Regions Bank fined $7.5 mil for illegal overdraft practices (re-post of press release from CFPB)

FOR IMMEDIATE RELEASE: April 28, 2015 [CBPB announcement via Internet] 

CONSUMER FINANCIAL PROTECTION BUREAU FINES REGIONS BANK $7.5 MILLION FOR UNLAWFUL OVERDRAFT PRACTICES

Bank Refunds $49 Million in Illegal Fees to Consumers Who Did Not Opt-In to Overdraft

Regions Branch in Houston (Galleria)

WASHINGTON, D.C. – Today the Consumer Financial Protection Bureau (CFPB) took action against Regions Bank for charging overdraft fees to consumers who had not opted-in for overdraft coverage. The bank also charged overdraft and non-sufficient funds fees on its deposit advance product despite claims that it would not. Regions has already refunded hundreds of thousands of consumers approximately $49 million in fees, and the consent order requires the bank to fully refund all remaining consumers. The Bureau also fined the company $7.5 million for its illegal actions. “Today the CFPB is taking its first enforcement action under the rules that protect consumers against illegal overdraft fees by their banks,” said CFPB Director Richard Cordray. “Regions Bank failed to ask consumers if they wanted overdraft service before charging them fees. In the end, hundreds of thousands of consumers paid at least $49 million in illegal charges. We take the issue of overdraft fees very seriously and will be vigilant about making sure that consumers receive the protections they deserve.” 

Regions Bank, headquartered in Birmingham, Alabama, operates approximately 1,700 retail branches and 2,000 ATMs across 16 states. It is one of the country’s biggest banks with more than $119 billion in assets. Among its various products and services, it has checking accounts and offers loans known as deposit advance products. With deposit advance products, the borrower authorizes the bank to claim repayment as soon as the next qualifying electronic deposit is received. 

Regions offers overdraft services with its checking accounts. An overdraft can occur when consumers spend or withdraw more money from their checking accounts than is available. The financial institution can choose to cover the payment by advancing funds on the consumer’s behalf, and generally charges a fixed overdraft fee for doing so. The institution can also choose to return the payment if it is a check, online bill payment, or direct debit, and then charge a non-sufficient funds fee. In recent years, most banks have adopted automated systems for making these decisions. These systems have contributed to the evolution of overdraft from an occasional courtesy to a significant source of industry revenues. 

In 2010, federal rules took effect that prohibited banks and credit unions from charging overdraft fees on ATM and one-time debit card transactions unless consumers affirmatively opted in. If consumers don’t opt-in, banks may decline the transaction, but won’t charge a fee. The “opt-in” rule took effect in July 2010 for new accounts and August 2010 for existing accounts.  

The Bureau found that Regions Bank: 

• Failed to obtain required opt-ins for certain consumers: Regions allowed consumers to link their checking accounts to savings accounts or lines of credit. Once that link was established, funds from the linked account would automatically be transferred to cover a shortage in a consumer’s checking account. Regions never provided customers with linked accounts an opportunity to opt in for overdraft. Because those consumers had not opted in, Regions could have simply declined ATM or one-time debit card transactions that exceeded the available balance in both the checking and linked accounts. Instead, the bank paid those transactions then charged its customers a fee of up to $36. Those fees violated the opt-in rule. 
• Delayed fixing the violation until almost a year after discovering it: Thirteen months after the opt-in rule’s mandatory compliance date, an internal review by the bank found that linked-account overdraft fees violated the rule. But Regions failed to stop the charges for almost another year. It was not until April 2012 that the compliance department brought the violation to the attention of senior executives, who then reported the error to the Bureau. Regions reprogramed its systems to stop charging the unauthorized fees in June 2012. In early 2015, the bank discovered additional accounts that had been charged unauthorized fees. 
• Misrepresented overdraft and non-sufficient funds fees related to its deposit advance product: Regions charged overdraft and non-sufficient fundsfees with its deposit advance product, called Regions Ready Advance, despite claiming it would not. Specifically, if the bank collected payment from the consumer’s checking account and the payment was higher than the amount available in the account, it would cause the consumer’s balance to drop below zero. When that happened, the bank would either cover the transaction and charge an overdraft fee or reject its own transaction and charge a non-sufficient funds fee. At various times from November 2011 until August 2013, the bank charged non-sufficient funds fees and overdraft charges of about $1.9 million to more than 36,000 customers. 

Enforcement Action
Under the Dodd-Frank Act, the CFPB has the authority to take action against institutions violating federal consumer financial laws, including by engaging in unfair, deceptive, or abusive acts or practices. Regions Bank violated the Electronic Fund Transfer Act and the Consumer Financial Protection Act of 2010. The CFPB’s order requires that Regions Bank: 

• Provide refunds to all remaining affected consumers: Regions Bank voluntarily reimbursed approximately 200,000 consumers a total of nearly $35 million in December 2012 for the illegal overdraft fees. After the Bureau alerted the bank to more affected consumers, Regions returned an additional $12.8 million in December 2013. In January 2015, the bank identified even more affected consumers and is now required to provide them with a full refund. Under the terms of the consent order filed today, Regions must hire an independent consultant to identify all remaining consumers who were charged the illegal fees. Regions will return these fees to consumers, if not already refunded. If the consumers have a current account with the bank, they will receive a credit to their account. For closed or inactive accounts, Regions will send a check to the affected consumers. 
• Correct errors on credit reports: Regions must identify and fix all instances of negative credit reporting resulting from the unlawful fees. 
• Pay a $7.5 million fine: Regions will make a $7.5 million penalty payment to the CFPB’s Civil Penalty Fund. Regions’ violations and its delay in escalating them to senior executives and correcting the errors could have justified a larger penalty, but the Bureau credited Regions for making reimbursements to consumers and promptly self-reporting these issues to the Bureau once they were brought to the attention of senior management. 

A copy of the consent order is available at:http://files.consumerfinance.gov/f/201504_cfpb_consent-order_regions-bank.pdf 

The CFPB’s July 2014 Overdraft Data Point is available at:http://files.consumerfinance.gov/f/201407_cfpb_report_data-point_overdrafts.pdf 

The CFPB’s Responsible Conduct Bulletin is available at:http://files.consumerfinance.gov/f/201306_cfpb_bulletin_responsible-conduct.pdf 

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FOR IMMEDIATE RELEASE:April 28, 2015

Prepared Remarks of Cara Petersen Deputy Enforcement Director of the Consumer Financial Protection Bureau 

Regions Bank Enforcement Action Press Call 

Washington, D.C. April 28, 2015

Today the Consumer Financial Protection Bureau is taking its first enforcement action under the federal rules that protect consumers against illegal overdraft fees by their banks.  We are taking action against Alabama-based Regions Bank for failing to ask consumers if they wanted overdraft service before charging them fees for this service.  Regions amplified this harm by letting it drag on for almost an additional year after the bank first discovered the violation.  The bank also charged overdraft and non-sufficient funds fees on its deposit advance product despite claims that it would not do so.  In the end, hundreds of thousands of consumers paid at least $49 million in illegal charges. 

The 2010 Federal Reserve overdraft “opt-in” rule is critically important.  It prohibits depository institutions from charging an overdraft fee for ATM withdrawals and one-time debit card transactions unless the consumer has affirmatively “opted in.”  The opt-in permission means that if consumers overspend their balance while using their debit card to make a purchase or withdraw cash from an ATM, the bank will cover the shortage with a temporary advance, in exchange for a fee.  If consumers do not opt in, transactions are generally declined, with no fee. 

When the rule was first implemented, Regions Bank did not apply it to situations when consumers had one Regions account linked to a second Regions account, such as a savings account or a line of credit.  If a consumer exhausted their funds in their checking account, the bank would automatically dip into the second account or line of credit.  But in circumstances where the combined balance in both the checking account and linked account was not enough to cover the transaction, Regions would sometimes pay the transaction through its overdraft service and charge an overdraft fee of up to $36.  Yet Regions failed to obtain consumer consent from many of these customers for this overdraft service.  This failure to get the required consumer permissions resulted in customers paying tens of millions of dollars in illegal overdraft fees. 

To compound the problem, Regions Bank identified the violation but failed to channel that information to senior decision makers.  The result was that the bank continued to charge consumers incorrectly for almost a year after it discovered the problem. 

Regions also had a deposit advance product, called Regions Ready Advance, which led to a second violation.  Deposit advance products are like payday loans; they typically are sold as a way to bridge a cash-flow shortage between paychecks or other income.  Generally these loans are for small-dollar amounts and borrowers must repay them quickly by giving lenders access to their deposit accounts. 

Regions said it would not charge overdraft or non-sufficient funds fees when its customers made repayments on its Ready Advance loans.  But the bank did, in fact, assess such fees in instances where it collected payment from the consumer’s checking account and caused the balance to drop below zero.  Charging such fees in addition to collecting its payments was contrary to its description of how these loans worked.  At various times from November 2011 until August 2013, the company charged non-sufficient funds fees and overdraft charges of nearly $2 million to tens of thousands of its deposit advance customers. 

Regions has already refunded $49 million to consumers.  Today’s order requires Regions Bank to ensure that all remaining customers get their money back if they were wrongfully charged fees.  The bank also must pay a fine of $7.5 million for the violations.  And, it is worth noting, Regions’ conduct would have warranted an even stiffer penalty if it had not voluntarily refunded consumers and promptly self-reported this problem to the Bureau once it was brought to the attention of senior management.  Any consumers who had their credit harmed as a result of the violations will also get their credit records straightened out. 

At the Consumer Bureau, we take the issue of overdraft fees very seriously.  In its original form, overdraft began as an occasional courtesy service for checks that would otherwise have been returned, but it has evolved over the years.  By the time the opt-in rule was adopted in 2010, if a consumer overdrew his account, banks and credit unions often would cover the difference and generally charge a fee for that service.  With the advent of debit cards, consumers started to use them instead of cash for more of their small or impulse purchases.  And as banks and credit unions came to cover more of these transactions, they started assessing higher fees for doing so.  Accordingly, overdraft started to become a significant source of the revenue generated from checking accounts.  Today, even with the opt-in rule in place, more than half of consumer checking account income comes from overdraft and similar fees. 

Opting consumers into overdraft without their permission can be very expensive.  In July 2014, the CFPB released its second report on overdraft that raised concerns about how consumers are being affected by overdraft practices.  It confirmed that overdraft fees can pile up quickly on smaller debit card purchases, often for less than $24, such as buying a quick meal or perhaps an impulse purchase at the mall.  The study also found that, on average, opted-in accounts pay almost $260 per year in overdraft and non-sufficient funds fees, compared to just over $35 for non-opted-in accounts. 

The 2010 opt-in rule made clear that consumer protection in this area is critical.  That Regions Bank violated the law raises definite concerns worthy of note by all depository institutions.  And their customers should rest assured that the Consumer Bureau is here to protect them when it comes to the hard-earned money they keep in their checking accounts.  Thank you. 

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The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.

CFPB Leader on Financial Abuse of the Elderly (press release re-post)

FOR IMMEDIATE RELEASE: April 27, 2015 [issued by the CFPB via the internet] 

Prepared Remarks of Richard Cordray Director of the Consumer Financial Protection Bureau 

White House Conference on Aging Regional Forum 

Cleveland, Ohio 

April 27, 2015

Good morning.  It is an honor to be here today alongside my colleagues who are stalwart champions of our seniors.  We are here because we care about making sure that all Americans, throughout their lifespans, can have the opportunity to learn and develop skills, engage in productive work, make sound choices about their daily lives, and participate fully in the life of our communities. 

We are experiencing the greying of America, with 45 million people in this country who are age 65 or older and 10,000 more who are turning 65 each day.  They are our grandparents, our parents, our neighbors, our friends.  And they are living longer, healthier lives than ever before.  The average American is now spending about twenty years in retirement.  During these years, they are active consumers.  They are still taking out and making payments on mortgages; they are still borrowing to buy cars and trucks; they are still accumulating credit card debt; some are even taking out student loans on behalf of their grandchildren.  These heavier debt loads, that previous generations did not have, can threaten their economic security. 

We have recently come through the worst financial crisis since the Great Depression.  Many Americans were shaken in their deeply held belief that if they work hard and act responsibly, they can get ahead and retire securely.  Millions lost their jobs, millions lost their homes, and almost all of us lost a substantial chunk of our life savings. 

In the aftermath of the crisis, this country had to make a new beginning.  The new Consumer Financial Protection Bureau is part of that fresh start.  We are very busy addressing key problems in the consumer financial markets, and we are working to create a sustainable marketplace where informed consumers can find value in responsible business practices.  Let me briefly describe three ways we are seeking to accomplish these goals. 

First, we are cleaning up problems in the financial marketplace through evenhanded oversight and enforcement of the law.  So far our enforcement actions have made over $5.3 billion available to millions of consumers, and we have levied hundreds of millions of dollars in penalties.  We also are improving the financial markets through balanced regulation.  For example, in the largest single consumer financial market in the world – the U.S. mortgage market, worth trillions of dollars – we have adopted sweeping new rules to ensure that the excesses and irresponsible practices that brought about the financial crisis cannot be repeated.  That change alone will help safeguard Americans against the kinds of economic dangers and calamities they suffered just a few short years ago. 

Second, we are addressing individual problems that arise every day through our consumer response function.  To date, we have addressed complaints from over 600,000 consumers.  More than 50,000 of them came from consumers who told us they are age 62 or older.  Through our complaint process, we have helped return millions of dollars to consumers and we have solved other problems that had been frustrating them for months or even years.  Anyone who believes they were mistreated on their mortgage, auto loan, student loan, credit card, or bank account can go to our website at consumerfinance.gov to file a complaint.  It is a simple and easy process and typically takes less than fifteen minutes from start to finish. 

Third, we are developing powerful new tools for all consumers, including older Americans.  For those who feel disempowered by the confusing explanations provided for many financial products, we have created our “Ask CFPB” tool.  This interactive database has over a thousand answers to questions most commonly asked by consumers.  When you encounter a particular issue, you can go to Ask CFPB to learn more about it and understand your rights. 

So in these ways the Consumer Bureau is working on behalf of more than 300 million American consumers.  But the law that created our new agency specifically recognized the need to protect older Americans against financial exploitation and promote economic security later in life.  With the aging of the baby boomer generation, that mission has never been more important.  This is especially so for two central themes of the White House Conference on Aging:  retirement security and elder justice.  Our Office for Older Americans is dedicated to addressing these issues.  It has enjoyed top-flight leadership, first from Hubert Humphrey III and now from Nora Dowd Eisenhower – two individuals who became leaders on these issues at the state level before bringing that same commitment to the federal level at the new Consumer Bureau.  Let me describe how we are making progress in both of these areas. 

*** 

Our Office for Older Americans has done much great work around retirement security.  Our team has traveled the country listening to older Americans.  Based on what we heard, we issued studies, guides, and advisories to arm seniors and their caregivers with the information and tools they need to protect themselves and their precious retirement savings. 

One of our first reports to Congress exposed problems with so-called “senior designation” credentials that many financial advisers use to market their services to older Americans.  We identified more than fifty different senior designations that financial advisers use to indicate that they have advanced training or expertise in the financial needs of older consumers.  Many of these credentials are flimsy at best, yet they can confuse older consumers, who are already at risk for deception and fraud.  Based on those findings, we made recommendations to policy makers to help older consumers by implementing rigorous training standards and increasing supervision and enforcement. 

In another report, we found that debt collection is a top complaint for older Americans, just as it is for younger consumers.  So we issued a consumer advisory to help older Americans deal with harassing debt collectors.  We let them know that their federal benefits are legally protected against these risks, and we explained how they can dispute debts they believe are false or inaccurate. 

We have also done much work on reverse mortgages, starting with a comprehensive report on the industry that we published three years ago.  We have produced a guide to help consumers assess the pros and cons of this product, and for those who already have a reverse mortgage, we have offered tips on how to plan ahead to avoid financial hardships that may result from certain mortgage terms.  We have also analyzed our consumer complaints on reverse mortgages, which showed that many older consumers are quite frustrated with loan terms, servicing runarounds, and foreclosure problems.  We are helping many seniors who filed these complaints, and we are prioritizing these issues for oversight and enforcement. 

Protecting older consumers also means supporting those who love and take care of them.  So we put out a guide to help assisted living and nursing home staff better protect the people in their care by preventing and addressing financial abuse and scams.  Many seniors are vulnerable, and our guide helps their caretakers deal with financial mistreatment by family members or others who are handling the finances of an incapacitated adult. 

About 22 million people who are age 60 or older have named someone as an agent under a power of attorney to make financial decisions for them – and millions more have court-appointed guardians or other fiduciaries.  The vast majority of those designated to serve in these capacities are trying their best to do the right thing, but they often have no training.  We have published guides, called “Managing Someone Else’s Money,” to help family members and friends better understand their role in serving as financial caregivers.  These guides are written in plain language and are designed to apply to four different types of fiduciaries.  Each guide tells them about their duties, how to prevent and respond to financial exploitation and scams, and where to go for additional help. 

In partnership with the FDIC, we have also developed resources that provide financial education for older consumers and their caregivers.  “Money Smart for Older Adults” uses a train-the-trainer approach that makes it easy for instructors to provide practical guidance for a safe and secure financial future.  Instructors can include financial institution staff, senior organizations, adult protective services agencies, law enforcement, and others who serve this population. 

*** 

In addition to retirement security, the Consumer Bureau also is focused on issues of elder justice.  Unfortunately, we have seen that older Americans all too often fall prey to financial exploitation.  They make attractive targets because they often have higher household wealth in the form of retirement savings or home equity or both.  They may develop impaired capacity and they can be isolated and vulnerable.  Recent studies found that financial exploitation is the most common form of elder abuse, but that only a small fraction of incidents is ever reported.  I saw this during my time as the Attorney General of Ohio – how a lifetime of savings can be wiped out by falling prey to a scam artist.  Our Office for Older Americans is working with a broad spectrum of stakeholders to prevent these things from happening. 

We are also bringing enforcement actions to address some of the issues most commonly raised by older American consumers.  Two of those issues are mortgage servicing and debt collection.  We have taken major actions against Ocwen and Flagstar, two large mortgage servicers, for the same troubles seniors are experiencing.  And we have brought numerous enforcement actions for problems in debt collection that are frequently described by older consumers.  We have also begun to police reverse mortgage lenders for advertisements that misstate the costs and risks of these sensitive financial products – advertisements we so often see on late-night television. 

We are also calling on financial institutions to do their part to help protect older Americans.  When seniors fall victim to a scam or to theft by a trusted family member, they may be too embarrassed or too frail to pursue legal action or even to report that they have suffered harm.  So it is crucial that other folks are looking out for them too.  Financial institutions are especially well-positioned to prevent such fraud.  Many older consumers make frequent use of traditional bank and credit union branches and are known personally by the tellers, who often are able to spot irregular transactions, abnormal account activity, or unusual behavior that signals financial abuse. 

Preventing elder financial abuse requires coordinated efforts on the national, state, and community level.  Financial institutions can and should collaborate with Adult Protective Services, other senior service providers, and law enforcement to keep our seniors safe.  Reporting suspected abuse to the appropriate authorities is the right thing to do.  Yet there has been confusion about whether federal law permits financial institutions to do this without first informing the consumer and providing an opportunity to opt out.  The Consumer Bureau, in collaboration with other financial regulators, has developed guidance to clarify the issue and reassure financial institutions as a general matter that they can and should report suspected financial abuse that victimizes older Americans to all appropriate authorities. 

We need to recognize that we all bear responsibility here.  Both older Americans and those who look out for them should know how to identify and report the common signs of elder financial abuse.  Our “Managing Someone Else’s Money” guides highlight common signs of financial exploitation:  funds disappearing from accounts, bills that go unpaid, belongings that are missing.  It also points out others that are more subtle:  electronic or ATM withdrawals that fly under the radar or a new best friend or acquaintance showing up with power of attorney or being added as a joint account holder. 

The Consumer Bureau is encouraging all financial services providers to work with us to focus on the “three Rs”:  recognize, record, and report.  Those who serve seniors as profitable customers can also share resources effectively to prevent and respond to elder financial abuse.  Some credit unions and smaller banks are already following our guidance and sharing our resources to protect seniors.  We strongly encourage more institutions to do the same.  

*** 

The Consumer Bureau was born out of the recent financial crisis, and our work is still in its early stages.  But as the American economy recovers, we want consumers of all ages to be able to look ahead with hope and resilience.  We want them to know they have a new agency standing on their side and looking out for their interests, to help restore confidence and trust in the consumer financial marketplace.  With your help and advice, we are glad to work with you to do that.  Thank you. 

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The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.

Green Tree Servicing to pay $48 million in restitution and $15 mil penalty stemming from misconduct in loan servicing [re-post of press release from the CFPB and FTC]

April 21, 2015 MEDIA RELEASE VIA INTERNET: 

CONSUMER FINANCIAL PROTECTION BUREAU AND FEDERAL TRADE COMMISSION TAKE ACTION AGAINST GREEN TREE SERVICING FOR MISTREATING BORROWERS TRYING TO SAVE THEIR HOMES

Green Tree to Pay $48 Million in Borrower Restitution and $15 Million Fine for Servicing Failures

WASHINGTON, D.C. – Today the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC) took action against Green Tree Servicing, LLC, for mistreating mortgage borrowers who were trying to save their homes from foreclosure. The mortgage servicer failed to honor modifications for loans transferred from other servicers, demanded payments before providing loss mitigation options, delayed decisions on short sales, and harassed and threatened overdue borrowers. Green Tree has agreed to pay $48 million in restitution to victims, and a $15 million civil money penalty for its illegal actions. 

Different kind of Green Tree 

“Green Tree failed consumers who were struggling by prioritizing collecting payments over helping homeowners,” said CFPB Director Richard Cordray. “When homeowners in distress had their mortgages transferred to Green Tree, their previous foreclosure relief plans were not maintained. We are holding Green Tree accountable for its unlawful conduct.”

Green Tree, headquartered in St. Paul, Minn., is a national mortgage servicing company. It has rapidly expanded into the residential mortgage market and services loans for millions of homeowners. Green Tree specializes in servicing delinquent loans and markets itself as a “high touch” servicer that makes frequent collection calls to consumers. 

As a servicer, Green Tree is responsible for, among other things, creating and sending monthly statements to borrowers, collecting payments, and processing payments. For troubled borrowers, it administers short sale and foreclosure relief programs provided by the owner of the loan. These “loss mitigation” programs provide alternatives to foreclosure. Green Tree is responsible for soliciting borrowers for these programs, collecting their applications, determining eligibility, and implementing the loss mitigation program for qualified borrowers. 

The CFPB and FTC allege that Green Tree engaged in illegal practices when servicing loans that it acquired from other servicers. According to the complaint filed by the CFPB and FTC, on a number of occasions, Green Tree failed to honor loan modifications that consumers had entered into with their prior servicers and insisted that the consumer pay their original, higher monthly payment. Green Tree also failed at times to get the information and documentation from the prior servicer that it needed to accurately collect payments from consumers. Green Tree demanded payments before providing loss mitigation options, delayed decisions on short sales, and resorted to illegal practices to collect mortgage payments from consumers who fell behind on their loans, including false threats, repeated calls, and revealing debts to third parties, like employers. 

Green Tree’s failures as a mortgage servicer hurt homeowners. In many cases, Green Tree delayed or deprived borrowers of the opportunity to save or sell their home. Specifically, the Bureau and the FTC allege that from 2010 to 2014, the company: 

• Demanded payments before providing loss mitigation options: Delinquent consumers who called Green Tree were automatically routed to a debt collector. The CFPB and FTC allege that consumers who wanted to speak with a customer service representative or loss mitigation specialist rather than a collector found that there was no way to do so and were sometimes told that they had to make a loan payment before they could be considered for a loan modification. In reality, consumers did not need to make payments on their loans before they could be considered for a loan modification. For example, the Home Affordable Modification Program (“HAMP”), which Green Tree participated in, does not allow participating servicers to require consumers to make payments before considering them for a loan modification. 
• Failed to honor in-process modifications: Because Green Tree was rapidly expanding its mortgage servicing business, it often acquired customers who already had an agreement with their previous servicer to modify their loans. The complaint alleges that Green Tree, in many instances, failed to honor these agreements and insisted that consumers pay their old higher mortgage payment. 
• Delayed short sales: Green Tree’s short sale department was frequently unreachable and unresponsive. The complaint alleges that in numerous instances, Green Tree took two to six months to respond to consumer requests for short sales. This could have cost consumers potential buyers, and it may also have cost them other loss mitigation alternatives while their short sale requests were pending. 
• Harassed and threatened overdue borrowers: The CFPB and FTC allege that if a consumer was two weeks or more past due, Green Tree consumers could receive seven to 20 phone calls a day. Some Green Tree representatives also told consumers that nonpayment of their mortgage loan could result in arrest or imprisonment. Or, representatives threatened seizure or garnishment of the consumer’s wages when Green Tree had no intention to take such actions. Such threats are illegal. 
• Used deceptive tactics to charge consumers convenience fees: The Bureau and the FTC allege that Green Tree deceived consumers to get them to pay $12 for its pay-by-phone service, called Speedpay. Green Tree representatives would pressure consumers to use the service by telling consumers that Speedpay was the only available payment method to ensure the payment would be received on time. In fact, Green Tree accepted other payment methods that do not involve a fee, such as checks and ACH payments, which consumers could have used to make a timely payment. 

This enforcement action covers Green Tree’s illegal practices prior to the January 2014 effective date of the CFPB’s new mortgage servicing rules. 

Enforcement ActionUnder the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB has the authority to take action against institutions engaging in unfair, deceptive, or abusive practices. The CFPB also has authority to take action against institutions violating the Real Estate Settlement Procedures Act, the Fair Credit Reporting Act, and the Fair Debt Collections Practices Act. If entered by the court, today’s order would require Green Tree to: 

• Pay $48 million in redress to victims: Green Tree must pay $48 million to thousands of consumers whose loan modifications were not honored, who had their short sales decisions delayed because of Green Tree’s poor servicing, or who were deceptively charged convenience fees when paying their mortgage. Borrowers who receive payments will not be prevented from taking individual action on their claims as a result of this settlement. 
• Engage in efforts to help affected borrowers preserve their home: For certain borrowers affected by Green Tree’s unlawful practices who were not foreclosed on, Green Tree must convert in-process loan modifications into permanent modifications and engage in outreach, including telephone and mail campaigns and translation services, to contact borrowers and offer them loss mitigation options. And Green Tree must halt the foreclosure process, if one is happening, during this outreach and qualification process for these borrowers. 
• End all mortgage servicing violations: In addition to being subject to the loss mitigation provisions of the CFPB’s new mortgage servicing rules, Green Tree is prohibited from making misrepresentations to consumers regarding loss mitigation, such as false statements about how much consumers owe Green Tree. Green Tree must take other actions relating to servicing loans in loss mitigation, such as acknowledging the receipt of a short sale request and providing consumers with a list of any missing documents, within five days. 
• Adhere to rigorous servicing transfer requirements: Green Tree must create a detailed data integrity program that tests, identifies, and corrects errors in loans transferred to Green Tree to ensure that Green Tree has accurate information about consumers’ loans. Green Tree may not transfer loans in loss mitigation, in or out, unless all account-level documents and data relating to loss mitigation are provided to the new servicer by the date of transfer. 
• Honor prior loss mitigation agreements: Green Tree must honor loss mitigation agreements entered by the prior servicer, continue processing pending loss mitigation requests received in the transfer, and review and evaluate pending loss mitigation applications within a set time. 
• Provide access to quality customer service: Green Tree must ensure that consumers are referred to a loss mitigation or other appropriate supervisor upon request, have access to individuals able to stop foreclosure proceedings, and are not subject to compensation arrangements that encourage collection over loss mitigation. 
• Pay $15 million civil penalty: Green Tree will make a $15 million penalty payment to the CFPB’s Civil Penalty Fund. 

The Bureau’s complaints and consent orders are not findings or rulings that the defendants have actually violated the law. 

A copy of the proposed consent order is available at:http://files.consumerfinance.gov/f/201504_cfpb_proposed-consent-order-green-tree.pdf 

A copy of the complaint is available at:http://files.consumerfinance.gov/f/201504_cfpb_complaint-green-tree.pdf   

Today’s settlement is a collaborative effort with the FTC. The FTC’s press release is available at: https://www.ftc.gov/news-events/press-releases/2015/04/national-mortgage-servicing-company-will-pay-63-million-settle

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CFPB Director Cordray on Payday Lending - March 26, 2015 Richmond VA event (re-posted press release)

FOR IMMEDIATE RELEASE:March 26, 2015

CONTACT:Office of CommunicationsTel: (202) 435-7170

Prepared Remarks of Richard Cordray
Director of the Consumer Financial Protection Bureau

Field Hearing on Payday Lending

Richmond, Va.March 26, 2015

Thank you for joining us in Richmond for this field hearing.  When I was originally appointed to serve as the Director of the Consumer Financial Protection Bureau, we decided to hold our first field hearing in Birmingham, Alabama on the topic of payday lending – the same subject we are addressing here today.  That was in January of 2012.  These issues generated intense interest then, and they continue to generate intense interest today.  We have seen and heard and felt that same deep and passionate interest from a great many people in a wide range of settings all over the United States. 

Over the past three years, we have engaged in intensive analysis of the short-term and longer-term credit markets for personal loans.  We have considered the history of the demand for such loans and the conditions that create such demand.  We have also focused carefully on how people are affected by the kinds of credit products that have evolved to meet this demand.  As we first said in Alabama, and as we underscore again today, we believe that many people who live on the edge need access to credit that can help them manage their financial affairs.  But we have also emphasized that the market for such credit products must be marked by responsible lending that helps rather than harms consumers.  Extending credit to people in a way that sets them up to fail and ensnares considerable numbers of them in extended debt traps, is simply not responsible lending.  It harms rather than helps consumers.  It has deserved our close attention, and it now leads to a call for action. 

So after much study and analysis, we are taking an important step toward ending the debt traps that are so pervasive in both the short-term and longer-term credit markets.  Today we are outlining a proposal that would require lenders to take steps to make sure borrowers can repay their loans.  The rules we are considering would cover payday, vehicle title, and certain high-cost installment loans.  We have released an outline of the proposals we are considering, and we invite feedback on our approach.  This is the first step in addressing much-needed change. 

*** 

Before I discuss more specifics, it seems important that we first take a step back to get more perspective. 

Consumer credit is a relatively modern phenomenon, which grew up with the rise of the money economy itself and developed initially as a means of enabling consumers to make a purchase.  At one time, that purchase might have been dry goods from the community’s general store; today, it could be a home or an automobile.  The advantage of consumer credit is that it lets people spread the cost of repayment over time.  Until recently, a bedrock principle of all consumer lending was that before a loan was made, the lender would first assess the borrower’s capacity to repay the loan.  In a healthy credit market, both the borrower and the lender succeed when the transaction succeeds – the borrower meets his or her need and the lender gets repaid. 

What we have observed is that in the markets we are discussing today, many lenders make loans based not on the consumer’s ability to repay but on the lender’s ability to collect.  The ability to collect is often fueled by modern technology that allows the lender to obtain electronic access to the consumer’s checking account or paycheck.  A lender that acquires such access can then move to the head of the line and obtain payment as soon as money reaches the account or, in the case of payroll access, even before the money gets to the account.  But collectability can also be achieved through less sophisticated means, such as by holding a postdated check or a vehicle title.  Our research and analysis indicates that when loans are made on ability to collect, consumers are put at serious risk. 

With payday loans, vehicle title loans, and many types of installment loans, the pattern is all too common.  A consumer facing difficult financial circumstances is offered quick cash with no questions asked and in return agrees to provide access to a checking account or paycheck or vehicle title in order to get the loan.  No attempt is made to determine whether the consumer will be able to afford the ensuing payments – only that the payments are likely to be collected.  Indeed, in many of these markets the lender’s business model often depends on many consumers being unable to repay the loan and needing to borrow again and again while incurring repeated fees. 

By providing the lender with an easy means of collection or, in the case of vehicle title loans, with power over the consumer’s means of getting about, the lender can trump the consumer’s own discretionary choices about budgeting and spending.  At that point, the consumer is left unable to choose, for example, between repaying the loan and paying rent or covering food or medicine or other pressing needs.  If the lender is able to exert a stranglehold over the consumer’s funds, the consumer may fall behind on her rent or utilities and fall deeper into debt.  Often, the only alternative that these lenders present to consumers is to pay a new set of fees to roll the loan over and defer the day of reckoning.  For many consumers, that choice repeats itself time after time, pushing the consumer further and further into a debt trap.  Some consumers may attempt to climb out of the debt trap by taking out additional loans at the same time, which only compounds their financial difficulty. 

In order to understand the nature and magnitude of the debt traps that can ensnare consumers, we need to gain a more complete understanding of the true costs of such loans to the borrower.  Certainly these loans can seem quite costly on their face, with high annual percentage rates and especially where they lead to repeated rollovers with cascading fees.  All of those costs are paid by the borrower to the lender over time. 

But when we evaluate the further trajectory of these loans, we can begin to comprehend many additional costs that can end up being paid to parties other than the lender.  Some consumers will not have enough money even to pay the fees to roll over the loan when it is due.  In some instances, the lender may nonetheless succeed in collecting repayment by overdrawing the consumer’s deposit account.  If so, the consumer will be charged at least one overdraft fee, and depending on the timing of other transactions the consumer might be charged repeated overdraft fees.  This is not uncommon.  

But even that is not the whole picture – other steps may add further costs along the way.  In certain instances, when the lender goes to collect on the unpaid loan against the consumer’s deposit account, the bank or other depository institution may reject the transaction.  When that happens, the consumer will incur “insufficient funds” fees.  And when the lender’s collection efforts are thwarted in this way, it may respond by making repeated, unsuccessful attempts to withdraw the funds, leading to multiple charges.  Some lenders even break up the total amount they are owed into smaller amounts and put them through the payment system in pieces that generate multiple fees to collect on what started out as a single unpaid loan. 

After a period of time, some consumers will end up facing the closure of their accounts due either to the overdrafts or the piling up of fees or both.  This exposes consumers to yet more fees as well as the costs (in time as well as money) of either having to establish another deposit account elsewhere or having to arrange for financial services outside the banking system altogether, which carries its own set of costs and risks.  These scenarios also will have negative effects on consumers’ credit reports, causing further damage to their financial lives.  

Of course, collection efforts do not end with attempts to debit the consumer’s bank account.  Even though no attempt was ever made at the outset to determine whether the consumer could afford to repay, the consumer is still expected to do so.  Consumers are thus exposed to standard – and, in some markets, non-standard – debt collection methods.  These range from repeated telephone calls to worksite visits to debt collection lawsuits that can lead to wage garnishment.  Debt collection efforts generate a further array of fees and charges, which can include the potential cost of having to defend against collection lawsuits.  These encounters also exact a personal toll on consumers that disrupts their lives.  The extent of that disruption can be hard to quantify, but consumers who experience it often find it to be quite substantial.  And finally, another significant cost of a defaulted loan that turns into a court judgment is the blemish on the consumer’s credit report, which may result in blocking the consumer from accessing affordable credit for an even longer period into the future.  

Each of these additional consequences can be significant, and together they may impose massive costs that go far beyond the amounts paid solely to the original lender.  So the true costs, taken in the aggregate, of a lending model that rests on the ability to collect, rather than the ability to repay, must be kept in mind as we assess the effects on consumers, especially those who were already experiencing financial difficulties when they took out the loan in the first place. 

We recognize that consumers have a legitimate need to access credit to meet their particular circumstances.  But consumers need credit that helps them, not harms them.  If the lender’s success depends on the borrower failing, market dynamics are not functioning properly.  In these cases, the proper balance between lenders and borrowers is knocked off course and the “win-win” dynamic of healthy credit markets is no longer achieved.  That is why we are holding this field hearing, so that we can begin to gain feedback on our approach to these issues. 

*** 

Today we are outlining a framework that would put in place strong federal rules for both short-term and longer-term credit products.  This framework is the product of extensive research, analysis, deliberation, and outreach.  We recognize that it is challenging to determine the best way to address consumer harm in these markets while still leaving room for affordable credit.  So we are releasing a preliminary outline of the proposals we are considering.  We welcome feedback from small businesses and all other affected stakeholders, including consumers and providers alike.  Our formal and deliberative process will lead to fundamental decisions about the proper direction of change in this important marketplace. 

Our proposed framework would provide two different approaches:  debt trap prevention and debt trap protection.   Under the prevention requirements, lenders would have to take appropriate steps at the outset to determine that consumers will not fall into debt traps.  Under the protection requirements, lenders would have to comply with various restrictions designed to ensure that the consumer can affordably extract themselves from the loan over time.  Lenders could choose which set of requirements to follow.  The proposals under consideration also would restrict lenders from accessing consumer deposit accounts in ways that cause consumers to lose control of their own finances and that tend to rack up high fees paid to financial institutions and other parties.  We believe these measures could dramatically improve outcomes in these markets.  Consumers would still be able to get the credit they need, but they could do so within a framework of strong consumer protections under federal and state law. 

*** 

Under our proposed framework, we define the short-term credit market as loans for 45 days or less.  These are typically payday loans or vehicle title loans, but one important feature of our rules is that they would apply to any lender issuing similar short-term loans.  The rules thus would cover all firms that offer competing products in this segment of the market through any channel, including both storefront and online lenders. 

Our proposals to address these short-term loans are based in part on extensive research we have done on the market for payday loans and deposit advance loans, our careful review of the many research studies that others have done on this and related markets, and our discussions with stakeholders on all sides.  Based on our review of millions of transactions, we found in our own research that for about half of all initial payday loans, borrowers are not able to repay the loan without renewing it.  More than one in five initial loans turns into a repeating series of seven or more loans.  The amounts that people borrow in each successive loan in the series is usually the same or more as the initial amount borrowed, leaving many consumers mired in debt while lenders continue to receive their repeated fees. 

Our proposals under consideration would seek to establish strong protections for these short-term loans so that consumers are able to borrow but are not set up to fail.  Lenders would have two alternative ways to meet this requirement:  either prevent debt traps at the outset or protect against debt traps throughout the lending process. 

As Benjamin Franklin sensibly said, “An ounce of prevention is worth a pound of cure.”  So the prevention requirements we are considering would help ensure, at the outset, that consumers can avoid debt traps.  Specifically, the proposals under consideration would require the lender to make a reasonable determination that the consumer could repay the loan when it comes due without defaulting or re-borrowing.  This requirement applies to the whole loan, including the principal, the interest, and the cost of any add-on products.  Lenders would have to engage in basic underwriting by verifying the consumer’s income, major financial obligations, and borrowing history, and determining that the consumer can meet their obligations, cover basic living expenses, and cover payments on the loan.  

If the consumer returns for an additional short-term loan before the consumer has had time to regain her financial footing, lenders would have to confirm that some change in circumstances has occurred that would make the new loan affordable even though the consumer has been unable to escape the debt.  In cases where the consumer takes out three loans in close succession, there would be a mandatory 60-day cooling-off period after the third loan to give the consumer enough time to recuperate financially before borrowing again.  This would prevent lenders from taking advantage of consumers caught in a financial rut by prohibiting long sequences of loans that trap consumers in debt.                                                                                                       

While the prevention requirements would primarily apply at the moment when the borrower takes out the loan, the alternative protection requirements under consideration would apply throughout the life of the loan.  We are considering two alternatives.  Under the first alternative, lenders would have to decrease the principal amount for each subsequent loan so that after three loans the debt is paid off.  At that point, a 60-day cooling-off period would kick in.  Under the second alternative, when the borrower still cannot repay after two rollovers, the lender would have to offer the consumer an off ramp consisting of a no-cost extended payment plan.  After that, a 60-day cooling-off period would apply.  Under either approach, the lender could not lend more than $500 or take a security interest in a vehicle title, and the lender could not keep the consumer indebted on these loans for more than 90 days in a 12-month period. 

These measures are being carefully considered to help consumers avoid spiraling into long-term debt.  The financial incentives for the lenders would change significantly because loan rollovers could not continue indefinitely.  In the end, the proposed framework under consideration for this segment of the market is designed to achieve one crucial objective:  to allow for responsible lending while ensuring that short-term loans do not turn into long-term cycles of debt. 

*** 

The second part of our proposal today covers certain longer-term, higher-cost loans.  More specifically, the proposal under consideration would apply to credit products of more than 45 days where the lender has access to the consumer’s bank account or paycheck, or has a security interest in a vehicle, and where the all-in annual percentage rate is more than 36 percent.  These types of installment and open-end loans cause us great concern.  Not only are they high-cost credit, but the lender secures a special form of preferential control over the consumer’s ability to manage his or her own financial affairs, which as we have seen is dangerous and potentially disabling. 

Once again, the proposed framework under consideration here would address the problem of debt traps by establishing strong requirements to help ensure that borrowers can afford to repay their loans.  Just as with short-term loans, lenders would have a choice between two alternative ways to meet this requirement:  prevent debt traps at the outset or protect against debt traps throughout the lending process. 

As with short-term credit products, the debt trap prevention requirements would mean the lender must determine, before a consumer takes out the loan, that the consumer can repay the entire loan – including interest, principal, and the cost of add-on products – as it comes due.  For each loan, the lender would have to verify the consumer’s income, major financial obligations, and borrowing history to determine whether the borrower could make all of the loan payments and still cover her major financial obligations and other basic living expenses. 

If the borrower has difficulty repaying the loan, the lender would be barred from refinancing the old loan upon terms and conditions that the consumer was shown to be unable to satisfy in the first place.  Instead, as with our framework for short-term loans, the lender would be required to document that the consumer’s financial circumstances have improved enough to take out yet another such loan upon the same terms and conditions. 

Alternatively, lenders could adhere to the debt trap protection requirements.  We are considering two approaches here.  Under both approaches, lenders could extend loans with a minimum duration of 45 days and a maximum duration of six months.  Under the first approach, lenders would generally be required to follow the same protections as loans that many credit unions offer under the National Credit Union Administration’s existing program for “payday alternative loans.”  These loans protect consumers by charging no more than 28 percent interest and an application fee of no more than $20.  Under the second approach, we are considering limiting monthly loan payments to no more than 5 percent of the consumer’s monthly income.  This would shield the bulk of their income from being eaten up by repayments, while the six-month limit also prevents the payments from extending in perpetuity. 

The proposed framework here is thus designed to protect consumers against high rates of default or re-borrowing that tend to aggravate their underlying financial problems while preserving their access to affordable credit.  As we go along, we welcome further input on how we can best address the issues consumers face in these credit markets.  We are focused on finding solutions that put an end to irresponsible lending practices too often based on the lender’s ability to collect rather than the consumer’s ability to repay. 

*** 

We are also considering new consumer protections about when and how lenders are able to access consumer accounts.  To mitigate the problems of racking up excessive overdraft and insufficient funds fees, we are weighing two measures:  requiring lenders to notify borrowers before accessing their deposit accounts, and protecting consumers from repeated unsuccessful attempts to access their accounts. 

The first provision would require lenders to give notice to consumers three business days before trying to withdraw funds from the account, including key information about the forthcoming attempt.  The goal here is to protect consumers by giving them more information to help them plan how to manage their accounts and their overall finances.  The notice provision would prevent nasty surprises when the consumer goes to see what money they have in their account.  It would help them avoid unexpected problems such as a rent check that bounces because a payday or installment lender already got to their account first. 

The second provision would require that if lenders make two consecutive unsuccessful attempts to collect money from consumers’ deposit accounts, they could not make any further attempts to collect from the account unless the consumer provided them with a new authorization.  This would help avoid an unexpected cascade of debilitating overdraft or insufficient funds fees incurred by multiple collection attempts. 

The goal behind these parts of our proposal is to block lenders from harming consumers by abusing their preferential access to the consumers’ accounts.  Of course, lenders that are owed money are entitled to get paid back.  But consumers should be able to maintain some meaningful control over their financial affairs, and they should not be subject to an array of fees and other costs that can be generated entirely at the whim of the lender.

*** 

The harms to consumers that we have observed in the short-term and longer-term credit markets for personal loans demand an appropriate policy response.  As Virginia’s own Thomas Jefferson once said, “The care of human life and happiness, and not their destruction, is the first and only object of good government.”  And that is why today we are issuing a call to action. 

The proposed framework under discussion reflects rigorous thinking by our colleagues at the Consumer Bureau.  In addition to our own extensive research, we have had many discussions with consumers, industry, other federal agencies, state and local regulators, academics, and other interested parties.  Our outreach efforts have covered both depository and non-depository lenders that offer payday loans, deposit advance loans, vehicle title loans, installment loans, or other similar loans. 

We are releasing this outline to kick off our efforts to solicit specific feedback from small entities that will be affected by this rulemaking.  As we are getting this feedback, we will also continue to consult with consumers, industry, and others.  We will then formally issue a proposed rule and provide opportunity for everyone to comment.  We will move as quickly as we reasonably can, but we will be thoughtful and thorough as we continue this work, in accordance with our best lights about how to address these issues. 

In the end, we intend for consumers to have a marketplace that works both for short-term and longer-term credit products.  For lenders that sincerely intend to offer responsible options for consumers who need such credit to deal with emergency situations, we are making conscious efforts to keep those options available.  For consumers who need more time to repay, there should continue to be opportunities available for affordable installment loans.  But lenders that rely on piling up fees and profits from ensnaring people in long-term debt traps would have to change their business models.  Consumers should be able to use these products without worrying that they will end up stuck in a deep hole with no way out.  We urge you to join us in helping to achieve that goal. Thank you. 

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The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.

CFPB Considers Proposal to End Payday Debt Traps‏

FOR IMMEDIATE RELEASE:March 26, 2015

CONTACT:Office of CommunicationsTel: (202) 435-7170

CONSUMER FINANCIAL PROTECTION BUREAU CONSIDERS PROPOSAL TO END PAYDAY DEBT TRAPS

Proposal Would Cover Payday Loans, Vehicle Title Loans, and Certain High-Cost Installment and Open-End Loans

WASHINGTON, D.C. — Today the Consumer Financial Protection Bureau (CFPB) announced it is considering proposing rules that would end payday debt traps by requiring lenders to take steps to make sure consumers can repay their loans. The proposals under consideration would also restrict lenders from attempting to collect payment from consumers’ bank accounts in ways that tend to rack up excessive fees. The strong consumer protections being considered would apply to payday loans, vehicle title loans, deposit advance products, and certain high-cost installment loans and open-end loans. 

“Today we are taking an important step toward ending the debt traps that plague millions of consumers across the country,” said CFPB Director Richard Cordray. “Too many short-term and longer-term loans are made based on a lender’s ability to collect and not on a borrower’s ability to repay. The proposals we are considering would require lenders to take steps to make sure consumers can pay back their loans. These common sense protections are aimed at ensuring that consumers have access to credit that helps, not harms them.” 

Today, the Bureau is publishing an outline of the proposals under consideration in preparation for convening a Small Business Review Panel to gather feedback from small lenders, which is the next step in the rulemaking process. The proposals under consideration cover both short-term and longer-term credit products that are often marketed heavily to financially vulnerable consumers. The CFPB recognizes consumers’ need for affordable credit but is concerned that the practices often associated with these products – such as failure to underwrite for affordable payments, repeatedly rolling over or refinancing loans, holding a security interest in a vehicle as collateral, accessing the consumer’s account for repayment, and performing costly withdrawal attempts – can trap consumers in debt. These debt traps also can leave consumers vulnerable to deposit account fees and closures, vehicle repossession, and other financial difficulties. 

The proposals under consideration provide two different approaches to eliminating debt traps – prevention and protection. Under the prevention requirements, lenders would have to determine at the outset of each loan that the consumer is not taking on unaffordable debt. Under the protection requirements, lenders would have to comply with various restrictions designed to ensure that consumers can affordably repay their debt. Lenders could choose which set of requirements to follow.  

Ending Debt Traps: Short-Term LoansThe proposals under consideration would cover short-term credit products that require consumers to pay back the loan in full within 45 days, such as payday loans, deposit advance products, certain open-end lines of credit, and some vehicle title loans. Vehicle title loans typically are expensive credit, backed by a security interest in a car. They may be short-term or longer-term and allow the lender to repossess the consumer’s vehicle if the consumer defaults. 

For consumers living paycheck to paycheck, the short timeframe of these loans can make it difficult to accumulate the necessary funds to pay off the loan principal and fees before the due date. Borrowers who cannot repay are often encouraged to roll over the loan – pay more fees to delay the due date or take out a new loan to replace the old one. The Bureau’s research has found that four out of five payday loans are rolled over or renewed within two weeks. For many borrowers, what starts out as a short-term, emergency loan turns into an unaffordable, long-term debt trap. 

The proposals under consideration would include two ways that lenders could extend short-term loans without causing borrowers to become trapped in debt. Lenders could either prevent debt traps at the outset of each loan, or they could protect against debt traps throughout the lending process. Specifically, all lenders making covered short-term loans would have to adhere to one of the following sets of requirements: 

• Debt trap prevention requirements: This option would eliminate debt traps by requiring lenders to determine at the outset that the consumer can repay the loan when due – including interest, principal, and fees for add-on products – without defaulting or re-borrowing. For each loan, lenders would have to verify the consumer’s income, major financial obligations, and borrowing history to determine whether there is enough money left to repay the loan after covering other major financial obligations and living expenses. Lenders would generally have to adhere to a 60-day cooling off period between loans. To make a second or third loan within the two-month window, lenders would have to document that the borrower’s financial circumstances have improved enough to repay a new loan without re-borrowing. After three loans in a row, all lenders would be prohibited altogether from making a new short-term loan to the borrower for 60 days. 
• Debt trap protection requirements: These requirements would eliminate debt traps by requiring lenders to provide affordable repayment options and by limiting the number of loans a borrower could take out in a row and over the course of a year. Lenders could not keep consumers in debt on short-term loans for more than 90 days in a 12-month period. Rollovers would be capped at two – three loans total – followed by a mandatory 60-day cooling-off period. The second and third consecutive loans would be permitted only if the lender offers an affordable way out of debt. The Bureau is considering two options for this: either by requiring that the principal decrease with each loan, so that it is repaid after the third loan, or by requiring that the lender provide a no-cost “off-ramp” after the third loan, to allow the consumer to pay the loan off over time without further fees. For each loan under these requirements, the debt could not exceed $500, carry more than one finance charge, or require the consumer’s vehicle as collateral. 

Ending Debt Traps: Longer-Term LoansThe proposals under consideration would also apply to high-cost, longer-term credit products of more than 45 days where the lender collects payments through access to the consumer’s deposit account or paycheck, or holds a security interest in the consumer’s vehicle, and the all-in (including add-on charges) annual percentage rate is more than 36 percent. This includes longer-term vehicle title loans and certain installment and open-end loans.   

Installment loans typically stretch longer than a two-week or one-month payday loan,have loan amounts ranging from a hundred dollars to several thousand dollars, and may impose very high interest rates. The principal, interest, and other finance charges on these loans are typically repaid in installments. Some have balloon payments. The proposal would also apply to high-cost open-end lines of credit with account access or a security interest in a vehicle. 

When lenders have the ability to access the consumer’s account or have a security interest in a vehicle, consumers may lose control over their financial choices and these longer-term loans can turn into debt traps. The CFPB’s proposals under consideration for longer-term loans would eliminate debt traps by requiring that lenders take steps to determine that borrowers can repay. Just as with short-term loans, lenders would have two alternative ways to extend credit and meet this requirement – prevent debt traps at the outset or protect against debt traps throughout the lending process. Specifically, lenders making covered longer-term loans would have to adhere to one of the following sets of requirements: 

• Debt trap prevention requirements: Similar to short-term loans, this option would eliminate debt traps by requiring lenders to determine at the outset that the consumer can repay the loan when due – including interest, principal, and fees for add-on products – without defaulting or re-borrowing. For each loan, lenders would have to verify the consumer’s income, major financial obligations, and borrowing history to determine whether there is enough money left to repay the loan after covering other major financial obligations and living expenses. Lenders would be required to determine if a consumer can repay the loan each time the consumer seeks to refinance or re-borrow. If the borrower is having difficulty affording the current loan, the lender would be prohibited from refinancing into another loan with similar terms without documentation that the consumer’s financial circumstances have improved enough to be able to repay the loan.  
• Debt trap protection requirements: The Bureau is considering two specific approaches to the debt trap protection requirements for longer-term products. Under either approach, loans would have a minimum duration of 45 days and a maximum duration of six months. With the first, the proposal being considered would require lenders to provide generally the same protections offered under the National Credit Union Administration program for “payday alternative loans.” These loans have a 28 percent interest rate cap and an application fee of no more than $20. With the second, the lender could make a longer-term loan provided the amount the consumer is required to repay each month is no more than 5 percent of the consumer’s gross monthly income; the lender couldn’t make more than two of these loans within a 12-month period. 

Restricting Harmful Payment Collection Practices Lenders of both short-term and longer-term loans often obtain access to a consumer’s checking, savings, or prepaid account to collect payment through a variety of methods, including post-dated checks, debit authorizations, or remotely created checks. However, this can lead to unanticipated withdrawals or debits and transaction fees. When lenders attempt to get repayment through repeated, unsuccessful withdrawal attempts, consumers are charged insufficient funds fees by their depository institution and returned payment fees by the lender, and may even face account closure. These fees add to the spiraling costs of falling behind on these loan products and make it even harder for a consumer to climb out of debt. To mitigate these problems, the Bureau is considering proposals that would: 

• Require borrower notification before accessing deposit accounts: Under the proposals being considered, lenders would be required to provide consumers with three business days advance notice before submitting a transaction to the consumer’s bank, credit union, or prepaid account for payment. The notice would include key information about the forthcoming payment collection attempt. This requirement would apply to payment collection attempts through any method and would help consumers better manage their accounts and overall finances. 
• Limit unsuccessful withdrawal attempts that lead to excessive deposit account fees: Under the proposals being considered, if two consecutive attempts to collect money from the consumer’s account were unsuccessful, the lender would not be allowed to make any further attempts to collect from the account unless the consumer provided a new authorization. This would limit fees incurred by multiple transactions that exacerbate a consumer’s financial woes. 

A factsheet summarizing the proposals under consideration is available at:http://files.consumerfinance.gov/f/201503_cfpb-proposal-under-consideration.pdf 

A factsheet summarizing the Small Business Review Panel process is available at:http://files.consumerfinance.gov/f/201503_cfpb_factsheet-small-business-review-panel-process.pdf 

An outline of the proposals under consideration will be available on March 26 at:http://files.consumerfinance.gov/f/201503_cfpb_outline-of-the-proposals-from-small-business-review-panel.pdf

A list of questions on which the Bureau will seek input from the small business representatives providing feedback to the Small Business Review Panel is available at: http://files.consumerfinance.gov/f/201503_cfpb_list-of-questions-from-small-business-review-panel.pdf 

This is the first public step in the CFPB’s efforts to reform the markets for these products. In addition to consulting with the Small Business Review Panel, the Bureau will continue to seek input from a wide range of stakeholders before continuing with the process of a rulemaking. Once the Bureau issues its proposed regulations, the public will be invited to submit written comments which will be carefully considered before final regulations are issued. 

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The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.