Regulation
For The CFPB, A Diet of ‘Meat and Potatoes’
October 24, 2016
CFPB Director Richard Cordray gave the closing keynote speech during Money2020’s first night in Las Vegas, and he sounded an assertive, yet amenable tone. “We can help push [the innovators] in the right direction,” he said, but he conceded that the agency can’t actually create the products. “That’s what the people here [at this conference] are doing.”
Since their purpose is to go after companies when they do something wrong, there’s only so much they can do to nurture companies to do things right, but they have tried to do their best to reduce uncertainty, he explained, through the use of aids like no-action letters.
Despite this, some fintech companies have already been on the receiving end of an enforcement action, and Cordray explained the reason behind that is very simple. “Our enforcement actions to date have dealt with meat and potatoes issues,” he said, adding that it’s typically centered around deceptive practices, where a company promises something and then doesn’t deliver it.
And being innovative first and patching the holes in the customer experience second, is not the type of formula that Cordray’s CFPB is very accepting of. Be consumer-focused and compliant with all laws from the very beginning, he advised.
Cordray didn’t mention small business lending at all, but Ori Lev, the CFPB’s former deputy enforcement director for litigation, said on an earlier panel that “they’re going to nibble on the edges of it.” Lev couldn’t speak on the agency’s behalf however, since he now works in the private sector as a partner at law firm Mayer Brown.
Still, some folks in commercial finance have told deBanked that they’re afraid a few nibbles could turn into a bite. That’s because even if Cordray is a meat and potatoes kind of guy for now, his unchecked authority is so extensive, that a federal court recently declared it unconstitutional. The CFPB plans to challenge that ruling however, which currently only affects the D.C. Circuit.
With Cybersecurity Rule Looming, It’s About To Get Way More Expensive To Be A Traditional Lender In New York State
October 18, 2016
Coming soon to New York, any company required to operate under a license, registration, charter, certificate, permit, accreditation or similar authorization under the banking law, the insurance law or the financial services law, will need to implement a cybersecurity program.
“Senior management must take this issue seriously and be responsible for the organization’s cybersecurity program and file an annual certification confirming compliance with these regulations,” the NYDFS proposed rule states. That likely means hiring computer experts to comply. Actually, it definitely does because one of the requirements is to employ cybersecurity personnel sufficient to manage cybersecurity risks and to perform core cybersecurity functions. That includes training, monitoring, penetration testing, auditing, implementing multi-factor authentication, and encrypting non-public data, among other tasks.
Based on the language, MCA companies are likely exempt, as are companies that have fewer than 1,000 customers a year, are generating less than $5 million in revenue a year and have less than $10 million in assets.
In Leasing News, Barton, Klugman & Oetting attorney Tom McCurnin, argued the proposal will be a disaster for small banks with branch offices in New York.
The rule is slated to go into effect on January 1, 2017. And even if the rule doesn’t apply to you, it might be a good time to start bolstering your cybersecurity anyway, if for no other reason than to protect your customers and your company.
SBA’s Office of Advocacy Goes to Bat for Payday Lenders
October 17, 2016
What’s the Small Business Administration’s Office of Advocacy doing advocating for payday lenders? Well they’re small businesses first and foremost, according to a letter submitted to CFPB Director Richard Cordray, and the CFPB’s short-term lending proposal puts them at risk.
Coming in at a cool 1,341 pages, the proposal no doubt exudes costly compliance. And it’s not just lawyers and compliance officers that payday lenders need to worry about, they’re also asked to forfeit some of their major profit centers, a condition that has left many of them outraged. In a roundtable convened by the Office of Advocacy, “some [short-term lenders] stated that they may experience revenue reductions of greater than 70 percent and be forced to exit the market.”
The CFPB has more-or-less acknowledged these steep revenue loss projections and if you read between the lines, having these companies be forced to exit the market seems to be the unspoken consequence they’re probably hoping for.
But at what cost?
“The CFPB’s proposed rule may force legitimate businesses to cease operation,” The Office of Advocacy argues. “Imposing such a regulation will not alleviate a consumer’s financial situation. The consumer will still need to pay his/her bills and other expenses. Imposing these strict regulations may deprive consumers of a means of addressing their financial situation.”
CFPB’s Power Structure Ruled Unconstitutional – Concentration of Enormous Power a Threat to Individual Liberty
October 11, 2016
The enforcement agency long panned for not being accountable to anyone, including Congress, has finally been checked by the judicial branch. On Tuesday, October 11th, the United States Court of Appeals for the District of Columbia Circuit, ruled the CFPB’s structure is unconstitutional because as a single-person-run agency of the executive branch, it is not even accountable to the President of the United States. The CFPB’s existence challenges the very framework set forth by the nation’s founders, the Court asserted.
The opening of the 110-page decision cites Article II of the United States Constitution. “The executive Power shall be vested in a President of the United States of America,” adding that Article II grants the President alone the authority and responsibility to “take Care that the Laws be faithfully executed.” As time has passed however, independent executive agencies have been created and overseen by multi-member commissions, which have become an acceptable check on the individual power of one person.
In other words, to help preserve individual liberty under Article II, the heads of executive agencies are accountable to and checked by the President, and the heads of independent agencies, although not accountable to or checked by the President, are at least accountable to and checked by their fellow commissioners or board members. No head of either an executive agency or an independent agency operates unilaterally without any check on his or her authority. Therefore, no independent agency exercising substantial executive authority has ever been headed by a single person. Until now. – Excerpt from the Court of Appeals decision
As it stood previously, CFPB Director Richard Cordray essentially had unlimited power to write his own rules, attack and fine companies whether warranted or not, personally motivated or not, on whatever whim he so desired. While very unpopular among Republicans and even among some Democrats, he received recent acclaim for his agency’s work on the Wells Fargo fake account scandal. Other moves have been more dubious, like their foray into lawmaking without the legislative branch (see a 1341-page law they invented) and reinterpreting their own statutory authority by expressing an interest to regulate commercial finance, all while potentially engaging in “chokepoint-like” tactics to intimidate business models they don’t like.
The Court of Appeal’s decision is especially damning because the CFPB was caught making legal errors in their enforcement action against a mortgage lender that led to this review to begin with. In effect, in a case that questioned whether or not the agency’s mere existence is rogue in that of itself, the CFPB was actually going rogue in how they applied the law. Basically, they removed any doubt about whether or not oversight should be warranted.
The CFPB will not be dismantled as a result of the decision and it will still possess incredible enforcement power. The decision instead directs the organization to conform to an existing executive agency structure, either through a multi-member commission or be directly accountable to the President of the United States.
The WSJ reported that the CFPB had no comment and is currently reviewing the decision.
“The CFPB’s concentration of enormous executive power in a single, unaccountable, unchecked Director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decision-making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency,” the Court asserted.
Morgan Stanley, Deutsche Bank and Santander Stress Under Fed’s Test
June 30, 2016The unemployment rate is 10 percent, the stock market is worth half its value and short-term treasury rates are negative making investors pay the US government to hold their money.
This was the Fed’s hypothetical scenario for this year’s stress test for big banks, and all but three of 33 banks passed.
Wednesday’s stress test announcement pertained to the Fed’s evaluation of how well big banks planned for risk and allocated capital under stress. The first part of the tests announced last week, examined and monitored whether big banks had sufficient capital to sail through economic turbulence, which all 33 banks passed.
Deutsche Bank, Banco Santander and Morgan Stanley were among 33 banks that felt the stress during the second round. The regulator objected to the capital distribution plans put forth by the US subsidiaries of Deutsche Bank and Banco Santander and stopped them from issuing dividends or making share buybacks and asked Morgan Stanley to submit a revised plan for “qualitative reasons.” The banks who passed the test will be able to pay out as much as two thirds of the projected net income for the next four quarters and can also continue to retain capital.
Deutsche Bank has failed the test two years in a row and Santander for three. The Fed is concerned about the banks’ ability to measure risk but in practice, the Fed’s rejection means that these banks cannot send US profits back home until they pass the test.
Santander blamed its regulatory trouble on “growing pains” and said that the bank is building up a holding company to oversee the banking unit and consumer-lending subsidiary.
In part, these capital restrictions placed on big banks under Dodd Frank is what bolsters the alternative non-bank lending sector where lenders pride themselves on being lean and agile. While the industry is still negotiating its relationship with Wall Street, total insulation from bank capital for now seems like a distant dream. Santander is an investor in Atlanta-based small business lender Kabbage and also uses its technology to underwrite loans for small businesses quickly.
1,334 Page CFPB Loan Rule Proposal Warns Business Lenders
June 2, 2016
Congress isn’t responsible for lending lawmaking anymore it seems, the CFPB is. That’s a bit chilling considering the federal agency is also tasked with enforcing the laws it creates. A new 1,334 page law proposal published by Richard Cordray at the CFPB to assert control over payday loans, vehicle title loans, and certain high-cost installment loans also mentions business loans in it.
“The Bureau intends to exclude loans that are made primarily for a business, commercial, or agricultural purpose,” the proposal states. However, since the proposal is not a bill that would be brought before Congress for a vote, the weakly and seemingly intentionally phrased statement of “intends to exclude” is not the most reassuring language. Cordray concedes in an earlier paragraph though that Dodd-Frank only empowered the Bureau to prescribe rules over consumer finance, which was defined primarily as personal, family, or household purposes.
Already the proposal explains how a business lender might violate that threshold:
“A lender would violate this part if it extended a loan ostensibly for a business purpose and failed to comply with the requirements of this part if the loan in fact is primarily for personal, family, or household purposes. See the section-by-section analysis of proposed § 1041.19 for further discussion of evasion issues.”
That referenced further analysis basically says that if the lender is really just pretending a personal loan is a business loan, then they’re just trying to evade the rules and that won’t work.
If a consumer claims they’re going to use the money for a personal purpose but then decides to use it to finance a small business, well then it’s still a consumer loan, Cordray argues:
“Proposed § 1041.3(b) specifies that the proposed rule would apply only to loans that are extended to consumers primarily for personal, family, or household purposes. Loans that are made primarily for a business, commercial, or agricultural purpose would not be subject to this part. The Bureau recognizes that some covered loans may be used in part or in whole to finance small businesses, both with and without the knowledge of the lender. The Bureau also recognizes that the proposed rules will impact the ability of some small entities to access business credit themselves. In developing the proposed rule, the Bureau has considered alternatives and believes that none of those alternatives considered would achieve the statutory objectives while minimizing the cost of credit for small entities.”
Business lenders and even merchant cash advance companies should make sure they ask every applicant what the intended use of the funds are. If it’s for a personal purpose, the CFPB could try to exercise jurisdiction in the future.
Here’s Why The DOJ Wants to Keep an Eye on Online Lenders
May 26, 2016
Online lending has been getting a lot of attention, but not necessarily all good.
The U.S. Justice Department is among the latest authorities to be concerned about online lending, while it’s going through a rather choppy ride.
Assistant Attorney General at the DOJ, Leslie Caldwell voiced the regulator’s concern that the loans made online were backed by investors and are without “traditional” safeguards of deposits that banks rely on. Although alternative lending is still a small part of the lending industry, DOJ wants to keep an watchful eye to avoid another mortgage crisis-like situation.
“I’m not saying … that we’ve uncovered a massive fraud, but just that there’s a potential for things to go awry, like when underperforming loans were being sold in residential mortgage-backed securities,” Caldwell told Reuters.
And while the DOJ questions Lending Club, New York’s financial regulator is said to have sent letters to 28 online lenders seeking information on loans made in the state.
The New York Department of Financial Services first subpoenaed Lending Club on May 17th, seeking information about fees and interest on loans made to New Yorkers. Bloomberg reported that the regulator has sent letters to 28 firms including Funding Circle and Avant asking for similar disclosures. The full contents of those letters have not been made public yet, but Reuters seemed to characterize them as being perhaps more aggressive than the inquiry in California six months ago.
Most lenders, the NYDFS will likely learn, are relying on preemption granted under the National Bank Act or Federal Deposit Insurance Act. Chartered banks covered under these laws are typically the entities in question making the actual loans. The “online lenders” buy the loans from the banks and service them. But absent that structure, it is possible that New York could model future regulation on California’s system, where lenders must go through a vetting process and be licensed.
Online lenders dependent on chartered banks to enjoy preemption have slightly less reason to be worried after the US Solicitor General recently filed a response to the US Supreme Court’s request, that argued the Second Circuit’s ruling in Madden v Midland, a case that challenged preemption, was simply incorrect.
Google’s Payday Loan Ad Ban Smells Like Government Intimidation
May 12, 2016CFPB Director Richard CordrayGoogle loved payday lending and products like it, until something happened.
Google Ventures is one of the most notable investors in LendUp, a personal lender that charges up to 333% APR over the period of 14 days. The famous creator of Gmail, Paul Buchheit, is also listed as one of LendUp’s investors. Four months ago, Google Ventures even went so far as to double down on their love for the concept by participating in LendUp’s $150 Million Series B round.
This week, Google Inc. has apparently found Jesus after “reviewing their policies” and determined that personal loans over 36% APR or under 60 days will be forever BANNED from advertising on their systems. “This change is designed to protect our users from deceptive or harmful financial products,” they wrote in a public message. Ironically of course, Google is tacitly admitting that it must protect users from its own products that it has invested tens of millions of dollars in because they are deceptive or harmful.
LendUp is not the only company that Google Ventures has invested in that charges more than 36% APR. A business lender they previously invested in charged up to 99% APR. That investment was for $17 million as part of a Series D round. At the time, they called the management team’s vision “game changing.”
The only thing game-changing now is their about-face after their supposed policy and research review. It’s hard to imagine that in 2016, Google is just finally reading research about payday lending, especially considering that payday loan spam has for so long been a part of their organic search results. It cannot be understated that they’ve even created entire algorithms over the years dedicated to payday search queries and results. And “loans” as a general category is their 2nd most profitable. Yes, surely they know about payday.
Predatory middleman
Google has good reason lately to be afraid of sending a user to a website to get a payday loan however, even if they’re just an innocent middleman in all of this.
Last month, the Consumer Financial Protection Bureau filed a lawsuit against Davit (David) Gasparyan for violating the Consumer Financial Protection Act of 2010 through his previous payday loan lead company T3Leads. In the complaint, the CFPB acknowledges that T3Leads was the middleman but argues that its failure to properly vet the final lender customer experience is unfair and abusive. At its core, T3Leads is being held responsible for the supposed damage caused to individuals because they may not have ended up getting the best possible loan terms.
One has to wonder if Google could be subject to the same fate. Could they too be accused of not auditing every single lender they send prospective borrowers off to?
Four months before being sued by the CFPB personally, the CFPB sued T3Leads as a company.
Gasparyan however, is already running a new company with a similar concept, Zero Parallel. That company is indeed advertising on Google’s system.
Chokepoint
For the CFPB, coming fresh off of having made the allegations that even a middleman sending a prospective borrower off to an unaudited lender is culpable for damages, the most bold way to achieve their goals of total payday lending destruction going forward would be to threaten the Internet itself, or in more certain terms, Google.
It’s quite possible that Google has been strong-armed into this new policy of banning short term expensive loans by a federal agency like the CFPB. Not giving in to such a threat would likely put them at risk of dangerous lawsuits, especially now that there are some chilling precedents. By forcing Google to carry out its agenda under intimidation, the CFPB wouldn’t have to do any of its day-to-day work of penalizing lenders individually that break the rules. Google essentially becomes a “chokepoint” and that’s quite literally something right out of the federal regulator playbook.
In 2013, the Department of Justice and the FDIC hatched a scheme to kill payday lenders by intimidating banks to stop working with them even though there was nothing illegal about the businesses or their relationships. That plan, which caused a massive public outcry, had been secretly codenamed “Operation Chokepoint” by the DOJ. A Wall Street Journal article uncovered this and a Congressional investigation finally put an end to the scheme after two years, but not before some companies went out of business from the pressure.
Given this history, it’s highly plausible that Google has been pressured in such a way that it’s too afraid to reveal it.
Google has long known all about payday lending. Their recent decision smells like government and they just might very well be the chokepoint.
