• CFPB’s New Target: Payday Lenders
  • January 25, 2012 | Authors: David N. Anthony; Virginia Bell Flynn; Alan D. Wingfield; Philip "Duke" de Haas
  • Law Firm: Troutman Sanders LLP - Richmond Office
  • On January 19, 2012, the Consumer Financial Protection Bureau (CFPB) put the payday lending market under the microscope by convening the agency’s first-ever “field hearing” in Birmingham, Alabama - a state with a large number of payday lenders.

    Richard Cordray, the new director of the CFPB, highlighted the $7 billion in fees earned annually by the payday lending industry and noted the high concentration of payday lenders in Alabama, which has led Birmingham to impose a 6-month moratorium on new payday lending stores. He stated that “[the CFPB] recognize[s] the need for emergency credit. At the same time, it is important that these products actually help consumers, rather than harm them. Now, the Bureau will be giving payday lenders much more attention.”

    According to Cordray, the lack of supervision of payday lending at the federal level means that there is a lot the federal government does not know about payday lending. He noted that through open forums and through the supervision program, the CFPB hopes to gather data to get a fuller picture of the market. Cordray also indicated that the gathering of this information and data will enable the CFPB to choose among its available tools to balance consumer needs and risks.

    The CFPB also announced the implementation of the Short-Term, Small Dollar Lending Procedures (the Procedures), an examination and supervision manual for the payday lenders. The CFPB will begin assessing the risks to consumers based upon the volume of business and the extent of state oversight and will continue to gather reports from and conduct examinations of bank and nonbank activities.

    The Procedures

    These Procedures describe the types of information that the agency’s examiners will gather to evaluate payday lenders’ policies and procedures, assess whether they are in compliance with applicable laws, and identify risks to consumers throughout the payday lending process. The examination manual also tracks key payday lender activities, from initial advertisements and marketing practices to closing practices.

    Specifically, the Procedures focus on several areas:

    1. Marketing;
    2. Application and Origination;
    3. Payment Processing and Sustained Use;
    4. Collections, Accounts in Default, and Consumer Reporting; and
    5. Third-Party Relationships.

    Most importantly, the Procedures look to whether payday lenders adequately inform potential debtors of the risks, policies, and payment terms of the loans.

    Cordray also noted specific bad practices in the payday lending industry, including:

    1. Unauthorized debits to consumers’ checking accounts;
    2. Fraudulent practices by internet lenders, which may not be the same entity as the entity advertising the loan product to the consumer; and
    3. Aggressive debt collection practices, either by the payday lender or third parties, including:
      a.     Posing as agents of the federal government;
      b.     Threatening criminal prosecution;
      c.     Attempting to garnish wages improperly; and
      d.     Harassing borrowers and their family, friends, and co-workers.

    Impact of these Procedures

    The CFPB has made it clear that the payday lenders are now a priority. With the release of this manual, payday lenders should have a fully implemented compliance program in order to deal with customer complaints. Other financial service industries, such as debt collectors, student loan providers, and check cashers are next on the CFPB’s list. All of these groups should be doing the same.

    However, with pending investigations comes a potential for advance notice. This early warning process allows the subject of an investigation to respond to potential violations before the legal action is commenced. This notice, unsurprisingly, is not mandatory.

    Another significant concern for payday lenders is the power the CFPB has to regulate Unfair, Deceptive, and Abusive Acts and Practices (UDAAP). The Procedures specifically addresses UDAAP with respect to payday lenders’ interactions with consumers. Although the CFPB broadly defines “unfair,” “deceptive,” and “abusive,” the Procedures give some insight as to practices which are looked unfavorably upon:

    • When the payday lender fails to disclose check cashing fees;
    • Some incentive programs for employees and third parties;
    • When the lender fails to disclose material terms of the optional product or service, including costs;
    • When the lender receives and documents the consumer’s express authorization prior to adding optional products or services to the payday loan;
    • When the lender fails to clearly disclose the consumer’s rights regarding payment methods.

    The CFPB continues to give vague descriptions of UDAAP behavior in the payday lender industry, but Cordray has recently given some insight on where the CFPB is heading. In an interview on January 22, 2012, Cordray stated: “Frankly there's a lot of fraud that's committed in the marketplace that is not on its face necessarily technically illegal.” Moreover, Cordray stated that a key concern with payday lenders is focusing on practices and products that “actually help consumers and don’t harm them.” Not only do financial institutions have to be vigilant when complying with the law, they also have to speculate as to what the CFPB considers non-illegal fraud. This creates a danger zone as the regulators begin to define these terms through case decisions.

    In sum, the CFPB is giving ample warning of broad thrusts of its regulatory efforts and is beginning to advance on multiple fronts. Businesses are on notice that complaint procedures, “early warning” procedures, and “unfair” and “abusive” business practices will be important. The question for potential targets is whether they start work now to put themselves in a position to respond quickly, knowledgeably, and effectively when the CFPB comes knocking.