts or practices prohibited by the Consumer Financial Protection Act (“CFPA”), such as:

  • Examiners found that certain entities improperly reduced loan origination compensation based on a term of a transaction by failing to use actual costs and fee amounts that were accurate and known to loan originators at the time initial disclosures were provided to consumers. Subsequently at closing, consumers were provided a lender credit when the actual costs of certain fees exceeded the applicable tolerance thresholds, which led entities to reduce loan originator compensation after loan consummation by the amount provided in order to cure the tolerance violation. Notably, the Bureau found that in each instance, the settlement service had been performed and the loan originator knew the actual costs of those services. The loan originators, however, entered a cost that was completely unrelated to the actual charges that the loan originator knew had been incurred, resulting in information being entered that was not consistent with the best information reasonably available. Thus, examiners found that the unforeseen increase exception permitted by Regulation Z did not apply to these situations.
  • Examiners also identified a waiver provision in a loan security agreement, which was used by certain entities in one state, that was determined to be deceptive in violation of the CFPA. The waiver provided that borrowers who signed the agreement waived their right to initiate or participate in a class action. The language was found to be misleading because a reasonable consumer could understand the provision to waive their right to bring a class action on any claim, including federal claims, in federal court, which is expressly prohibited by Regulation Z.

Mortgage Servicing

The Bureau indicated that its mortgage servicing examinations focused on servicers’ actions as consumers experienced financial distress related to COVID-19. Mortgage servicing findings by the CFPB included the following:

  • Servicers engaged in abusive acts or practices by charging sizable phone payments fees when consumers were unaware of the fees’ existence and, if disclosures were provided, providing general disclosures indicating that consumers “may” incur a fee did not sufficiently inform consumers of the material costs;
  • Servicers engaged in unfair acts or practices by:
    • charging consumers fees during a CARES Act forbearance plan, in violation of the CARES Act’s prohibition on the imposition of “fees, penalties, or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract”; and
    • failing to timely honor requests for forbearance from consumers;
  • Servicers engaged in deceptive acts or practices by misrepresenting that certain payment amounts were sufficient for consumers to accept a deferral offer at the end of their forbearance period, when in fact, they were not due to updated escrow payments; and
  • Servicers violated Regulation X by failing to maintain policies and procedures reasonably designed to:
    • inform consumers of all available loss mitigation options, which resulted in some consumers not receiving information about options, such as deferral, when exiting forbearances; and
    • properly evaluate consumers for all available loss mitigation options, resulting in improper denial of deferral options.

Payday Lending

Regarding payday lending, examiners found that some lenders failed to maintain records of call recordings that were necessary to demonstrate compliance with certain conduct provisions in consent orders, e.g., prohibiting certain misrepresentations. The consent order provisions required creation and retention of all documents and records necessary to demonstrate full compliance with all provisions of the consent orders. The Bureau determined that the failure to maintain the call recordings violated the consent orders and federal consumer financial law.

Although this finding was specific to payday lenders, it may have broader implications for entities subject to an active CFPB consent order, as the provision relied upon by the Bureau in making its finding is routinely found in CFPB orders.

Takeaway

The compliance issues noted in the Supervisory Highlights emphasize the importance of maintaining a strong and continually updated compliance management system. Entities should review the Bureau’s supervisory observations against their current policies, procedures, and processes to ensure consistency with the Bureau’s compliance expectations, and to determine whether enhancements and/or proactive consumer remediation may be appropriate. Finally, entities subject to active CFPB consent orders should pay particular attention to whether their current policies, procedures, and processes are sufficient to ensure compliance with applicable law and the terms of the consent order, in order to mitigate against the risk of being deemed a repeat offender and potentially subject to increased penalties or broader structural remedies such as “seek[ing] ‘limits on the activities or functions’ of a firm for violations of laws, regulations, and orders.”

CFPB Petitions High Court to Consider Decision Holding Funding Structure Unconstitutional

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A&B Abstract:

On November 14, 2022, the Consumer Financial Protection Bureau (“CFPB”) filed a petition for a writ of certiorari in connection with the Fifth Circuit’s recent decision in Community Financial, which held that the CFPB’s funding structure violated the Constitution’s Appropriations Clause.  (For a full discussion of the Community Financial decision, click here.)

The CFPB is asking that the Supreme Court set the case for argument this term during its April 2023 sitting.

The CFPB’s Petition

According to the CFPB, the Fifth Circuit’s ruling constituted an “unprecedented and erroneous understanding of the Appropriations Clause.”  In the CFPB’s view, the Appropriations Clause requires only that “Congress enact[] a statute explicitly authorizing . . . [the] use [of] a specified amount of funds from a specified source for specified purposes,” which Congress did in establishing the CFPB’s funding.  For support, the CFPB relied on the constitutional text, historical practice, and the Supreme Court’s precedent.  And it argued that “[n]o other court has ever held that Congress violated the Appropriations Clause by passing a statute authorizing spending.”

The CFPB also asserts that the Fifth Circuit “compounded its error by adopting a sweeping remedial approach that calls into question virtually every action the CFPB has taken in the 12 years since it was created.”  This remedy, the CFPB argues, “raises grave concerns not just for the CFPB and consumers, but for the entire financial industry,” as the vacatur of past CFPB actions could have “destabilizing consequences.”

The CFPB asked the Supreme Court to review the Fifth Circuit’s decision for several reasons.  First, the Fifth Circuit held an Act of Congress violates the Constitution, and there is a strong presumption in favor of granting writs of certiorari to review decisions holding federal statutes unconstitutional.  Second, the Fifth Circuit’s decision conflicts with the D.C. Circuit’s decision on the same issue, creating a circuit split that the Supreme Court should resolve.  Third, the Fifth Circuit’s decision has “immense legal and practical significance” that should be addressed promptly because it “threatens the validity of all past CFPB actions,” which, if unwound, could result in harm to consumers and the “entire financial industry.”

For these reasons, the CFPB asked the Supreme Court to set the case for argument this term.   Given what is at stake, the CFPB explained that it filed its petition “less than one month after the [Fifth Circuit’s] decision,” and “plans to waive the 14-day waiting period after the brief in opposition is filed,” so that the Supreme Court may “consider the petition at its January 6, 2023 conference and hear the case during its April 2023 sitting.”

Takeaways

The CFPB has acknowledged the significant existential threat that the Fifth Circuit’s Community Financial decision poses to its future, and has petitioned the Supreme Court for relief.  Stay tuned for further updates on whether the Supreme Court grants the CFPB’s petition.

The CFPB’s Funding Structure Held Unconstitutional: The Practical Implications

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A&B ABstract:

In another existential challenge to the CFPB, last week the Fifth Circuit held in the Community Financial[1] case that the CFPB’s funding structure is unconstitutional. On this ground, it vacated the CFPB’s Payday Lending Rule. The decision’s rationale, however, is expected to have much further-reaching implications. Simply put, many believe that the Fifth Circuit’s analysis invalidates practically all actions the CFPB has taken since its inception.

The CFPB’s Unconstitutional Funding Structure

The CFPB is an executive agency with sweeping authority to issue regulations, conduct administrative hearings, wage civil litigation, and impose penalties on private citizens for a host of issues related to consumer finance. To exercise this authority, the CFPB requires funding, which it receives from a unique mechanism outside the Congressional appropriations process. By statute, the CFPB Director has the right to draw up to 12% of the Federal Reserve’s annual budget without seeking approval from Congress.

The Fifth Circuit held that this funding structure violated the Constitution’s Appropriations Clause, which requires that all expenditures of federal funds be approved by Congress. Specifically, the Fifth Circuit held that the CFPB’s extensive mandate combined with the inability of Congress to subject the agency to oversight via the appropriations process improperly concentrated the power of both “purse and sword” in the Executive Branch.

The Remedy

As important, unlike the challenge to the CFPB’s leadership structure in Seila Law, which led the Supreme Court to essentially rewrite the unconstitutional director-removal provision to salvage the CFPB’s ability to operate, the Community Financial decision held that there was no similar way to fix the Bureau’s unconstitutional funding. Fundamental to the Community Financial ruling was its interpretation of Collins v. Yellen, 141 S Ct. 171 (2021)—the Supreme Court’s most recent take on the proper remedy when an agency’s actions are tainted by an unconstitutional structure. Looking to Collins, the Fifth Circuit held that to obtain the holy grail of relief—vacatur of the agency action in its entirety—a party must show that: (1) a provision of the agency’s enacting statute is unconstitutional, and (2) the unconstitutional provision inflicted harm.

The Fifth Circuit then found that making the showing Collins required was “straightforward” in the case before it because “the funding employed by the Bureau to promulgate the Payday Lending Rule was wholly drawn through the agency’s unconstitutional funding scheme.” From the court’s perspective, this created “a linear nexus between the infirm provision (the Bureau’s funding mechanism) and the challenged action (promulgation of the rule). In other words, without its unconstitutional funding, the Bureau lacked any other means to promulgate the rule.”

The Implications

Problematically for the CFPB, the logic of this “linear nexus” between the CFPB’s funding mechanism exists for practically all of the agency’s actions. Pursuant to the Dodd-Frank provisions that created the CFPB, all of its operations have been funded out of the “Bureau Fund” into which quarterly draws from the Federal Reserve are deposited. That is the funding mechanism the Fifth Circuit rejected as unconstitutional. Indeed, while Dodd-Frank also created the agency’s Civil Penalty Fund, the CFPB cannot by statute use those monies other than for limited purposes having to do with victim compensation and financial literacy.

There’s lots of speculation about what will happen next. The CFPB has not indicated whether it will seek en banc review, try its luck with the Supreme Court, or perhaps seek a legislative fix. None of these routes is without substantial risk for the Bureau. Seven of the sixteen judges on the Fifth Circuit who would hear the case en banc have already authored or joined opinions concluding that the CFPB’s funding structure is unconstitutional. The Supreme Court, which already invalidated the CFPB’s leadership structure in Selia Law, now has an even more solid majority that appears poised to closely scrutinize federal agencies on these very issues. And voters have yet to decide the makeup of the 118th Congress.

Takeaway

Given this, covered persons under the CFPB’s regulatory umbrella may consider striking while the iron is hot.

Parties subject to rules issued by the CFPB may consider challenging the CFPB’s activity as the invalid product of the agency’s constitutionally infirm funding structure. Any such challenge has the greatest likelihood of success in the Fifth Circuit: where Community Financial is binding, but as yet stands as the only circuit court to have held the CFPB’s funding structure unconstitutional. While the D.C. Circuit addressed the issue several years ago in In re PHH,[2] numerous questions remain about the viability of its prior ruling. Not only was the majority’s decision there regarding the director-removal provision abrogated by the Supreme Court in Selia Law, many observers believe that its brief, cursory treatment of the appropriations issue cannot be relied upon. Indeed, as the Fifth Circuit also noted, if anything, the subsequent Selia Law cure for the director-removal provision, which vests even more power in the Executive Branch, only exacerbated the separation of powers problem presented by the CFPB’s self-funding mechanism. And while several district courts have also upheld the CFPB’s funding structure, including the Districts of Rhode Island, Maryland, and Montana, the Middle District of Pennsylvania, the Southern District of Indiana, and the Central District of California, none dealt directly with the post-Selia Law issue or meaningfully grappled with the separation of powers arguments that carried the day in the Fifth Circuit.

Similarly, Parties currently subject to CFPB investigation may consider whether to object on the grounds that the investigation is improvidently funded. Some parties engaged in enforcement litigation with the CFPB, both within and even outside the Fifth Circuit, have already pressed for dismissals based on the Fifth Circuit’s decision.

In short, parties should consider their options. While no one can say as yet that the Fifth Circuit’s decision in Community Financial will become law nationwide, it is clear that the decision has exposed a significant threat to the very existence of the CFPB.

[1] Cmty. Fin.l Servs. Ass’n of Am., Ltd. v. Consumer Fin. Prot. Bureau, No. 21-50826 (5th Cir. Oct. 19, 2022), available at http://www.ca5.uscourts.gov/opinions/pub/21/21-50826-CV0.pdf.

[2] PHH Corp. v. Consumer Fin. Prot. Bureau, 881 F.3d 75, 95 (D.C. Cir. 2018) (en banc), overruled in part by Seila Law LLC v. Consumer Fin. Prot. Bureau, 140 S. Ct. 2183 (2020).

CFPB Sues MoneyLion over Membership Program, Uses Military Lending Act as Hook

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A&B Abstract:

On September 29, 2022, the Consumer Financial Protection Bureau (“CFPB”), sued MoneyLion Technologies Inc. and 37 of its subsidiaries (“MoneyLion”) in New York federal court for violations of the Military Lending Act (the “MLA”) and Consumer Financial Protection Act (“CFPA”).

The Allegations

The CFPB alleges that MoneyLion offered installment loans that consumers could not access unless they enrolled in a membership program with monthly membership fees.  While MoneyLion represented to consumers that they “had the right to cancel their memberships for any reason,” it “maintained a policy prohibiting consumers with unpaid loan balances from canceling their memberships.”

According to the CFPB, MoneyLion’s membership model resulted in violations of the MLA’s 36% APR cap.  Under the MLA’s implementing regulation, APR is calculated as including “fee[s] imposed for participation in [an] arrangement for consumer credit.”  Based on this, the CFPB argues that the membership fees MoneyLion required servicemembers to pay to gain access to installment loans must be included in those loans’ APR.  If correct, those loans’ APR would unlawfully exceed 36%.

The CFPB also alleges that the installment loans to servicemembers violated the MLA by containing unlawful arbitration clauses and failing to contain required disclosures.

Lastly, the CFPB alleges that MoneyLion’s membership model resulted in unfair, deceptive, and abusive acts or practices under the CFPA. Particularly, the CFPB alleges that MoneyLion misled and injured consumers by representing to consumers that they had the right to cancel their memberships when, in fact, they did not.

Takeaways

The MoneyLion suit serves as a good reminder that every lending program should: (i) account for the additional protections provided to uniquely situated borrowers, such as servicemembers under the MLA; (ii) scrutinize any fees paid by consumers that could be viewed as increasing a loan’s APR; and (iii) review representations they make to consumers to align with the commercial realities and the regulatory requirements of the products they offer.