Regulation
DFS Releases Recommendations for Online Lending
July 12, 2018
The New York State Department of Financial Services (DFS) released a report on Wednesday on the subject of online lending in the state. The report was mandated by a bill signed by New York Governor Andrew Cuomo on June 1 of last year. According to the original bill, this report was to be researched and composed by a task force of multiple parties. But in the eleventh hour, the section regarding the task force was struck. The report is to be presented to the governor, the temporary president of the senate, the speaker of the assembly, the chair of the senate standing committee on banks, and the chair of the assembly standing committee on banks.
Wednesday’s 31-page report is based on survey responses from 35 online lenders operating in the state, lending both to businesses and to individuals. One of the revelations in the report is that, from the data obtained, “New York individuals appear to account for a higher total dollar amount of loans than New York businesses.”
The report presents three primary assertions:
Equal Application of Consumer Protection Laws.
The report establishes that New York has strong consumer protection laws and regulations that apply to financial institutions. “These protections should apply equally to all consumer lending and small business lending activities,” the report reads. The report explains that there are strong protections against payday lenders and indicates that there should be strong protections across the board, even though the financial products and the consumers may vary widely.
Usury Limits Must Apply to All Lending in New York.
The report asserts that access to credit at usurious rates has long been prohibited in New York and that online lenders should not be able to bypass this by having arrangements with banks in other states, like Utah, where the usury laws are different. In New York, the civil usury rate is 16% and the criminal usury rate is 25%. But because online lenders have arrangements with out-of-state banks, they can charge interest at rates well above 25%.
Currently, if an online lender sues a merchant for not paying, the merchant cannot use usury as a defense. In the report, DFS recommends that a business should have the right to present usury as a defense.
All Online Lenders Should be Licensed and Supervised.
The report states that New York State chartered banks, credit unions and licensed non-depositories are subject to regular examinations by the DFS and, if applicable, federal regulatory agencies.
“Many online lenders remain unlicensed in New York with no direct supervisory oversight from a safety and soundness or consumer compliance perspective,” the report reads. “Direct supervision and oversight is the only way to ensure that New York’s consumers and small business owners receive the same protections irrespective of the channel of delivery [of financing.]”
Some of these issues relate to the well-known 2015 Madden v. Midland Funding court decision, in which a credit card consumer (Madden) won a case against a debt-collection agency (Midland Funding) because the court decided that Midland, as a non-bank, was not allowed to charge interest above what was allowed in the state.
House Passes Bill That Would Help More Consumers Build Credit
June 26, 2018
Yesterday, the house passed the Credit Access and Inclusion Act of 2017, a bill that would allow reporting of telecom and utility payments to credit reporting agencies. The idea behind the bill, written by Rep. Keith Ellison of Minnesota, is to give people more opportunities to report positive on-time payments that could improve their credit.
“By allowing more of Americans’ positive financial information to be reported to credit rating agencies, this bill will help millions more Americans access credit and everything that comes with it,” Ellison wrote in a statement. “Once this bill is signed into law, millions of Americans who previously couldn’t will now be able to access lower-cost loans, cheaper car payments, or a mortgage on their first home.”
If passed in the Senate, the law would allow a person to present to a consumer reporting agency information about payments “with respect to a dwelling, including such a lease in which the Department of Housing and Urban Development provides subsidized payments for occupancy,” according to the bill.
This bill is an amendment to the Fair Credit Reporting Act, which was originally passed in 1970.
Lawyers Weigh in on Federal Decision That CFPB is Unconstitutional
June 22, 2018In light of a federal court ruling yesterday that the structure of the Consumer Financial Protection Bureau (CFPB) is unconstitutional, deBanked spoke with some lawyers to get their perspective on what this decision could mean.
Alan Kaplinsky, Partner, Ballard Spahr
“I think it will sow more confusion related to the CFPB. I think it’s important to note that this opinion – while it is precedent that could be cited in other cases…it’s not binding on any other court anywhere in the country, including in the Southern District of New York. That being said, I anticipate that the CFPB will appeal [the decision] if for no other reason than because they have other cases. Ultimately, I would anticipate that the case will end up in the U.S. Supreme Court.”
Lucy Morris, Partner, Hudson Cook (previously a Deputy Enforcement Director at the CFPB)
“The bottom line is that it creates yet more uncertainty for the bureau, for industry and for consumers. Is this bureau legitimate or not? And if not, what does that mean for all of the many decisions and actions taken by the former [CFPB] director Cordray and the current acting director, Mulvaney.
Maybe this can add to a momentum to create a bipartisan commission to finally resolve this, and to give everyone a commission that…avoids the wide pendulum swings that have been happening. This requires a legislative fix, which is challenging of course.”
Lawrence Kaplan, Of Counsel, Paul Hastings
“Typically, in a case like this, you would have a circuit split, where now you have one circuit saying yes and one circuit saying no. And ultimately that would go up to the supreme court. But you could have the administration saying ‘We’re not going to defend this.’ [Given the administration’s unfavorable attitude toward the CFPB], it’s likely that you’re not going to see anyone vigorously defend the agency.
As for alternative lenders, [these] are state issues. And as a result, [lenders] are not off the hook…At the end of the day, everyone will still have to comply with a patchwork of state laws. You’re really taking away the federal hammer. So, [certain cases] may no longer be a federal case. Now, in some ways, be careful what you wish for, because now you have to face 50 executioners [because] a lot of the states would defer to and join with the feds.”
Commercial Financing Disclosures Bill Approved in the CA Senate
May 31, 2018The use of an annualized cost metric on loan and non-loan contracts alike is now one step closer to becoming the law in the State of California. On Thursday, SB 1235 was approved on the Senate floor. The bill calls for commercial finance companies to disclose an Estimated Annualized Cost of Capital. In previous hearings, the bill’s author, Sen. Steve Glazer (D), stated that it was his intention that this apply to merchant cash advances as well.
“This estimate includes all charges and fees incurred for the financing, assuming you make all payments when scheduled and adhere to the terms of the agreement. This number is based on the estimated term. If the actual term is shorter than estimated, the annualized cost of capital may be higher than shown. If the actual term is longer than estimated, the annualized cost of capital may be lower. This is not an Annual Percentage Rate (APR).”
Here is how to calculate the Estimated Annualized Cost of Capital as set forth in the bill:
(1) Divide the total dollar cost of financing by the total amount of funds provided.
(2) Multiply the result in paragraph (1) by 365.
(3) Divide the result from paragraphs (1) and (2) by the term or estimated term of the financing in days.
(4) Multiply the result from paragraph (3) by 100.
(5) The result from paragraph (4) shall be labeled “The Estimated Annualized Cost of Capital.”
In addition, commercial finance companies will also have to disclose the total dollar cost of the transaction and the total amount of money the merchant will receive net of all fees.
The bill must now pass through the solidly Democrat-controlled Assembly and be signed by the Governor to become the law.
New Law Benefits Small Banks
May 24, 2018
President Trump signed into law today the Economic Growth, Regulatory Relief and Consumer Protection Act, which pares down Dodd-Frank regulations for thousands of small and medium-sized American banks. Dodd-Frank refers to the 2010 Dodd-Frank Act, which instated laws to regulate the risky behaviors of banks that led to the 2008-2010 financial crisis.
Among the changes this new law makes to Dodd-Frank is reducing the number of banks that are subject to strong government oversight because they are considered “systemically important.” Banks with assets of $50 billion or more had been considered “systemically important.” As of today, only banks with assets of $250 billion or more will get that moniker and be subject to the strictest government regulations.
In addition to this, small banks – generally with assets of $10 billion or less – will now be much freer to originate residential mortgages. And they will have to comply with fewer regulations in general.
“There are simplifications in [this law] that change the capital costs for smaller banks,” said Dodd-Frank expert and Senior Counsel at Morrison & Foerster, Oliver Ireland. “By lowering the cost structure of the bank, you may facilitate lending at either lower rates, or more lending.”
Ireland said that there is no way to quantify this, but acknowledged that small banks will be in a stronger position with this new law in place. As for the effect of the new law on alternative lenders, Ireland didn’t predict anything at all dramatic.
Still, he said, “There are a number of provisions in here that make the cost of being a small bank somewhat less. That may put them in a better position to compete with non-bank lenders.”
Andrew Smith Named Director, FTC’s Bureau of Consumer Protection
May 20, 2018
On Wednesday, Andrew Smith, former partner of the law firm Covington & Burling, was named the Federal Trade Commission’s Director of the Bureau of Consumer Protection.
This is not Smith’s first role in government. From 1997 to 2000, Smith worked as a lawyer for the Securities and Exchange Commission. And from 2001 to 2005, he worked as a lawyer for for the Federal Trade Commission (FTC), where he will now be returning.
Since leaving the FTC, Smith served as a partner at Morrison & Foerster and most recently at Covington & Burling. Smith’s recent appointment garnered criticism from government officials who pointed out that Smith has represented egregious offenders of consumer rights. Of the five FTC commissioners, the two Democratic commissioners voted against his appointment.
But a recent New York Times article, which stressed the fact that Smith has represented violators of consumer rights, also acknowledged that he is “regarded as a hard-working and knowledgeable lawyer even by critics.”
Chairman of the FTC Joe Simons, who appointed Smith, expressed dismay over his colleagues’ rejection of Smith.
“I am disappointed that two of my new colleagues have chosen to turn Mr. Smith’s appointment into a source of unnecessary controversy,” Simon said in an FTC statement. “I am highly confident that Mr. Smith will be an effective leader of the Bureau of Consumer Protection. He is widely respected as one of our country’s best and most experienced consumer protection lawyers.”
Smith has recently represented Facebook, Uber and Equifax, all companies with cases before the FTC. Because of this, it is most likely that Smith will recuse himself from these cases. Critics of Smith’s appointment, including Democratic U.S. Senators Elizabeth Warren, Richard Blumenthal and Brian Schatz believe that this makes him unfit to be director of the bureau. But Simon strong disagrees.
“When a political appointee is recused, the Commission relies even more heavily on these seasoned career professionals to allocate resources and tee up recommendations for the Commissioners, who are the ultimate decision makers,” Simon said in an FTC statement. “When Mr. Smith is recused on a matter, I know [the bureau’s] career managers and staff will ensure that American consumers are still well protected.”
California Commercial Financing Disclosures Bill Still a Work in Progress
May 8, 2018
SB-1235, a bill that would require APR disclosures on all types of commercial financing products transacted in California (including some types of factoring, leasing, and merchant cash advance), survived the Judiciary Committee hearing on Tuesday. The bill was previously debated by the Senate Committee on Banking and Financial Institutions, where key provisions like a uniform APR disclosure came under fire.
Since then, Senator Steve Glazer, the bill’s author, is now proposing an alternative Annualized Cost of Capital metric rather than an Annual Percentage Rate in an attempt to compromise with the opposition that says the metric will not work for non-lending products.
On Tuesday, two trade association representatives continued to press their case for a collaborative solution that would work best for all parties, especially small businesses.
Scott Riehl, VP, State Government Relations at the Equipment Leasing and Finance Association (ELFA) said that his association, whose members include Caterpillar and Hewlett Packard, was not on board with the bill as currently drafted. No one in the financial community has ever even heard of the term Annualized Cost of Capital, Riehl said.
Katherine Fisher, Partner at Hudson Cook, LLP, who was there on behalf of the Commercial Finance Coalition, testified that it would not be possible to calculate an annualized rate when the timeframe of products like factoring and merchant cash advances were indeterminate.
Judiciary Committee Chairwoman Hanna-Beth Jackson wrapped up the lively debate by saying that ultimately California “wants a robust small business community” after several of her committee members voiced concerns that the bill in its current form could potentially deter commercial finance companies from providing capital in their state.
The hearing concluded with only 3 aye votes, putting the bill “on call,” wherein no decision was formally reached.
Update: Before the close of the day, the committee secured a 4th aye vote, pushing the bill forward.
Hearing on Commercial Financing Disclosures Scheduled in California State Senate
May 7, 2018Update: Link to the LIVE stream is here
The Senate Judiciary Committee for the State of California will convene for a hearing on the commercial financing disclosures bill at 1:30 PST on May 8th. SB-1235, as its known, previously survived the Senate Committee on Banking and Financial Institutions when it was debated and contested on April 19th. (a video of that hearing is available here)
deBanked will attempt to stream the hearing or provide a link to it when it begins. Check back here for more details.
