May 2014 Newsletters
As I am sure you are all aware, Operation Choke Point is an initiative of the Department of Justice (DOJ) conducting an investigation of banks in the United States and the business they conduct with payment processors, payday lenders and other businesses believed to be at higher risk for fraud. This initiative was started in 2013 and up to this point it has not been highly publicized. Unless your bank was one of the banks that received the initial letters requesting more information, you may not have even given it a second thought. However, you may want to educate your bank and your staff on what this initiative entails. For example, recently there has been a lot of press on the payday lending operations and the crackdown from the CFPB on these businesses. How exactly does this crackdown on payday lenders affect us at our banks? What does this have to do with the recent payday lender lawsuits?
Operation Choke Point has caused banks to evaluate their customer base and begin to cut ties to the industries that regulators have deemed as unacceptable from a risk standpoint. The industries that have made the list range from gun sales, to pornographic industries and payday lenders.
That being said, the proactive action of closing relationships with the listed businesses may not be enough to keep the bank from being involved in legal actions. For example, there have recently been judicial rulings that might be a reason to worry. Last year, cases were filed in which the plaintiff (your customer) made an argument that the banks should have known that their payday lender customers were doing illegal things and because the payday lender was breaking the law by funding the payday loans, the bank is implicated by merely providing access to banking services to the payday lender.
There are court cases that have been filed in which consumers have sued 10 banks and a credit union for allegedly helping online payday lenders break usury and other laws by processing transactions for those companies.
The lawsuits, all filed last year in federal court, recently crossed the first hurdle. The judge refused to dismiss the banks’ motions to throw out the cases. Most of the suits name multiple banks as defendants.
One of the banks here in the U.S., Four Oaks Bank & Trust (USB) had been sued in federal court in Minnesota, but a judge dismissed the case on April 21 and ordered the $91 billion-asset company to enter arbitration with the plaintiffs.
A Kansas City, Mo. attorney has accused the banks of playing an essential role in allowing payday lenders to charge egregiously high interest rates.
The Kansas City attorney, Steve Six, has also been quoted as saying, "Payday lenders know that if they had to collect their debts by check, debit card" or another method that allowed the customer to first approve the payment "they would not be able to maintain their illegal activity. These banks play a key link in the scheme," says Six, a former Kansas attorney general.
The banks, according to Six's court filings, have violated federal anti-racketeering laws; federal banking regulations; and industry standards and rules established by NACHA. NACHA's rules "put the gatekeeper responsibilities on the banks to vet the originators they allow into the ACH network and to ensure that all the entries are in compliance," Six says. The number of banks that illegally process transactions for payday lenders is limited, Six says.
The affected banks have denied the claims. The banks do not believe they are in violation of the NACHA requirements and are simply performing a back-office function in these transactions.
The complaints seek funds collected by the banks in repayment of any unlawful loans extended by the payday lender. In the banks’ motions it states that the bank was not the lender and all the bank did was transmit the plaintiff’s instruction to debit their account.
This will be interesting, at best, to watch unfold. We will keep you informed and let you know of any implications that your bank should be concerned about. In the meantime, review your customer base and your requirements for ACH and ask yourself, does our bank process debit card transactions from payday lenders?
Even though there have not been any amendments to the SCRA, it appears the interpretations recently made changes to the SCRA. Does your bank have loans that fall under the SCRA requirements? If so, you should read about the surprising $60 million SCRA settlement that was announced earlier this week.
The FDIC announced this settlement which involved Sallie Mae and Navient Corp. for alleged unfair and deceptive practices as well as violations of the SCRA related to student loans.
The FDIC said that the parties (referred to as Sallie Mae in the FDIC order) violated federal law that prohibits unfair and deceptive practices by:
- Inadequately disclosing its payment allocation methodologies to borrowers;
- Allocating payments across multiple loans in a way that maximizes late fees; and
- Inadequately disclosing how to avoid late fees in billing statements.
The FDIC also said that Sallie Mae violated the SCRA by unfairly conditioning receipt of benefits upon requirements that were not included as a part of the act, improperly advising servicemembers that they must be deployed to receive SCRA benefits, and by failing to provide SCRA relief after they had been put on notice of the borrowers' active duty status.
Sallie Mae and Navient have been ordered to pay $6.6 million in penalties, $30 million in restitution to harmed borrowers, and fund a $60 million settlement fund with the U.S. Department of Justice. This is a result of an examination of Sallie Mae conducted by the FDIC.
In addition to the restitution payments and civil monetary penalty, the FDIC has ordered Sallie Mae to take steps to see that late fee and avoidance payment allocation is clear and conspicuous, that servicemembers receive proper treatment under the SCRA and that all residual violations are remedied in accordance with applicable laws.
Holly Petraeus, CFPB assistant director, Office of Servicemember Affairs, commended the actions by the DOJ and the FDIC. "The men and women serving this country should receive quality customer service and the legal protections afforded to them. Instead, Sallie Mae gave servicemembers the runaround and denied them the interest-rate reduction required by law," she said, adding, "This behavior is unacceptable. And it's particularly troubling from a company that benefits so generously from federal contracts." Petreaues was quoted stating, this “action should serve as warning not just to the student loan servicing industry, but to all institutions that provide or service loans to the military.”
She noted a 2012 CFPB report that found that servicemembers faced serious hurdles in accessing their student loan benefits, including the provisions of the SCRA which caps the interest rate on pre-existing student loans and other consumer credit products at 6 percent while the servicemember is on active duty.
So what are the perceived changes that have been noted in this action? Well, let’s take a closer look:
As set forth in Section 527(b)(1) of the SCRA, to obtain a rate reduction on a loan originated before the borrower entered military service, the servicemember must submit a written request for relief and the servicemember must submit a copy of the military orders calling the servicemember to military service. It is only upon receipt of written notice and a copy of orders that the creditor is required by Section 527(b)(2) to reduce the interest rate to 6 percent. Even the Department of Education (ED) has consistently held federal student loan servicers to this standard. In fact, ED has previously advised federal student loan servicers that the receipt of military orders alone is not sufficient because it is both inconsistent with the SCRA and inconsistent with the ED’s own regulations.
That being said, it now appears that any institutional knowledge of military service, whether through a telephone call, written correspondence, an email or text message, obligates a student loan servicer, and by implication, any creditor, to attempt to obtain the necessary written request and military orders or substitutes through the use of the Defense Manpower Data Center. More significantly, the servicer and creditor must provide the 6 percent interest rate relief even if the servicemember has never submitted any request for such relief.
This move has set a precedent that we as bankers and servicers of SCRA loans need to take note of.
In January 2013, the CFPB finalized several mortgage rules, most of which took effect in January 2014. Among these rules, the Ability-to-Repay rule was written to protect consumers from requiring bank/mortgage lenders to make a reasonable, good-faith determination that the loan applicants have the ability to repay their loans. The mortgage servicing rules were written to establish protections for all homeowners, including those who were facing foreclosure.
On Wednesday of this week the CFPB proposed amendments to address concerns about origination and servicing issues, particularly for nonprofit housing providers.
Among the provisions in the proposed rule are amendments that address:
- Definition of a nonprofit small servicers: Certain small servicers are exempt from some of the CFPB’s new mortgage servicing rules, so long as they service 5,000 or fewer mortgage loans and meet other requirements. The CFPB has learned since implementation of the servicing rules that there are some nonprofit organizations that service loans, for a fee, from other associated nonprofit bank/mortgage lenders. Because of the unique structure of these entities they may not be able to consolidate their servicing activities and still meet the current requirements to be able to qualify for the small servicer exemption. That being said, the proposal on Wednesday offers an alternative definition of a small servicer that would apply to certain 501(c)(3) nonprofit organizations so that they can continue to consolidate their servicing activities while maintaining their exemption from some of the servicing rules.
- Nonprofit Ability-to-Repay exemption amendment: Certain nonprofit organizations that lend to low- and moderate-income consumers are already exempt from the Ability-to-Repay rule if the organization makes no more than 200 mortgages a year, among other limitations. Today’s proposal includes an amendment to this provision so that certain 501(c)(3) nonprofit groups, such as Habitat for Humanity, can continue to extend certain interest-free, forgivable loans, also known as “soft seconds,” without regard to the 200-mortgage loan limit.
- Refunding excess points and fees: Under the Ability-to-Repay rule, qualified mortgages are subject to special consumer protections. The points and fees charged to a consumer on a qualified mortgage generally cannot exceed 3 percent of the loan principal, if the loan principal is $100,000 or more. If a bank believes it has offered a qualified mortgage but afterwards discovers that it has exceeded the 3 percent cap, the proposal lays out limited circumstances where the excess can be refunded to still have the loan meet the legal requirements of a qualified mortgage. The CFPB notes that the points and fees concept is complex and may result in certain items, such as discount points, mortgage insurance premiums and loan originator compensation, being improperly excluded from points and fees. The proposed amendment creates a procedure permitting the bank/mortgage lender to refund the excess points and fees amount to the borrower within 120 days and keep the loan’s QM status. The bank/mortgage lender must also maintain and follow policies and procedures for reviewing the loans and providing refunds to borrowers. The bank must also have originated the mortgage loan in good faith as a QM. The amendment also lists examples of factors that may be used as evidence that a loan was or was not originated in good faith as a qualified mortgage. The proposal is designed to encourage bank/mortgage lenders to provide access to credit to consumers seeking loans that are at or near the points and fees limit.
In addition to seeking public comment on these proposals, the CFPB is also seeking input on other questions relating to the impact of the mortgage rules, including their effect on larger banks or mortgage bank/mortgage lenders that do not meet the definition of small creditor.
Once the proposal is published in the Federal Register, there will be an open comment period. We will keep you apprised on this issue.