What Creditors Should Know: Consumer Fraud Laws and Payday Lending

consumer fraud lawsShort-term, low-dollar lending transactions are prevalent in today’s marketplace, particularly with budding digital payment options for consumers.  With consumer protection being a primary concern, the federal government has implemented regulation of payday lending that creditors and borrowers should keep in mind when transacting these types of loans. A New Jersey collection attorney can help you learn more about consumer fraud laws and payday lending.

A payday loan generally functions to fill a gap in between paychecks for an individual.  Loan size ranges from $100 to $1000.  The repayment period is brief, often one or two weeks or the time for a person to receive the next paycheck. The borrower must give the lender access to repayment through a claim on the borrower’s deposit account.

The Most Significant Consumer Fraud Laws and Regulations

If you operate a nonbank entity that engages in payday lending, your business will fall within the jurisdiction of the Consumer Financial Protection Bureau (CFPB) despite not being a traditional financial institution.  It is therefore critical as a creditor to ensure lending activities and collection efforts comply with several federal consumer fraud laws and regulations. The regulations are numerous, but here are primary areas of enforcement for the CFPB:

The Truth in Lending Act’s (TILA) Regulation Z requires lenders to disclose pertinent transaction details to their borrowers.  For starters, initial disclosures should identify key loan terms such as the time for repayment and the annual percentage rate, which in some instances can be as high as 500%.  The lender also must provide periodic statements and advertising disclosures.  Creditors disclosing periodic statements and advertising disclaimers mitigate unfair and deceptive lending activity.  Those disclosures also allow consumers to be aware of their balance and distinguish between a promotion and an actual offer.

Regarding the loan application process, The Equal Credit Opportunity Act (ECOA) requires a payday lender to notify the consumer of any adverse action taken on a loan application.  Regulation B of the ECOA also prohibits discrimination on the basis of race, color, religion, national origin, sex, marital status, age, receipt of public assistance, or the exercise of a right under the Consumer Credit Protection Act.

The Fair Debt Collection Practices Act (FDCPSA) also is implicated by payday lending activity.  The intent of the rule is to protect consumers against unfair collection practices and consequently, debt collectors are obligated to conduct their collection activities in accordance with several procedural requirements. See 15 U.S.C. 1692(d-f).

If the payday lender is in the business of reporting consumer information, in all likelihood to a subprime credit reporting agency, The Fair Credit Reporting Act (FCRA) and its implementing regulation, Regulation V, require that a payday lender who provides information to consumer reporting agencies ensure the reported data is complete and accurate.  It is also imperative for the payday lender to take consumer disputes seriously and implement internal investigative procedures to track and evaluate those consumer disputes.  If you have affiliated companies, such as third party collection agencies, under your umbrella, there are limitations of sharing information between the lending entity and those affiliated companies.  There must always be a permissible purpose for furnishing this sensitive consumer information and you should consult with an attorney on your business practices to ensure compliance.

Enforcement of Federal Consumer Fraud Laws

Prior to Dodd-Frank, the FTC was the enforcing agency of consumer financial laws against payday lenders. A payday loan collector now is subject to enforcement by the CFPB and their enforcement authority is growing rapidly. Title X of Dodd-Frank granted the CFPB enforcement authority for payday lenders.  Enforcement actions primarily relate to deceptive activities in collection efforts and are a real risk for creditors.

For example, in July 2014, the CFPB took action against ACE Cash Express, which was prompted by a supervisory examination.  After an administrative proceeding, the CFPB found that ACE Cash Express used illegal debt collection tactics, including harassment and false threats of lawsuits or criminal prosecution, to pressure delinquent borrowers into taking out additional loans they could not afford.  Consequently, ACE Cash Express was required by the CFPB to provide $5M in refunds to wronged consumers and pay a $5M penalty.

See http://files.consumerfinance.gov/f/201407_cfpb_consent-order_ace-cash-express.pdf

The reach of the CFPB extends into jurisdictions where deceptive trade practices statutes apply already and even into affiliates of tribal nations.  In December 2013, the CFPB took action against CashCall, a servicer affiliate of a small-dollar lender affiliated with a Native American tribe, for attempting to collect debts that exceeded state usury caps or were otherwise void.  CashCall was making loans over the Internet to consumers in various states. While the CFPB did not sue the tribal lending entity itself, such entities are not exempt from the Dodd-Frank Act’s prohibition on unfair, deceptive, and abusive practices.

See http://www.consumerfinance.gov/about-us/newsroom/cfpb-sues-cashcall-for-illegal-online-loan-servicing/

CFPB enforcement aside, there is also the exposure of criminal charges should the pattern of behavior indicate criminal intent.

Advice for Lenders to Mitigate Risk of Violations of Consumer Fraud Laws

A payday loan creditor should develop a compliance risk management system, including internal controls and policies for its payday lending business.

Here are some assessments in order to mitigate risk:

  • Are the material terms of the payday loan clearly and prominently disclosed on advertising materials (e.g. conditions on promotional offers, rewards or discounts, and costs)?
  • Can the content or terms be construed to discriminate against a certain protected class?
  • Are telephone calls to consumer and online communications monitored or recorded?
  • Does the accounting department perform internal audits and are policies and procedures able to withstand audits around substantiating debts?
  • Do telephone call scripts treat consumers equitably?
  • What type of internal business process software do you have to improve record retention and bolster data security?
  • Do any criterion for assessing, extending, or denying credit result in a discriminatory effect?
  • If a consumer cannot repay the loan, do you allow the borrower to modify the loan or convert a balloon payment into an installment plan?
  • Do you provide the consumer with all repayment options available?
  • Have you evaluated policies and procedures for processing applications and qualifying applicants?
  • Do you review, track, and appropriately resolve consumer complaints regarding the collection of debts?
  • Do you clearly disclose to consumers that they are contacting the consumer about the collection of a debt?
  • Do you keep confidential the existence of a consumer’s debt, disclosing this information only with the consent of the consumer?

A payday lender in the course of reporting consumer information to credit bureaus should:

  • Maintain policies and procedures regarding data integrity and the accurate reporting of a consumer’s loan information to consumer reporting agencies.
  • Review, track, and appropriately resolve consumer complaints regarding the reporting of consumer data.

If you engage third-party service providers such as collection agencies or marketing firms, you should ensure that all service providers certify in writing that they will conduct all business activities on your behalf in a manner that is compliant with federal laws.

Other measures that a payday lender should take when engaging third-party service providers should include:

  • Methods for screening and hiring service providers.
  • Methods for sharing information in accordance with the FCRA affiliate marketing rule.
  • Evaluate its compliance management controls for the training of service provider employees, particularly if they are going to be performing work on-site.
  • Research any instances of wrongful disclosure of personal information.
  • In service agreements, include provisions for audit rights. Subsequently, conduct audits if issues occur and ensure agreements include an obligation to cooperate with audits.
  • Background checks for third-party service provider employees.
  • Confirm proper licensures and corporate registrations.
  • Research any prior regulatory compliance history such as enforcement action.
  • Confirm certification with data security controls.

Learn More About Consumer Fraud Laws and Payday Lending

Contact Snellings Law LLC, at 973.4265.6100 to schedule an initial consultation to discuss your debt collection, consumer fraud, or other business law matter.