CFPB Small Dollar Lending Exam Procedures Module 2 ECOA, FCRA, TILA and Other Risks

CFPB Exam Procedures for Short-Term, Small-Dollar Lending

Module 2 Provisions Addressing: ECOA, FCRA, TILA and Other Risks

October 6, 2012

Justin HosieHudson Cook, LLP

Introduction

• Coverage. Module 2 covers: Taking applications Evaluating applicants Originating payday loans

• Federal Laws. Examiners will seek to identify acts, practices, or materials that violate the following federal requirements: Equal Credit Opportunity Act/Regulation B Fair Credit Reporting Act Truth In Lending Act/Regulation Z Electronic Fund Transfer Act/Regulation E (addressed by Chuck with Module 3)

• 7 Other Risks. Examiners will also seek to address 7 other risks to consumers in this module

Overview of CFPB Examinations

• The Playbook is Published. Agency has published it’s small dollar lending examination manual, outlining expectations.

• “Mostly” Enforcing Regulations You’ve Known About. Primarily addresses longstanding requirements that have always applied. There are some new concepts.

• Learning Curve Exists on Both Sides. There is a new level of scrutiny and a learning curve. Learning about federal regulatory processes Similarities exist for those who made loans under an FDIC bank model years ago Industry members have been examined, and some are undergoing examination now The CFPB is learning about the industry too.

• Policies Alone Are Not Enough – You Need Training and Auditing Too.

Equal Credit Opportunity Act and Regulation B (ECOA)• Examiners will assess compliance with

requirements for: taking applications evaluating customer qualifications extending credit providing disclosures (i.e. adverse action)

and denying credit

ECOA – Don’t DiscriminateDon’t treat consumers less favorably, in any

part of the process, based on: Race, Color,

Religion, National origin, Sex

Marital status Age (provided the

applicant has the capacity to contract)

Public assistance income

The applicant has in good faith exercised any right under the Consumer Credit Protection Act

ECOA – Taking Applications

• Don’t Discourage Applications. The Company should not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.


• Use a Model Application Like a Regulation B Model. 5 models based on transaction type.

• Important Notices: Optional nature of courtesy titles (“Mr.,” Ms.,” &

“Mrs.” are optional). Option to disclose alimony, child support, or

separate maintenance income Limitation concerning marital status inquiries must

be included in the appropriate places.


• Don’t Force Non-Applicant to Enter Credit Agreement. You should not force a non-applicant to obtain credit, for example, just because of marital status. Rather, if only one consumer applies, a spouse should not be forced to apply. • So, if the spouse is not an applicant, don’t force them to

sign the contract.

ECOA – Evaluating Customer Qualifications

• Consider anything, except: information used to discriminate on a

prohibited basis Note the following list of special

considerations

ECOA – Evaluating Customer Qualifications • Special Considerations – Don’t Discriminate Based on:

Having Children. Don’t make assumptions or use aggregate statistics relating to the likelihood that any category of persons will bear or rear children or will, for that reason, receive diminished or interrupted income in the future.

• Special Considerations – Don’t Discriminate Based on:

Unlisted Phone Numbers. Don’t consider whether there is a telephone listing in the name of an applicant for consumer credit.

You can consider whether there is a telephone in the applicant's residence.



Part Time Income, etc. Don’t discount or exclude income because it’s from part-time employment or is an annuity, pension, or other retirement benefit.

You can consider the amount and probable continuance of any income.



Alimony, etc. Don’t discount or exclude income because it’s from alimony, child support, or separate maintenance payments.

If the customer decides to share the amount, the amount is income.

You can consider whether those amounts are likely to be consistently made.



• Other Special Rules: You may consider Immigration Status.

Lenders may consider an applicant's immigration status or status as a permanent US resident of the United States.

You can also consider any additional information that may be necessary to ascertain the creditor's rights and remedies regarding repayment.


• Other Special Rules: Treat Married / Unmarried the Same.

Evaluate married and unmarried applicants by the same standards Don’t Treat Joint Applicants Different based on Marital

Status. For joint applicants, don’t treat applicants differently based on the

existence, absence, or likelihood of a marital relationship between the parties

If I apply with Grandma, a roommate, or my wife, all pairings should be evaluated in the same way.

ECOA – Extending Credit

• Don’t Discriminate on a Prohibited Basis.• Only Applicants Should Sign the

Contract. Don’t require the a spouse or other person to sign the contract with a qualified applicant, unless the person is a joint applicant. Submitting joint financial information/assets,

is not an application for joint credit.

ECOA – Extending Credit

• Unique Rule: Pick a Name

Customer Can Choose to Use Their Birth-Given Surname, Married Name, or Combined Name.

Don’t refuse to allow an applicant to open or maintain an account in a birth-given first name and a surname that is the applicant's birth-given surname, the spouse's surname, or a combined surname.

CFPB Regulation B § 1002.7(b)

ECOA – Denying Credit

• Provide Model Denial Notices within 30 Days. You must notify applicants of action taken on their applications, such as a denial, in a proscribed format within 30 days of receipt of a complete or incomplete application, and document the reason for the action.

• Give a Conspicuous Copy to the Consumer. ECOA disclosures must be provided in a clear and conspicuous manner and generally in a form the applicant may retain.

What is adverse action?

• Refusal to grant credit in terms requested in an application (barring an accepted counteroffer)

• Terminating or unfavorably changing terms• Refusing to increase credit available

after an application for an increase

ECOA – Disclosures (Adverse Action)

• Use the Model Form. Use the regulatory template and note your reasons on the notice or internally. Must include: statement of the action taken name and address of the creditor nondiscrimination statement Federal agency information Specific denial reasons or the right to request

denial reasons

ECOA – Disclosures (Adverse Action)

• Incomplete Application Use the specific model form. If the denial

is due to an incomplete application use special model notice of missing info and timeframe.

ECOA – Disclosures (Adverse Action

• Denial reasons must: be specific indicate the principal reason(s) for the

adverse action.

ECOA – Final Notes

• Have Clear Policies and Employee Scripts. Fair Lending, Non-discrimination, Credit Criteria, Sending denial

notices, Responding to inquiries

• Keep Records. Required for 25 Months from date you notify consumer of application

status (incomplete, denial, or loan approval).

• Consider Self-Testing Regarding Unintended Practices that Yield Discriminatory Results. Discrimination is measured by the effects of the policies in place, not

the intent (disparate treatment and impact) Companies should hire qualified parties to conduct self-testing to

determine whether policies are discriminatory.

Fair Credit Reporting Act• Permissible Purpose. Only use info from third

party databases for permissible purposes (application or as authorized)

• Accurate Furnishing. Only furnish accurate info to third party databases

Fair Credit Reporting Act• Probably Using Consumer Reports.

3rd party data providers may be FCRA consumer reporting agencies

FCRA applies when you use a consumer reporting agency to determine creditworthiness

FCRA – Loan Denial

• If you used a consumer reporting agency or third party source as part of your denial, notify the consumer of: Contact information Right to a copy

• Use the model FCRA notices provided by the agencies in Regulation B

FCRA – Key Policies• Have, Use, and Update the Following Policies:

Dispute Policy. Be Prepared to Respond to Consumer Disputes Regarding Information the Company Reports to Credit Bureaus.

Red Flags Policy. Be Prepared for Address Discrepancies and Identity Theft. Information Disposal Policy. Be Prepared to Properly Dispose of Sensitive

Consumer Information.

• These policies are explicitly required under the FCRA and it’s implementing regulations.

FCRA – Other Considerations• Negative Reporting Notice. • Truncate Card Numbers. • Investigate Alerts. Don’t Just Deny Consumers. • Ignore Medical Info. Don’t Obtain, Use, or Share Consumer

Medical Information. • Read and Follow the Stuff from Consumer Reporting Agencies.

Follow the Rights and Responsibilities Notice You Receive from the Consumer Reporting Agencies.

FCRA – Higher APRs

• If you have a higher APR due to info from a third party – give a special “risk based pricing” notice.

• Most payday companies have fixed fees, and APR variance is based on transaction durations not consumer reports.

Truth in Lending Act / Regulation Z

• Disclose loan terms and Annual Percentage Rates

• Credit payments properly• Process credit balances in accordance

with its requirements

Truth In Lending Act / Regulation Z

• Examiner Focus: Are loans closed-end or open-end? Are appropriate disclosures (closed vs.

open-end credit) provided? Whether disclosures comply? Do loans conform to the lender’s

representations? Is “refinancing” properly disclosed?


• Respond to Oral Questions on Cost, by Quoting the “APR.” In an oral response to a consumer's inquiry about the cost of credit, respond by stating the annual percentage rate. If the annual percentage rate cannot be determined in advance, the annual percentage rate for a sample transaction shall be stated, and other cost information for the consumer's specific transaction may be given.


• Provide Accurate TILA Disclosures. Provide model TILA disclosure for simple interest transactions, as appropriate, with correct calculations, in a form that the consumer may keep, before the consumer becomes contractually obligated on the obligation (“consummation”).


• Here is a copy of the model form for credit transactions: http://ecfr.gpoaccess.gov/graphics/pdfs/ec27se91.024.pdf

• Here is a copy of the model itemization to include below the disclosures: http://ecfr.gpoaccess.gov/graphics/pdfs/ec27se91.025.pdf

http://ecfr.gpoaccess.gov/graphics/pdfs/ec27se91.024.pdf





• Make the APR and Finance Charge More Conspicuous than Other Disclosures. • The terms “finance charge” and “annual percentage rate,”

together with a corresponding amount or percentage rate, must be more conspicuous than any other disclosure, except the Company’s identity.

• Get the math right on these. It isn’t easy, but resources exist to help you


• TILA Math Here is a copy of the calculation rules for your programmers to

implement in determining the Annual Percentage Rate: http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=06c1202917450b3643462228d4aba3a1&rgn=div5&view=text&node=12:3.0.1.1.7&idno=12#12:3.0.1.1.7.7.8.10.26

Federal APR Calculator: http://occ.gov/tools-forms/tools/compliance-bsa/aprwin-software.html

http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=06c1202917450b3643462228d4aba3a1&rgn=div5&view=text&node=12:3.0.1.1.7&idno=12



http://occ.gov/tools-forms/tools/compliance-bsa/aprwin-software.html

http://occ.gov/tools-forms/tools/compliance-bsa/aprwin-software.html


• Regularly Check for Errors. Maintain procedures to regularly and promptly detect, and correct errors such as clerical errors, calculation errors, computer malfunctions, programming errors, and printing errors.

• 60 Days to Correct. If you detect any TILA error immediately consult with counsel, and send correction notices within 60 days of detection.


• What is a refinancing? One obligation substitutes and replaces

another. Distinguished from extensions, deferrals, and

renewal of a single payment obligation on the same terms.

A few important cases distinguish these. Make sure your processes for successive

transactions are clear


• Two Final Notes: If You Make Disclosures in Non-English

Languages, Make them Available in English too.

Keep all TILA records for at least 2 years.

Electronic Funds Transfer Act - EFTA

• addressed by Chuck with Module 3

7 Other Risks to Consumers - #1

• Don’t Mislead Cost, Value, Availability, Cost Savings, Benefits, or Terms. No explicit regulations address this yet Ultimately may require disclosure on

likelihood and cost of rollovers If state law allows 4 rollovers – should a

disclosure address the cost over 4 transactions? APR does annualize the cost See Texas model



• Disclose “Useable” Credit. • Do you accurately and non-deceptively

represent the amount of potential, approved, or useable credit the consumer will receive? Make sure the consumer knows the amount

they will walk away with


• Disclose Fees to Get Proceeds. Do you disclose the fees to get the proceeds? Proceeds by Check – Is the Cost

Disclosed? Prepaid Card Proceeds – Do you Disclose

ATM Access Fee?


• Optional/Additional Products. Do you: Clearly and prominently disclose material

terms including costs? Receive and document express authorization

before adding optional products or services? Provide and document authorizations?

• Review how option is authorized.


• Disclose Repayment & Collection Practices.

• Do you disclose repayment and collection practices? No explicit rule yet for this requirement Make sure ACH/Check policies Consider explaining collection policies


• Disclose Repayment Rights. • Do you clearly and prominently disclose

rights regarding payment methods? No explicit regulation yet Make sure the consumer knows when you

may begin the process to deposit the check or submit the ACH


• Other Laws Apply. Military Lending Act and Servicemembers

Civil Relief Act TCPA - Robocalling and text message

requirements

• CFPB may refer matters to other state and federal agencies

Questions?

Thank you!

Justin Hosie

[email protected]

(423) 490-7564

Twitter: @ConsumerFinance

mailto:[email protected]

CFPB Exam Procedures for Short-Term, Small-Dollar Lending

Module 3: Payment Processing and Sustained Use

October 6, 2012

Chuck WashburnManatt, Phelps & Phillips, LLP

Introduction

• Module 3 of the CFPB's examination procedures for short-term, small-dollar lending (“payday lending”) covers the period in the lifecycle of a payday loan after origination and before collection following default.

• Accordingly, Module 3 focuses on repayment, including rollovers and other transactions in lieu of repayment.

• Although not as intensively regulated as origination and collection, this period in a payday loan's lifecycle is subject to important rules.

• Which rules apply will depend upon the features of a particular payday loan, including whether it is revolving credit, repaid electronically and/or repaid in a series of payments.

Overview of CFPB Examinations

• Being closely examined for compliance with federal consumer financial laws will be a new experience for most FiSCA members.

• Unlike state agencies and federal banking agencies, CFPB is singularly focused on consumer protection.

• In addition to traditional UDAP standards, CFPB will be applying an "abusive" test.

• CFPB is a new agency, and as such it is developing innovative examination procedures and techniques, taking into account what has worked in the past and what hasn't.

• Prior to the creation of the CFPB, federal consumer financial laws were interpreted by several agencies. Now, the CFPB is solely responsible for interpreting most of these laws.

Regulation Z – Open-End Credit vs. Closed-End Credit

• Different Regulation Z requirements apply to "open-end credit" and "closed-end credit".

• Open-end credit generally is revolving credit, where the creditor expects repeated transactions, an interest rate is applied to the outstanding balance, and the consumer can repay and re-borrow up to a credit limit.

• Closed-end credit is everything else.• Payday loans historically have qualified as closed-end credit.• The closed-end credit rules of Regulation Z focus on disclosures made prior

to consummation (which were covered in the discussion of Module 2), and generally do not require post-consummation disclosures, except in the case of a “refinancing.”

Refinancing

• A “refinancing” for Regulation Z purposes occurs when a borrower’s obligation is satisfied and replaced by a new obligation. The new obligation completely replaces the prior one.

• A refinancing is treated as a new transaction and requires a new set of Regulation Z disclosures.

• A modification that does not replace the existing obligation is not a refinancing.

• Also, a new obligation that is only a renewal of the prior obligation with no change in terms is not a refinancing.

• When in doubt, disclose!

Regulation Z – Open-End Credit

• Some payday lenders structure their products as open-end credit.• Open-end credit requires some disclosures prior to consummation, but the

focus instead is on post-consummation disclosures: A billing statement generally must be sent for each billing cycle. The regulation

includes detailed specifications for the format and content of billing statements (monthly credit card statements reflect many of these requirements).

Certain changes in terms (to the extent permitted by the loan agreement) are subject to notice requirements, including with respect to how much advance notice must be given.

• Open-end credit rules require that payments usually be credited as of the date of receipt, and also govern what requirements a creditor can specify for making payments (such as reasonable cut-off times).

Billing Errors

• Regulation Z provides for billing error procedures in connection with open-end credit.

• Billing errors include items on a billing statement that the borrower challenges for various reasons, including transactions with respect to which the borrower requests additional information, such as documentary evidence.

• If a borrower submits a proper billing error notice, the lender has to resolve the error within certain time frames.

• While this is going on, the borrower is not required to pay and the lender cannot attempt to collect any amount that is disputed.

Electronic Fund Transfers - Introduction

• Payday loans are repaid by the borrower giving the lender a right to access the borrower’s deposit account with a financial institution.

• Historically, a borrower would give a payday lender a paper check drawn on the borrower’s account to deposit on the repayment date.

• In online payday lending, borrowers instead typically authorize the lender to initiate an electronic fund transfer (an “EFT”) from the borrower’s deposit account to repay the loan. Brick and mortar payday lenders also are frequently repaid by EFTs.

• Also, payday loans may be funded in cash or by paper check.• Today it is increasingly common to fund payday loans by an EFT to the

borrower’s deposit account or by issuance of a prepaid card.

EFTA and Regulation E

• The Electronic Fund Transfer Act ("EFTA") regulates EFTs from and to consumer “accounts.”

• EFTA is implemented by Regulation E.• The CFPB is now charged with interpreting most of EFTA, including through

Regulation E and the Official Staff Commentary thereto. The FRB retains authority to issue regulations relating to debit interchange.

EFTs vs. Paper Checks

• Regulation E only applies to EFTs.• So payment of a payday loan by paper check is outside of Regulation E.• A remotely created check (“RCC”) in paper form and deposited in paper

form also is outside of Regulation E.• But an EFT initiated using information from a paper check is covered by

Regulation E.• An EFT to collect a returned item fee on a returned paper check likewise is

subject to Regulation E.

Authorization of EFTs

• In remarks at the payday loan field hearing in Birmingham in January 2012, CFPB Director Richard Cordray said that the CFPB will act immediately to eliminate illegal practices in connection with payday loans, and the first example he gave was “unauthorized debits on a person’s checking account.”

• An “unauthorized” EFT is defined as one that is initiated by a person other than the consumer without “actual” authority and from which the consumer receives no benefit.

Authorization – One-Time EFTs

• Regulation E does not include extensive authorization requirements for one-time EFT transactions.

• Regulation E billing error procedures apply among other things to any unauthorized EFT.

• EFTs using a paper check as a source of information for a one-time EFT must be authorized by the consumer. Authorization includes disclosing to the consumer that the paper check will be converted to an EFT and the consumer then “goes forward” with the transaction. An appendix to Regulation E includes model language for this disclosure.

• A similar authorization rule applies for collecting returned item fees by EFT, including required disclosure of the amount of the fee. Again, model language is provided in an appendix.

Recurring EFTs

• A preauthorized EFT is an EFT that is “authorized in advance to recur in substantially regular intervals.” So there would need to be a minimum of three EFTs in order for them to recur at regular intervals.

• Preauthorized EFTs can be involved in connection with: A series of rollovers or other renewals. Repayment plans involving installment payments. A payday loan structured as open-end credit.

• Regulation E imposes significant restrictions on preauthorized EFTs.

Recurring EFTs – Compulsory Use

• A creditor may not condition an extension of credit on repayment by preauthorized EFTs. But the Regulation E Commentary provides that a creditor can encourage the

borrower to agree to repay by preauthorized EFTs by offering a discount or other cost-related incentive.

A creditor can also avoid the prohibition by offering other repayment options.

Recurring EFTs - Authorization

• Preauthorized EFTs may be authorized “only by a writing signed or similarly authenticated by the consumer.”

• An “electronic record” and “electronic signature” under the ESIGN Act can satisfy these requirements. “Similarly authenticate” means an electronic signature must authenticate the

borrower similarly to a manual signature.

• These requirements can be satisfied in a transaction conducted over the Internet.

• What about a recorded telephone conversation?

Recurring EFTs – Authorization (Continued)

• The Commentary provides that the authorization must be “readily identifiable as such” and the terms of the authorization must be “clear and readily understandable.”

• The consumer must be provided with a copy of the authorization.• A consumer may place a stop payment with his or her bank on a

preauthorized EFT at least 3 business days before the scheduled date of the transfer.

• If the amount of preauthorized EFTs may vary, written notice of each varying amount must be provided at least 10 days before the scheduled date of the transfer. The consumer can agree that he or she will only receive notice if the varying

amount is outside of a specified range.

SAFE Lending Act of 2012

• The Stopping Abuse and Fraud in Electronic Lending Act of 2012 has been introduced in Congress. Its chances of passage will be impacted by the upcoming elections.

• Among other provisions that impact payday lending, the SAFE Lending Act as proposed includes the following provisions relating to repayment: It would amend EFTA to prohibit RCCs (including paper RCCs) except with the

specific, written authorization of the borrower to his or her bank, which authorization can be revoked at any time.

The current EFTA prohibition against conditioning an extension of credit on repayment by preauthorized EFTs would be amended to apply to repayment by any EFT.

If a consumer agrees to repay a payday loan by an EFT, that EFT would be treated as a preauthorized EFT for purposes of the EFTA.

NACHA Rules

• Repayment of payday loans by EFTs processed through the automated clearinghouse (“ACH”) network are subject to the NACHA rules.

• Unlike Regulation E, the NACHA rules require written authorization of one-time ACH transfers from a consumer’s account, subject to alternative authorization requirements for certain types of transactions, including: One-time or recurring ACH transfers authorized over the Internet (WEB entries)

are subject to requirements similar to preauthorized EFTs under Regulation E. One-time ACH transfers may be authorized over the telephone (TEL entries)

but must include several items of information, and must be recorded or prior written disclosure must be given. Recurring TEL entries are subject to similar requirements (including recording) and must comply with Regulation E (including providing a copy of the authorization).

NACHA Rules (Continued)

• The NACHA rules require that authorizations include a right to revoke. This includes one-time ACH transfers scheduled in advance.

• TEL entries require express consent. “Silence is not express consent.”• Key-entry responses do not qualify as “oral” authorizations for TEL entry

purposes.• NACHA rules are “private law.”

Payment Card Network Rules

• Repayment of payday loans by debits to debit cards or charges to credit cards are subject to the rules of the applicable payment card network (for example, Visa or MasterCard).

• Requirements under the payment card network rules for recurring payment card transactions are similar to Regulation E requirements for preauthorized EFTs, but apply to credit cards as well as debit cards.

• These rules likewise are private law.• Keep in mind that debit card transactions involve EFTs so Regulation E also

applies.

Prepaid Cards

• Some payday lenders may fund payday loans through the issuance of prepaid cards.

• Per prior FRB guidance, prepaid cards are not deemed to be “accounts” for Regulation E purposes and therefore are not subject to most Regulation E requirements.

• Also, Regulation E was amended to implement provisions of the Credit CARD Act regulating “general-use prepaid cards” and other products, but the rules only apply to such cards that are marketed or labeled as gifts.

• However, the CFPB in May 2012 issued an advance notice of proposed rulemaking indicating that the CFPB intends to extend Regulation E protections to general purpose reloadable (“GPR”) prepaid cards, and requested information about GPR cards.

Fair Credit Reporting Act – Furnisher Duties

• Historically, payday lenders have not used traditional consumer reporting agencies (“CRAs”), such as Equifax, Experian and TransUnion.

• However, the use by payday lenders of non-traditional CRAs, including those scoring consumers based on utility payments and social media data, is increasing.

• In order to obtain scores and other consumer reports, a user must often agree to furnish information to the CRA.

• The Fair Credit Reporting Act (“FCRA”) and CFPB regulations require furnishers to: Adopt and implement policies and procedures regarding the accuracy and

integrity of information furnished to CRAs. Investigate “direct disputes” received from consumers in accordance with

certain timing and other requirements.

Sustained Use

• “Sustained use” means repeated use of payday loans over a significant period of time. It includes rollovers, “back-to-back” transactions, and repeat transactions after brief “cooling off” periods.

• In his remarks at the Birmingham payday loan field hearing, Director Cordray said that a particular focus of the CFPB would be “repeated long-term use of payday loans,” and that the CFPB plans “to dig deep on this topic.”

• Sustained use is discussed in great detail in Module 3 of the CFPB exam procedures, confirming CFPB concerns with the practice.

• Consumer groups submitting comments to the CFPB on payday lending often focus on sustained use.

Sustained Use - Regulation

• State payday laws, Department of Defense regulations and FDIC guidelines, among other rules, address sustained use in various ways.

• But federal laws like Regulations E and Z currently do not expressly regulate sustained use.

• Instead, the CFPB appears to be raising a potential UDAAP concern regarding sustained use, including whether a payday lender’s program, depending on the facts, may be “deceptive” or possibly “abusive.”

Sustained Use - UDAAP

• "Unfair" Causes or likely to cause substantial injury that is not reasonably avoidable

and not outweighed by countervailing benefits.

• "Deceptive" Misleads or is likely to mislead, the consumer's interpretation is reasonable,

and the representation, omission, act or practice is material.

• "Abusive" Materially interferes with consumer's ability to understand, or Takes unreasonable advantage of

The consumer's lack of understanding, Inability of the consumer to protect his or her interests, or Reasonable reliance by the consumer on the covered person.

Sustained Use – Examination

• Based on the CFPB exam procedures regarding sustained use, a payday lender should do the following, including to reduce potential UDAAP issues: Adopt appropriate written policies and procedures regarding sustained use.

Once adopted, the lender should follow the policies. This includes monitoring third party call centers and other vendors for compliance

with the lender’s policies. Accurately and fully disclose the terms of rollover, back-to-back and similar

options. Failure to do so may be deemed to be a “deceptive” act or practice. All available repayment options should be disclosed. The most critical disclosures are those relating to the fees and other costs of each

option. If the transaction constitutes a “refinancing” of a closed-end credit transaction, ensure

that new Regulation Z disclosures are delivered.

Sustained Use – Examination (Continued)

Consider, when making a loan in the first place, assessing the borrower’s income or other financial information in order to determine whether the borrower has the ability to repay, or instead is likely to need a rollover or similar modification. Precedent for this concept may be found in Regulation Z provisions implementing the

Credit CARD Act that impose “ability to pay” obligations on credit card issuers. Consider specific limits on usage (i.e., limiting the number of transactions over

a specified time period) in addition to limits imposed by state or other law. Consider monitoring on an ongoing basis for possible overuse by individual

borrowers, and reach out to such borrowers. Offer alternatives, including installment payment plans.

Questions on Module 3?

Thank you!

Chuck Washburn

[email protected]

(310) 312-4372

mailto:[email protected]

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CFPB Small Dollar Lending Exam Procedures Module 2 ECOA, FCRA, TILA and Other Risks

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