June 3, 2016
Proposed regulations of payday and other “small dollar” loan products were unveiled Thursday to mixed reviews by theConsumer Financial Protection Bureau. Essentially, the proposal (for which comments are due Sept. 14) includes: a “full-payment” test requiring lenders to determine upfront that consumers can afford to repay their loans without re-borrowing; a “principal payoff option” for certain short-term loans; two less risky longer-term lending options for borrowers who need access to credit, but who may not meet the full-payment test. Additionally, lenders would be required to use credit reporting systems to report and obtain information on certain loans covered by the proposal, and repeated debit attempts – which CFPB says may generate more fees and may make it harder for consumers to get out of debt – would be limited.
“Less risky, longer term” lending options with more flexible underwriting include loans that meet the parameters set under NCUA’s “payday alternative loan” program (PALs). PALs allows federal credit unions to offer small-dollar loans to members at an APR up to 28% under specific conditions (that is: loan amount is between $200 and $1,000; the borrower is a member of the credit union for at least one month; the loan term is one to six months; an application fee up to $20 may be charged, and; the loan cannot be rolled over). The second option would be loans that are payable in roughly equal payments with terms not to exceed two years and with an all-in cost of 36% (not including origination fees, so long as the lender’s projected default rate on these loans is 5% or less).
Overall, CFPB stated in a release, consumers could borrow a short-term loan up to $500 without the full-payment test as part of the principal payoff option that is directly structured to keep consumers from being trapped in debt. Lenders would be barred from offering this option, CFPB stated, to consumers who have outstanding short-termor balloon-payment loans or have been in debt on short-term loans more than 90 days in a rolling 12-month period. Lenders would also be barred from taking an auto title as collateral.
At a CFPB field hearing Thursday in Kansas City, Mo., about payday lending generally, some witnesses (such as those representing the payday lending industry) denounced the regulation; others (community and consumer activists, for the most part) praised the bureau for proposing it. However, a credit union witness at the hearing, Kinecta Federal Credit Union President and CEO Keith Sultemeier, panned the PAL loan approach, saying his credit union offered the product for two years, and it was widely rejected by borrowers. “It is not a viable product for Kinecta,” Sultemeier said. Meanwhile, Nick Bourke of the Pew Charitable Trusts (above, speaking at the NASCUS 2015 Summit in New Orleans about the upcoming regulation), who provided data to the bureau on consumer small dollar borrowing, said the proposal “misses the mark” in protecting consumers, and limits financial institution innovation in small-dollar lending.
The payday loan proposal comes on the heels what was a busy month of May – and there’s more to come in the weeks ahead, from both the agency and, perhaps, from Congress. Last month, the bureau announced proposed rules to “prohibit mandatory arbitration clauses that deny groups of consumers their day in court” in pre-dispute arbitration agreements. The proposal affects so-called “arbitration clauses” prohibiting mandatory clauses in financial services contracts (such as for credit cards) that prevent consumers from engaging in class action suits. Comments are due Aug. 22. Also in May, the bureau unveiled a study detailing how one-in-five single-payment borrowers have their car or truck repossessed, and a 74-page report that details agency actions in enforcing the Fair Lending Act, which the bureau calls "shining a light on unfair and discriminatory practices in the financial system." Just recently, the bureau released its “spring rule-making agenda,” which gave a head’s up on the payday lending proposal, prepaid accounts, mortgage servicing (and mortgage disclosures) and other initiatives. Overdraft protection regulation is also being considered.
Meanwhile, legislation has been introduced in Congress to change both the oversight and funding of the bureau. The House financial services and general government Appropriations subcommittee has approved legislation that includes provisions to move the bureau’s funding under the appropriations process (H.R. 1486) and change the bureau’s leadership structure to a five-member panel (H.R. 1266), rather than a single director. The measure goes next to the full committee, although no schedule is apparent. Meanwhile, House Financial Services Committee Chairman Jeb Hensarling, R-Texas, is expected to unveil next week his legislative proposal to replace the Dodd-Frank Act, which created the CFPB; no action is likely on the bill in this Congress, but many expect the proposal to become a “placeholder” for action in the next. For a digest of all of the recent CFPB proposals, studies and reports, see the CFPB pages on the NASCUS website.
A new summary has been posted by NASCUS of the proposed rule on “incentive-based compensation” for executives and other “risk-taking individuals,” with some additional insights about the proposal’s impact. The NASCUS summary notes that, in addition to large federally insured credit unions, the proposal would also apply to any privately insured credit unions applying for federal insurance. In addition, the summary points out that NCUA has reserved to itself the power to impose some of the rule’s requirements on credit unions in the lowest asset category of the three covered under the proposal (which are not otherwise affected by some of the proposal's requirements). Further, the summary notes that incentive-based compensation plans created before the effective date of a final rule would be grandfathered. The proposal was issued by NCUA April 21, which was followed by a similar proposal by the other federal financial institution regulators (FDIC, OCC, Federal Reserve, Federal Housing Finance Agency and the SEC) May 16. Comments are due by July 22. NCUA issued the proposal first, largely because the agency's board was meeting before scheduled meetings of other agencies’ ruling bodies. The rule would become effective 18 months after publication, the summary points out.
A summary of the "customer due diligence" final rule - outlining effective dates and scope of the rule – has been published by NASCUS as well. The summary outlines the key provisions of the final rule, including: "beneficial ownership" (including its definition); exemptions for financial institutions not subject to the "beneficial owner requirements" in the final rule; and the "four core elements" of a CDD program." The rule, issued by the Financial Crimes Enforcement Network (FinCEN) May 5, includes the requirement that financial institutions – including credit unions, banks, brokers or dealers in securities, mutual funds, futures commission merchants, and others – “collect and verify the personal information of the real people (also known as beneficial owners) who own, control, and profit from companies when those companies open accounts.” The final rule – which takes effect July 11 -- also amends existing Bank Secrecy Act (BSA) regulations to clarify and strengthen obligations of these entities. Covered financial institutions must be in compliance with the rule by May 11, 2018.
An Illinois state credit union examiner is earning praise from federal prosecutors and law enforcement for her role in identifying a fraud that led May 20 to the conviction of a former credit union CEO for bank fraud and other felonies. Pam Steele, a credit union examiner for the Illinois Department of Financial & Professional Regulation, initially identified the fraud committed by the former president of the $23 million Tazewell County School Employees Credit Union in Pekin, Ill. IDFPR Secretary Bryan A. Schneider said Steele – after identifying the fraud in 2010– worked diligently to assist the U.S. Attorney’s office in its 2016 prosecution of the former executive. Additionally, she testified at the trial. “State credit union examiners perform a critical role in identifying and combatting fraud, as illustrated by Ms. Steele’s commitment and perseverance,” said Lucy Ito, NASCUS president and CEO. “Because of her actions, the misapplication of credit union members’ money was identified, and justice was done. Congratulations to Ms. Steele and the IDFPR for their work, particularly in protecting consumers’ financial resources.”
Cybersecurity experts from across the nation -- in more than 13 hours of educational presentations, discussions, demonstrations and discussions – will participate in the NASCUS/CUNA 2016 Cybersecurity Symposium, Aug. 1-2, in Chicago.
Scheduled speakers at the two-day event, held at the Westin Chicago River North Hotel, include:
- Det. Mark Solomon, Connecticut Financial Crimes Task Force, Greenwich Police Department, on law enforcement’s view of cyber crime;
- Michelle Misko, Trace Security, on choosing the right cybersecurity risk assessment tool;
- Jim Vilker, CU*Answers, on cybersecurity, anti-money laundering, and identity theft red flags;
- Bruce Jolly, Reed & Jolly; Rich Schulman, Esp Kruezer Cores, LLC, on cybersecurity, breaches and litigation;
- Chad Carrington, Golden 1 CU, on six things you can do right now to improve your information security;
- Mick Kless, Compliance Education Institute, on preparing a vendor exit strategy.
Leading the overall symposium is Tom Schauer of CliftonLarsonAllen in Seattle. Formerly CEO of TrustCC. Cost for the program is $895 for NASCUS- and CUNA-member organizations; registration for non-NASCUS/CUNA members is $1,095. For registration information, contact NASCUS Vice President of Education Isaida Woo at email@example.com; for program information, contact NASCUS Executive Vice President and General Counsel Brian Knight at firstname.lastname@example.org.
A webinar about complying with regulatory changes to the Military Lending Act will be hosted by NCUA June 29 at 2 p.m. ET, to provide a “high-level overview of the significant changes to the regulation implementing the Military Lending Act,” most of which go into effect by Oct. 3. … The agency has unveiled a “searchable” CUSO registry, aimed to provide a “snapshot at a glance,” providing some (not all) information on the nearly 900 CUSOs now registered with the agency.
Patrick Keefe, NASCUS Communications, email@example.com or (703) 528-5974