CONSUMER FINANCE REPORT–Is Buy Now/Pay later an Opportunity?

Buy Now/Pay Later (BNPL) transactions seem to be a thing that is catching on. A recent study shows that Millennials and Gen Xers particularly are warming to the use of this approach to finance purchases above $500.

Apparently Apple, Inc. is joining in this space through its Apple Wallet. Surely there is a way for consumer finance companies, working with installment sellers to capitalize on this trend.

Finance companies regularly buy installment sales contracts from credit sellers. There is no reason that, if the price is right, they should not purchase BNPL paper also. In the initial transaction, the credit seller will be responsible for giving the Truth-in-Lending Act (TILA) Disclosures to the purchaser. Even though no finance charge is assessed, if the purchaser has the right to repay the contract in more than four installments, TILA disclosures are required.

So, finance companies must remain vigilant of assignee liability under TILA. Bearing this in mind, there are several considerations:

• Since the “cost of credit” is built into the price of the goods that are the subject of the BNPL transaction, any assignee of a BNPL contract should obtain affirmation from the seller that there is no difference in the “cash price” for a cash transaction and a BNPL transaction. If there is a difference, then the additional cost is a finance charge that must be disclosed to the purchaser.
• A clear explanation of how missed payments will be addressed by the seller or contract assignee must be a part of the contract.
• An explanation of late charges that may be imposed must be disclosed.
• If the contact will transform retroactively into a true indirect sale/finance contract in the event of default in the BNPL terms, an explanation of how and when such will occur should be disclosed.
• A traditional consumer finance company that buys BNPL paper may well have the opportunity to convert the purchasers into borrowers of traditional consumer finance loans.

The CFPB is beginning to take a more in depth look at BNPL transactions. I understand that it will issue guidance or rules focusing on these transactions. Meanwhile, there is certainly opportunity for traditional installment lenders in the BNPL field.

Maurice L. Shevin

Consumer Finance Report – Common Mistakes Made In The Loan Office

This may be a good time to step back a minute to examine the most common mistakes that we see made by finance companies. I offer the following for your consideration:

Committing a UDAAP (unfair, deceptive or abusive act or practice) such as overselling ancillary products, initially offering and then withdrawing, of a rate that no customer actually qualifies for, spoofing of a customer’s caller ID, making a customer ask before releasing a lien on a car title, refinancing loans without regard for any tangible net benefit to the customer.

Engaging in faulty or false marketing—“bait and switch” advertisements, not making offers to those on a guaranteed offer of credit list, failing to follow state or federal law when advertising triggering terms.

Failing to respect bankruptcy—contacting a customer in violation of the “automatic stay.”

Violating credit reporting standards—reporting information incorrectly or not associated to the correct customer, failure to report disputed accounts as “in dispute,” re-aging incorrect information, failing to respond to a customer’s direct dispute.

Engaging in over-aggressive debt collecting—threatening lawsuits that the company has no intention of filing, in-person visits to a customer (especially at work) after having been told to refrain from doing so, aggressively colleting debts barred by the statute of limitations, incentivizing bad behavior by the collector’s compensation plan, failing to follow FDCPA “guidance” of sections 807, 808 and 812 of the Fair Debt Collection Practices Act notwithstanding that the finance company may not be a “debt collector” within the meaning of that law.

Poor credit decision making—discouraging applicants, requiring spouses as co-signers, using impermissible information in making the credit decision.

Mishandling complaints and disputes—ignoring complaints, failing to respond to a direct dispute letter, thinking that every customer complaint is bogus.

Not treating audits and examinations respectfully—when this attitude prevails, the company is in trouble.

I hope that none of our regular readers are engaging in any of this troubling conduct. If you think your CSRs may be doing so, then I urge you to step in and remind them of their duties and responsibilities.

Maurice L. Shevin

By: Maurice L. Shevin
There is a fundamental difference between the Truth-in-Lending Act disclosure statement that is used for a direct loan, and that which is used in an installment sale. The difference is that the latter requires the additional 5th box within the Federal Box labeled “Total Sale Price.” The Total Sale Price box is the location for disclosing the consumer’s total cost of the credit sale transaction, inclusive of the downpayment, finance charge and any ancillary charges. This disclosure is not a part of a direct loan disclosure statement, where the relevant information about the total obligation is described as the “Total of Payments,” and is found in the 4th box within the Federal Box.

The sales contract disclosure also includes the Total of Payments. The reason for an additional disclosure in the credit sale context is that in order for the consumer to truly understand the totality of the financial commitment, the credit sale disclosure format includes this additional piece of information. Interestingly, credit sales contracts or installment sales contracts are sometimes referred to as “indirect loans.” Such name reflects the fact that installment sales contracts are often purchased right after the point-of-sale by a lender, who has a pre-agreed arrangement with the credit seller to take assignment of the contract. So, these transactions really are not loans at all—they are sales made “on credit” by a seller. Hence, there is a need for the Total Sale Price disclosure.

It is important for lenders, who purchase or take assignment of consumer credit sales contracts, to be certain that the disclosure format used is the installment sales contract disclosure format. Otherwise, the finance company as assignee will be liable for the disclosure violation, since such violation will be very much “apparent” on the face of the instrument that is assigned. While assignees have certain defenses to Truth-in-Lending violations, the assignee defense does not  apply to defects that can be determined on the face of the disclosure. The absence of the Total Sale

Price box stands out like a sore thumb. Note also that the FTC Holder in Due Course Notice is slightly different in a sales contract than in a loan note. Make certain that the HDC Notice used is in the correct format. In many jurisdictions, credit sellers are not required to be licensed. So, there often is no regulator authority looking over their shoulders to make certain that their forms and processes are Truth-in-  Lending compliant. In the final analysis, that makes the assignee—the contract purchaser— ultimately responsible for its dealers’ compliance.

Maurice L. Shevin

Consumer Finance Report—Collecting on time-barred debt.

One of the more interesting developments in consumer finance law that we have witnessed over the years is the growing responsibility of creditors to protect debtors. While creditors are not fiduciaries of debtors, the law has developed in such a way as to recognize a special relationship that requires some duties by the party more able to protect its interests—the creditor. No better example of this concept is the consequence of a creditor pursuing a time-barred debt. Let me explain.

When collection of a debt is prevented by an applicable statute-of-limitations, that debt is considered “time barred.” Historically, this has meant that a debtor could plead the statute-of- limitations in any action by the creditor, and successfully defeat the creditor’s claim. However, the debt itself is still very much an obligation of the debtor to the creditor. It is just one that cannot be collected through the judicial process in a court of law. (Interestingly, a creditor may still file a proof of claim in a consumer’s bankruptcy case with respect to a time-barred debt.) Most significantly for my purposes, pleading an applicable statute-of-limitations has always been an affirmative defense available to the debtor. And, if a debtor did not plead such defense, then it could be waived. But, some recent developments in consumer finance law seem to have changed this precedent.

First, in Regulation F, the Debt Collection Rule promulgated by the CFPB under the Fair Debt Collection Practices Act, there is an absolute prohibition against debt collectors from bringing or threatening to bring a legal action to collect a time-barred debt. And, there is strict liability for those collectors who violate this prohibition. So, even though this Rule is limited in application to “debt collectors” as defined under the FDCPA, the rationale for the restriction would seem to be equally applicable to creditors collecting their own debt. Regulation F can be found here: eCFR :: 12 CFR Part 1006 — Debt Collection Practices (Regulation F)

Second, under the Dodd-Frank Act, the CFPB is empowered to regulate “unfair, deceptive or abusive acts or practices.” When one parses through the definition under the law of each of these words, it seems apparent that pursuit of a time-barred debt falls under the definition of “unfair” and “abusive” even if not “deceptive.” Therefore, any CFPB prohibition against UDAAPs would seem to include pursuit of a time-barred debt.

We should be mindful of pursuing time-barred debt. There are just too many other federal and state laws that may be vehicles to carry the prohibition on time-barred debt collection.

Maurice L. Shevin

Consumer Finance Report – CFPB Issues Guidance to Address Abusive Conduct in Consumer Financial Markets

For Consumer Finance Companies, the most unique aspect of the Dodd-Frank Act of 2010 involved the creation of the Consumer Financial Protection Bureau (CFPB). The Bureau acted quickly to address Unfair, Deceptive, or Abusive Acts or Practices. “Unfair” and “Deceptive” Acts or Practices had long been regulated by the Federal Trade Commission. The introduction of “Abusive” was the new and interesting factor for creditors in Dodd-Frank. That is, “Unfair” and “Deceptive” have been legal adjectives long used and long interpreted. Not so “Abusive.”

The Dodd-Frank Act defined an act or practice as abusive when such materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or when an act or practice takes unreasonable advantage of the consumer’s lack of understanding of the material risks, costs or conditions of the product or service, the inability of the consumer to protect his or her interests, or the reasonable reliance by the consumer on the creditor to act in the interests of the consumer. This is a mouthful.

My partner Sam Friedman did an early analysis in March of 2015, in which he diagrammed this structural definition of “Abusive.” Turns out that Sam’s analysis was prescient. This week, the Bureau proposed a Policy Statement Regarding Abusive Acts or Practices. The
proposal seeks to add clarity to the meaning of “Abusive” as stated in the Dodd-Frank Act. It mentions “obscuring important features of a product or service,” and “leveraging certain circumstances—including gaps in understanding, unequal bargaining power, or consumer reliance—to take unreasonable advantage.”

The CFPB’s Analysis uses five major themes to define acts or practices that are “Abusive”:
• Materially interfering with consumers’ understanding of the terms and conditions of the transaction
• Taking unreasonable advantage of the consumer
• A lack of understanding on consumers’ part
• Inability of consumers to protect their interests
• Reasonable reliance by the consumer.

The Bureau’s proposed policy statement reiterates Sam’s analysis and diagram. It does add some exemplary language to give us a better understanding of “Abusive.” The policy statement is open for comment until July 3, 2023.

-Maurice L. Shevin

Consumer Finance in Alabama—the View from the Regulator

The Alabama Installment Lenders Association held its 2023 Legislative Meeting & Reception in Montgomery last week. This annual meeting traditionally coincides with the start of the Regular Legislative Session. Prior to the Reception, Scott Corscadden, Alabama Banking Department Supervisor addressed the meeting.

The Supervisor first reviewed some staffing changes at the Department. Anne Gunter has returned as a divisional attorney and Lynne Windham is retiring as of June 1st. Lynne has served the Department as Assistant Supervisor over Loan Examinations. Tricia Kirby will be replacing Lynne. The Department is moving to have the examination staff become certified or accredited pursuant to the guidelines or rules of the Conference of State Bank Supervisors.

He next reported on the continuing efforts of the Department to upgrade its data base to allow licensees to make routine revisions electronically. Corscadden then reported on the number of licensed entity locations supervised by the Department.  There are currently 16,303 total licensees, of which 3524 are either Small Loan Act or Mini-Code licensees. These numbers are slightly down. Corscadden reported that the Department conducted 2791 examinations in 2022, and normally expects to conduct 3,000 per year.  There was a general discussion of multi-state license registration and examination. These coordinated exams with other states and the CFPB continue to become more the norm.

Mr. Corscadden addressed the Department’s continuing review of cyber security issues.  He also discussed the shifting of payday lenders to Small Loan Act licensees in Alabama. Advance America is an example. He also discussed the “buy now, pay later” trend and its impact on licensees. Finally, Supervisor Corscadden reported that the Small Loan Act and Mini-Code licensees continue to handle complaints in an exemplary fashion.

-Maurice L. Shevin

Lessons learned and relearned about lending other people’s money.

Consumer finance companies are accustomed to doing business in a heavily regulated environment. After all, we deal with consumers who are often borrowing substantial sums of money relative to their income and net worth. Consumer loans are routinely taken out to allow our customers the opportunity to enjoy goods and services in the here and now. I write this with full knowledge that in days past acquiring consumer goods was often done only with cash. No longer. Clearly that ship has sailed.

Doing business in a regulated environment was driven home to me last week when two mid-size banks in the United States suffered failure Silicon Valley bank and signature bank. Bank failures are not a rarity, although we are fortunate that we haven’t seen too many since 2008. Last week’s failures occurred despite a host of bank regulators whose sole purpose is to help assure through oversight, the safety and soundness of our banks.

There is now the usual Monday morning quarterbacking asking whether the bank regulators failed at their sole responsibility. There were mitigating circumstances including inflation and the federal reserve’s tinkering with interest rates to whip inflation. But someone was likely asleep at the switch certainly the officers and directors of the banks were.

Unlike the banking industry, where banks make loans, but also take deposits, the consumer finance industry only makes loans. We are not fiduciaries of our customers funds on deposit because we don’t take deposits. So, indeed the level of scrutiny in the banking world required of officers and directors and the regulation in the banking world should be much higher than in the consumer finance world. And, in reality, it is.

Consumer finance companies are only answerable to their shareholders. Banks are answerable to their shareholders but also to their depositors.

Shareholders are investors. If their investments are lost, then that is a risk that they take. Depositors are not investors. Depositors’ deposits are not supposed to be at risk at least not at the same type of risk that investors investments are. We have a system developed after the great depression to insure deposits. Interestingly, deposit insurance is required of banks and is paid by the banks.

My lesson learned and relearned from the recent bank failures is that regulation remains an important ingredient in financial services. Safety and soundness depend upon it. And we, as depositors and investors, look to regulators to keep a watchful eye out for us and on us.