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Consumer Credit Regulation: 9.4.2.5 Enforcement of the Payday Loan Payments Rules

The CFPB adopted the payday loan rule under its authority to implement the ban on unfair, deceptive, or abusive acts or practices (UDAAPs) under the Dodd-Frank Act.730 If and when the rule goes into effect,731 regulations adopted under the CFPB’s UDAAP authority may be enforced by state attorneys general and state regulators, but there is no direct private right of action for consumers to enforce the federal UDAAP ban or regulations adopted under the UDAAP authority.

Consumer Credit Regulation: 9.4.3.1 Introduction

This subsection considers guidances and principles on small dollar lending, including payday lending, issued by the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board (FRB), and the Consumer Financial Protection Bureau (CFPB).

Consumer Credit Regulation: 9.4.3.2 OCC Guidance

The OCC, which regulates national banks and (since 2011) federal savings associations, issued guidance on small-dollar lending in 2000,746 2013 (repealed in 2017),747 2018 (repealed in 2020),748 and 2020 (together with three other regulators).749 In addition, in 2000, the OCC issued an advisory letter on abusive lending practices that is not specific to small dollar loans but does apply to them.

Consumer Credit Regulation: 9.4.3.3.1 Guidelines for payday lending and deposit advance loans

Certain state-chartered banks and savings associations come under the FDIC’s jurisdiction if they are FDIC-insured banks and are not members of the Federal Reserve System. In 2003 the FDIC first issued guidelines for banks regarding payday lending, at a time when FDIC-regulated banks, like other banks, were engaged in rent-a-bank lending. (Rent-a-bank loans have made a comeback, with FDIC encouragement.783)

Consumer Credit Regulation: 9.4.3.3.2 Affordable small loan guidelines

In 2007 the FDIC issued Affordable Small Loan Guidelines.792 However, in 2020, the FDIC rescinded the guidelines when it entered into a new set of interagency principles regarding small dollar loans.793

The 2007 guidelines encouraged banks to develop affordable alternatives to payday loans. The guidance stated that, in doing so, banks should:

Consumer Credit Regulation: 9.4.3.3.3 Guidance on third-party and payment processor relationships

In 2016, the FDIC proposed a new “Examination Guidance for Third-Party Lending” but as of this writing it has not been finalized.794 The proposal does, however, incorporate and list a number of other FDIC guidances that are in effect and that address subprime lending, third-party risk, and safety and soundness standards.795 Those guidances may impact payday lending, whether done directly by banks or through partnerships.

Consumer Credit Regulation: 9.4.3.5 The CFPB’s 2016 Guidance

The Consumer Financial Protection Bureau has issued a guidance addressed to supervised banks and non-banks regarding business relationships with a broad range of service providers.811 Failure to comply with this guidance formed the basis for an enforcement action against a lead generator that worked with payday lenders.812 Although the guidance primarily refers to the duty to oversee service providers that banks and non-banks have, the court held that the “duty to monitor” in the guidance is two

Consumer Credit Regulation: 9.4.4 TILA and the ECOA

The federal Truth in Lending Act (TILA) imposes certain disclosure requirements on many forms of consumer credit, including payday loans, most significantly disclosure of the Annual Percentage Rate (APR).814 TILA is summarized in § 2.2.2, supra, and described extensively in NCLC’s Truth in Lending.815 The federal Equal Credit Opportunity Act (ECOA),816 which prohibits discrimination in lending, also applies to payday loans.

Consumer Credit Regulation: 9.5.1 Statutory and Regulatory Restrictions on Small Dollar Loans by Credit Unions

Most credit unions in the United States are chartered either by the federal National Credit Union Administration (NCUA) or at the state level. The NCUA has regulatory authority over federal credit unions (FCUs). The NCUA also has some authority over state credit unions that are insured by the National Credit Union Share Insurance Fund. In theory, credit unions should be less likely to be involved in abusive lending than other financial institutions because they are nonprofit entities intended to benefit their members.818

Consumer Credit Regulation: 9.5.2 Federal Credit Union Interest Rate Caps

Unlike federally chartered banks and thrifts, federal credit unions are subject to a fairly clear and strict interest rate cap that is independent of state caps.821 FCUs are chartered under the Federal Credit Union Act.822 The statute sets a usury cap of 15% but allows the NCUA to authorize increases for as long as eighteen months at a time.823 The NCUA has done so frequently, setting the cap at 18% since May 14, 1987.

Consumer Credit Regulation: 9.5.3 Higher Interest Cap for Payday Alternative Loans

The NCUA has authorized two payday alternative loan programs (PALs) for FCUs.829 Called PAL I and PAL II, they allow credit unions to make loans at rates up to 10 percentage points higher than the rate allowed by the general rate cap (resulting, effectively, in a 28% cap), plus a single application fee of up to $20.830 This rule is intended to give FCUs more latitude to make reasonably priced small loans as an alternative to high-priced payday loans.831

Consumer Credit Regulation: 9.5.5 PAL Loan Amortization Requirement and Fee Restriction

While the rule does not explicitly ban PAL loans with single-payment or balloon payments, NCUA expects multiple, amortizing841 payments rather than the single-payment loans many payday lenders make.842 The rule states merely that the higher 28% rate may be charged on condition that the FCU “fully amortizes the loan.”843 The explanatory material adds NCUA’s view that “balloon payments often create additional difficulty for borrowers trying to repay

Consumer Credit Regulation: 9.5.6 Restrictions on PAL Payment Method

As prohibited by the EFTA, FCUs cannot condition a loan on repayment by a preauthorized electronic fund transfer, such as a payroll deduction, except for single-payment loans.852 NCUA’s position, however, is that FCUs may offer members incentives, such as a lower rate, if they authorize payment through payroll deductions.853

Consumer Credit Regulation: 9.5.7 PAL Loans and the MLA

The Military Lending Act (MLA) caps interest rates for credit extended to active duty military personnel and their dependents at 36% APR.854 A 2010 NCUA guidance stated that credit unions could make PAL loans without complying with the MLA as long as they did not require the consumer to provide a post-dated check or a debit authorization.

Consumer Credit Regulation: 9.5.8 Other NCUA Guidance for All Credit Union Loans

The PAL loan rule does not prevent credit unions from making payday loans outside the PAL-loan criteria, though such loans must comply with the 18% rate cap, including any finance charges as defined by the Truth in Lending Act.864 Before creating the PAL loan rule, NCUA issued two guidance letters to FCUs discouraging them from engaging in payday lending.865 Both letters remind credit unions of the risks posed by payday lending, including the risk of borrower default, transactional risk (fraud),

Consumer Credit Regulation: 9.5.9 Credit Union Service Organizations

Despite the usury cap that applies to federal and many state credit unions, some federal and state credit unions have tried to directly offer, or indirectly profit from, payday loans. They have done so primarily in two ways.

First, they may put the bulk of their charges into application or participation fees that they claim are excluded from the finance charge used to calculate the APR under the Truth in Lending Act regulations.869

Consumer Credit Regulation: 9.6.2.1 Overview

Payday loans are, increasingly, being sold on the internet by lenders that are not physically located in the consumer’s home state. These loans present special problems and appear to have even more abusive features than storefront loans.

Consumer Credit Regulation: 9.6.2.2 Lead Generators

Lead generators are also a common feature on the internet. A lead generator is a website that refers potential customers to vendors.888 The potential customer is the “lead.”889 The lead generator may sell leads directly to lenders or to lead aggregators who offer them to lenders.890 It may not be apparent from the website that it is operated by a lead generator rather than an actual lender.

Consumer Credit Regulation: 9.6.3.1 General

Tribal payday lending is a version of internet-based payday lending with an important difference: rather than claiming to be based in a state with permissive lending statutes or a foreign country, tribal payday lenders claim to be owned and operated by Native American tribes.