Category: Credit Policy & Regulation

  • Are Mortgage Servicers Ready for the Loan Mod Rush?

    Posted by

    Christopher Odinet

    On May 4, the CFPB issued a report sharing information the agency had gathered about mortgage forbearances and delinquencies. One notable takeaway is that Black and Brown homeowners, as well as low-income homeowners, are very prevalent among those in forbearance. A large portion of those in forbearance also have loan to value ratios north of 60%. All of this suggests that many who face chronic financial struggles and are most at risk of losing their homes, are also those currently benefiting from the forbearance programs.

    This makes me immediately think: what happens when the forbearance periods are over? (which most believe will happen between September and November of this year) Specifically: what will their loan modifications look like?

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  • A Campaign to Opt-Out

    Posted by

    Christopher Odinet

    Following-up on my prior post, let’s talk more about what’s at stake in this little legislative kerfuffle in the Hawkeye state, as well as how consumer advocates should seize on this moment in a different way.  

    First, repealing this 521 provision in Iowa law is really all about whether states should have, to a large degree, the ability to control the interest rates charged on products and services that are offered to consumers by nonbank firms. 

    Many readers of this blog may already know this history backwards and forwards – but for those who don’t, here’s the backstory. In Marquette Nat’l Bank of Minneapolis v. First of Omaha Serv. Corp., the U.S. Supreme Court interpreted the National Bank Act as giving nationally-chartered banks the ability to charge the highest interest rate allowed in the state where the bank is located to borrowers located not only in that state, but also to borrowers located in any other state.  This means, for instance, that a national bank located in Iowa can not only charge the highest interest rate allowable in Iowa to anyone located in Iowa, but it can also charge that same rate to a borrower located in Oklahoma, Louisiana, or any other state.  Even if Louisiana, Oklahoma, or another state’s laws prohibit interest at such a rate, the loan is nevertheless free from being usurious. This concept is known as “interest rate exportation.”  

    After the 1978 decision in Marquette, there was a concern about the ability of state-chartered banks to compete with national banks. So, state legislatures started enacting “parity laws” that allowed their state banks to charge the maximum rates of interest allowable by any national bank “doing business” in that particular state. These parity laws were often even broader, granting to state chartered banks all of the incidental powers granted to national banks. In sum, the goal of these parity laws was to put state banks on equal footing with national banks, particularly when it came to usury.  Good so far?

    Ok here comes the part dealing with this shady Iowa house bill…

    In a final effort to give state-chartered banks a competitive edge, in 1980 Congress passed the Depository Institutions Deregulation and Monetary Control Act (DIDMCA).  A portion of DIDMCA, specifically section 521 (see where this is going…) granted interest rate exportation to any state-chartered bank that was federally insured (in other words, to all FDIC-insured state-chartered banks). 12 U.S.C. 1831d. This allowed a state-chartered bank to charge out-of-state borrowers the same interest rate allowable for in-state borrowers.  Thus, a state-chartered bank located in Iowa could charge an Oklahoma borrower the Iowa-allowable interest rate, even if that rate was higher than what would otherwise be legal under Oklahoma law. 

    But here’s the catch. In Section 525 of DIDMCA, Congress gave states the ability to opt-out of section 521 by enacting legislation stating the state did not want section 521 to apply. Only two jurisdictions opted out: Puerto Rico and…you guessed it…Iowa. In 1980, right after DIDMCA was passed, Iowa opted out per 1980 Iowa Acts, ch. 1156, sec. 32. To add one more bit of background, Iowa also did not enact any parity laws. In fact, a former general counsel to the Iowa Division of Banking stated in a 2002 interview that enacting such a law that delegated control over Iowa state banks to the feds would be seen as “a slap in the face” to the Iowa legislature. 

    So, there you have it. This little provision in an otherwise unrelated tax bill is to OPT INTO section 521 and thereby reverse the decision Iowa’s legislature made in 1980.

    Now you may say to yourself, why is this so bad? The bad part requires you know something about the rent-a-bank partnership model between certain state-chartered banks and a number of online “fintech” lenders. Since the 2008 financial crisis, a growing number of nonbank fintech firms that make loans over the internet have partnered with a handful of state-chartered banks (mostly chartered in Utah, Kentucky, and New Jersey) in order to make and market unsecured installment consumer loans. By and large the way the business model works is that although the loan application is submitted through the nonbank’s website or smartphone app, it is the partner bank that actually advances the funds. The marketing and underwriting process are both performed by the nonbank. Then, very shortly after, the bank sells the loan along with others (or some interest in those loans) to the nonbank fintech company or an affiliate. The fintech or another firm then sells the interest to a pre-arranged wholesale buyer or sponsors a securitization of a large pool of loans for sale as securities in the capital markets. 

    The bank’s role is merely passing, and it typically retains no material economic interest in the loans. However, so the argument goes, because the loan is originated by an insured state-chartered bank, it can export the interest rate of its home state to borrowers located in ANY state (with state usury laws preempted by DIDMCA section 521). And sometimes these loans can be quite expensive (rates of 160% APR or more e.g., CashNet USA, Speedy Cash, Rapid Cash, Check n' Go, Check Into Cash). You can get more info on these partnerships and check out some nifty maps provided by the folks at the National Consumer Law Center here. 

    So, here’s how I think consumer advocates can turn the tables. There are a number of states that have aggressively gone after these rent-a-bank schemes (adding a lawsuit by AG of DC to the mix here) and a group of state AGs are currently suing the OCC on account of its true lender rule. In other words, a number of states do not want this kind of high cost, fintech-bank lending happening in their jurisdiction. 

    Here’s my suggestion to those states: why not just pass your own opt out of DIDMCA Section 521? 

    As mentioned above, many of these online lenders in high-cost rent-a-bank schemes favor partnering with FDIC-insured, state-chartered banks rather than national banks. Opting out of DIDMCA would deprive these schemes of their regulatory arbitrage. Without the ability to import the interest rate law of another state into a given jurisdiction, it would force these online firms to apply for a lending license and otherwise abide by the jurisdiction’s usury limit. DIDMCA allowed states to opt out of Section 521, and the statute didn’t give a deadline to do it. So, here’s a call to states like Colorado and others who are going after these usury and regulatory evasive business models…take away the linchpin of the business model. Opt-out of section 521!

    And as for those of us back here in the Hawkeye state, here’s to hoping that the Iowa legislature doesn’t (pardon the Peloton pun) get so easily taken for a ride.

  • Of Usury, Preemption, and Fancy Stationary Bikes

    Posted by

    Christopher Odinet

    Greetings, Slipsters! I’m thrilled to be here guest blogging, and I thank the editors for having me. So with that, let me get started…

    Usury, preemption, and pandemic fitness are all colliding here in Iowa. 

    About two weeks ago, I was alerted to a single strike-through amendment buried in a tax bill currently being considered by the Iowa legislature. This simple little change that eliminates three numbers (“521”) would likely go unnoticed by most lawmakers (or, more realistically—all lawmakers). However, this little change could have a profound impact on Iowa’s ability to prevent high cost, predatory lending from spilling into its borders through website portals and smart phone apps. And, if you stay with me for this bit of guest blogging, you’ll never believe what’s supposedly (so I’m told) behind it all! 

    The bill is HSB 272. Most of the bill contains routine tax code clean-ups and modifications. Indeed, the bill itself is sponsored by the Iowa Department of Revenue. But, take a look at the relevant part of Section 5:

    1980 Iowa Acts, chapter 1156, section 32, is amended to read as follows: SEC. 32.  The general assembly of the state of Iowa hereby declares and states . . . that it does not want any of the provisions of any of the amendments contained in Public Law No. 96-221 (94 stat. 132), sections 521, 522 and 523 to apply with respect to loans made in this state . . .

    If you clicked on the link above and read the entirely of Section 5, you’d probably have to go through the text quite a few times before you’d see what’s being stricken out. The singular change is just the reference to section 521 of Public Law No. 96-221 (94 stat. 132). Otherwise, everything else in this existing statute stays the same. 

    So what’s this about? 

    The only clue as to what this stricken language actually deals with is the reference to “loans made in this state.” In truth, this single little strikethrough will allow FDIC-insured state-chartered banks located in other states to make loans under the usury laws of their home states to the residents of Iowa. This kind of lending usually comes in the way of partnerships between a handful of state-chartered banks and so-called “fintech” nonbank lenders making triple digit loans, hardly any different from payday financing. This partnership lending practice has also been the subject of recent lawsuits, including a summer 2020 settlement by the Colorado AG. If you’re interested in a deep dive on the rent-a-bank model and the unique legal and policy problems it creates, check out forthcoming articles here (by Adam Levitin) and here (by me!).

    The icing on the cake, however, is that the rationale (again, as I’ve been told) advanced by proponents of the bill is that without this amendment, Iowans will not be able to finance the purchase of Pelotons. That’s right. Pelotons!

    Here’s the connection: Peloton currently partners with Affirm, a fintech online lender, in order to help consumers finance the purchase of these roughly $3,000 stationary bikes (bike + membership). Interestingly, both firms generally promote 0% down, 0% APR, 0% hidden fees in their financing package. Of course, if you scroll down to the bottom of the promotional website and read the tiny 10.5 point, gray font print, you’ll notice: 

    Your rate will be 0–30% APR based on credit, and is subject to an eligibility check. Options depend on your purchase amount, and a down payment may be required. Affirm savings accounts are held with Cross River Bank, Member FDIC. Savings account is limited to six ACH withdrawals per month. Affirm Plus financing is provided by Celtic Bank, Member FDIC. Affirm, Inc., NMLS ID 1883087. Affirm Loan Services, LLC, NMLS ID 1479506. California residents: Affirm Loan Services, LLC is licensed by the Department of Financial Protection and Innovation. Loans are made or arranged pursuant to California Financing Law license 60DBO-111681 (emphasis added).

    As you can see, Affirm also plays the rent-a-bank game by partnering with FDIC-insured Utah state bank, Celtic Bank. While 30% APR may not seem like the most expensive loan term in the world, it opens the door to much higher cost lending by firms like Elevate Credit, Opportunity Financial, and more–all of whom use the rent-a-bank model. 

    This is about much more than Pelotons…stay tuned for more (including how I think consumer advocates can turn the tables on this strategy!).

    UPDATE: It appears that HSB 272 isn't going anywhere: no legislative movement since a canceled House subcommittee hearing on April 6. Meanwhile, a duplicate tax bill has been filed in the Senate, but it does not contain the DIDMCA opt-out (SSB 1268).

  • Commercial and Contract Law: Questions, Ideas, Jargon

    Posted by

    Melissa Jacoby

    In the Spring I am teaching a research and writing seminar called Advanced Commercial Law and Contracts. Credit Slips readers have been important resources for project ideas in the past, and I'd appreciate hearing what you have seen out in the world on which you wish there was more research, and/or what you think might make a great exploration for an enterprising student. This course is not centered on bankruptcy, but things that happen in bankruptcy unearth puzzles from commercial and contract law more generally, so examples from bankruptcy cases are indeed welcome. You can share ideas through the comments below, by email to me, or direct message on Twitter.

    Also, I am considering having the students build another wiki of jargon as I did a few years ago in another course. Please pass along your favorite (or least favorite) terms du jour in commercial finance and beyond.

    Thank you as always for your input, especially during such chaotic times.

  • Student Loan Relief Update

    Posted by

    Alan White

    Student loan relief provisions required by the CARES Act expire on September 30. Those protections included 1) for all federal direct loans: zero interest and automatic payment forbearance, 2) credit towards IDR and PSLF forgiveness for the 6 months covered by the Act, and importantly, 3) suspension of wage garnishments and other collections on defaulted loans. The Act called for student loan borrowers to receive notice in August that payments will restart October 1 and that borrowers not already in income-driven repayment plans can switch, so that borrowers with no or little income can remain on zero payments (but not if they were in default.)

    The President’s Executive Memorandum calls on the Secretary of Education to take action to extend economic hardship deferments under 20 U.S.C. 1087e(f)(2)(D) to provide “cessation of payments and the waiver of all interest” through December 31 2020.  These deferments are to be provided to “borrowers.” The Memorandum does not specify which loan categories (Direct, FFEL, Perkins, private) should be included, nor whether relief to borrowers in default should continue. Advocates also note that the Memorandum is vague as to whether borrower relief will continue automatically, or instead whether students will have to request extended relief, as under the Education Department’s administrative action just prior to passage of the CARES ACT. As of this writing the Education Department has posted no guidance for borrowers or servicers on its web site. Servicers will need guidance soon, and borrowers meanwhile will be receiving a confusing series of CARES Act termination letters and conflicting information about the latest executive action. UPDATE – USED has apparently issued guidance to collection agencies saying that borrowers in default are included in the Executive action so that garnishments and other collection should remain suspended through December 31, 2020.

    The HEROES Act passed by the House would extend all borrower relief until at least September 30 2021, would bring in all federal direct, guaranteed and Perkins loans, and would grant a $10,000 principal balance reduction to “distressed” borrowers. The House also included an interesting fix to the Public Service Loan Forgiveness program so that borrowers will not have to restart their ten-year clock towards loan forgiveness when they consolidate federal loans. In lieu of any extended student loan relief, Senate Republicans have proposed that borrowers just be shifted to existing income-dependent repayment plans. Existing IDR plans already allow zero payments for borrowers with zero or very low income, but do not stop the accrual of interest. They are not available to borrowers in default, so wage garnishments and collections for borrowers who were in default before March would resume October 1 under the Republican proposals.

  • American Predatory Lending and the North Carolina model

    Posted by

    Melissa Jacoby

    My coauthor Ed Balleisen has co-founded a program on consumer lending of interest to Credit Slips readers. Its initial data collection is particularly useful in documenting the North Carolina experience and its implications for other states. The quote below is from Balleisen's post on Consumer Law and Policy:  

    Data visualizations of statistics about the North Carolina mortgage market and consumer protection enforcement complement the oral histories, as do a set of policy timelines and memos about state- and national-level regulation of mortgage lending. Our key findings suggest that more stringent oversight of aggressive mortgage practices moderated the housing boom in North Carolina, and so partially insulated the state from the broad collapse in housing values across the country.

  • PPP Loan Fees for Banks

    Posted by

    Alan White

    $10 billion of CARES Act funds are going to the banks, especially megabanks, in fees for making “small” business PPP loans. The fees established by Congress, to be paid by the Small Business Administration, i.e. Treasury, range from 1% for loans above $2 million to 5% for loans below $350,000.

    The maximum loan amount is $10 million, so those loans generate a nifty $100,000 fee each. At least 40 large public companies received loans from $1 to $10 million.

    Given the highly streamlined application process, these fees likely far exceed the costs of originating these loans. The 1% interest rate, while low, still exceeds bank cost of funds. Do the banks need a bailout? First quarter earnings reports for the largest banks show steep drops in earnings, but earnings are still positive. The earnings drop is entirely due to provisioning for expected loan losses; obviously predicting loan performance over the next year is a very tricky business. Nevertheless, the PPP fee structure is designed to subsidize financial institutions not especially in need of a bailout, especially compared to restaurants, main street stores, and other small businesses. In fact, given that SBA is waiving the guarantee fee, why don’t the banks just waive the fees and interest on these loans? And given the robust public subsidies to megabanks, why should SBA pay these fees in the first place? If banks have inadequate capital to weather the coming storm, surely there is a better way to support them than having SBA pay these arbitrary PPP loan fees.

  • PSLF update

    Posted by

    Alan White

    The success rate for Public Service Loan Forgiveness applicants has doubled. From 1% to 2%.

    Thinking they have completed their 10 years of payments, 140,000 student loan borrowers had applied for cancellation through February 29, and about 3,000 had received a discharge, including 1,300 under the “temporary expanded” PSLF who were put in the wrong repayment plan by their servicers.

    1.3 million public servants have had their employment approved for eventual cancellation of their student loans after 10 years of repayment. Two-thirds are in public sector jobs and one-third work in the nonprofit sector. Their average debt is $89,000, although a median would be a more useful number (graduate school borrowers extend the long right-hand tail.)

    The pace of approvals is undoubtedly affected by quarantines of servicer employees. Pennsylvania and the federal Education Department should consider making student loan cancellation workers at FedLoan/PHEAA essential, and staffing up this program.

    USED now releases monthly rather than quarterly #PSLF data.

  • 11th Circuit: Student Borrower Consumer Claims not Preempted by HEA

    Posted by

    Alan White

    An 11th Circuit panel ruled last week that student loan borrowers may assert state law misrepresentation claims against a student loan servicer that falsely told them their FFEL loans qualified for Public Service Loan Forgiveness. The servicer, joined by USED, argued that the Higher Education Act preempted the borrowers' state law claims, because the HEA mandates certain disclosures and expressly preempts state laws that would require additional or different disclosures. Attorneys general and consumer lawyers around the country have been battling various versions of these preemption and related sovereign immunity arguments. 

    Kate Elengold and Jonathan Glater have posted an excellent article, the Sovereign Shield, summarizing the state of play.

  • Hope for Helping the Prospective Payday Loan Customer

    Posted by

    david lander

    Short term (payday) loans and high interest consumer installment loans continue to deplete low income households of micro dollars and their communities of macro dollars. Although the CFPB seems intent on supporting the depletions, a good number of states have provided some relief.  Even in states without interest rate limitations there are a couple of ideas that can help.

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