Annual Conference Payday Loan Bar Association November 1 , 2012

1. Annual Conference Payday Loan Bar AssociationNovember 1, 2012 Steering and Fastbucks Ronald D. Gorsline Rene Beasley Donald Kochersberger

2. State of N.M. v. Fastbucks • Facts • Issue: Whether Fastbucks used unfair, deceptive and/or unconscionable trade practices by offering installment loans with rates in excess of New Mexico’s payday loan rates. • Holding: Fastbucks used unconscionable trade practices insofar as it: • 1. Took advantage of consumers’ lack of knowledge, ability, experience, or capacity regarding the two loan products; and • 2. Sold a product that resulted in a gross disparity between the value received and the price paid.

3. State of N.M. v. Fastbucks Result : Fastbucks enjoined from making installment loans in excess of payday loan rates. Steering case? Unconscionability case? Both? Where do we go from here?

4. NMAG v. FastBucks - History 2005 – NMAG attempts to enact unconstitutional regulation of small loan rates – FastBucks sues and NMAG withdraws the regulation 2006 – NMAG gets the Financial Institutions Division to enact substantially similar, and equally unconstitutional regulation of small loan rates – FastBucks sues and Court permanently enjoins the regulations 2007 – NMAG succeeds in getting NM legislature to enact new provisions of Small Loan Act to restrict payday loans

5. FastBucks Installment Loans Starting at end of 2005 • 121+ days in duration • Fully amortized • Interest rates same as payday loans • Approximately 520% to 650% • Underwritten utilizing income and TeleTrack • Higher Income/TeleTrack = Higher Principal • 24 hour right to rescind • Allowed “bump ups” based on underwriting and payment experience

6. 2007 Payday Loan Amendment Defined “payday loan” • 14 to 35 days • Secured by a check • NOT an “installment loan” Requirements • Can only charge flat fee of $15.50/$100 • Max 25% gross monthly income as principal • Must offer 130 day interest free payment plan • No roll-overs • Right to rescind • Database

7. 2009 Lawsuit NMAG sued two lenders • Judge in other case refused to consider interest Complaint alleged • Common Law Unconscionability • Dismissed (lack of standing) • Unfair Practices Violation • Ruling for NMAG Based Upon • Interest rate excessive • No reasonable inquiry into “ability to repay”

8. New Mexico – Unfair Practices The New Mexico Unfair Practices Act defines an "unconscionable trade practice" as "an act or practice in connection with...the extension of credit...which to a person's detriment: (1) takes advantage of the lack of knowledge, ability, experience or capacity of a person to a grossly unfair degree; or (2) results in a gross disparity between the value received by a person and the price paid." NMSA 1978, § 57-12-2(E)(1)-(2).

9. September 26, 2012 Order • FastBucks diverted customers from payday loans into installment loans • Provided incentives to employees to do so • Recordings praising lack of “pay-offs” • The loan portfolio changed dramatically • “Smooth selling language” training document • Customers didn’t understand the differences • The price paid grossly exceeded value received • Should have known customers couldn’t pay • Customers were desperate and uninformed

10. September 26, 2012 Order Remedies • Restitution • “the difference in the amounts the borrowers paid under the installment loan products and the amounts they would have paid had they taken out payday loans, minus any deficiencies incurred on individual loans” • Must account for “time value of money on the loans” • Injunction • “enjoined from originating installment loan products that provide terms that do not accord with those statutory consumer protections to which payday loans are subject” • Unenforceability • “except to the extent they accord with the statutorily required terms of payday loans, installment loan products and loan agreements by any other name that share the same or similar terms as their installment loan products are unenforceable as a matter of New Mexico law”

11. Pending Issues • Final amount of restitution • NMAG = only allowed to make $15.50/$100 • FastBucks = allowed to make effective payday interest rate of ~405% • Scope of injunction • NMAG • Only charge $15.50/$100 regardless of length • Offer interest free payment plan • No rollovers • FastBucks • Charge less than 405% interest • Writ of Ne Exeat • Freeze FastBucks assets in New Mexico

12. CFPB policy "We recognize the need for emergency credit," Director Richard Cordray of the Consumer Financial Protection Bureau said recently. "At the same time, it is important that these products actually help consumers, rather than harm them.“ http://www.consumerfinance.gov/speeches/remarks-by-richard-cordray-at-the-payday-loan-field-hearing-in-birmingham-al/

13. $335 million settlement Under the settlement, Bank of America has agreed to pay $335 million to customers affected by the discriminatory loan . . .steered minority customers toward expensive subprime loans with ballooning interest rates, while white customers with the same credit scores were offered standard prime loans with lower interest rates.

14. CFPB & Employee Incentives • CFPB Exam Manual • Compensation Arrangements (including incentives) are part of the UDAAP document review • Looking for “unintended” incentives as well • “Does any employee receive incentives depending, directly or indirectly, on the terms or conditions of the credit product sold or the price (including both interest rates and fees) charged?” • Incentives regarding price, fees, products, referrals, can be an indicator of discriminatory practices.

15. CFPB & Employee Incentives CFPB Exam Manual: Risk Assessment – Page 5

16. Types of Steering IS STEERING AGAINST THE LAW? • The Orbitz Controversy: Why Steering Mac Users Toward Higher-Priced Hotels Is Arguably Wrong, and What Might be Done About It http://verdict.justia.com/2012/07/03/the-orbitz-controversy-why-steering-mac-users-toward-higher-priced-hotels-is-arguably-wrong-and-what-might-be-done-about-it

17. Types of Steering Steering, from a Regulation B perspective--steering a certain “group” to a more expensive product. • Disparate treatment exists if you only provide information on certain products to minority applicants who request information about all of the creditor’s products. (Comment 4(a)-2(i)(A).)  • Prohibited Practices include “a statement that the applicant should not bother to apply” based on a prohibited basis or “the use of interview scripts that discourage applications on a prohibited basis.” (Comment 4(b)-1(i) and (iii).)

18. Types of Steering When the customer walks in the door, how can the lender prove what the customer “applied for” if the Company does not have a form that asks the customer what they want (payday or installment) or explains the differences in the products?  Adverse Action Possibilites

19. Types of Steering  Steering in the payday loan context with respect to the term.   Disparity in rate between a 7 day payday loan that charges the same amount as a 30 day payday loan.  You need clear underwriting criteria.

20. Bait and Switch  Bait and switch -- advertising as a payday lender but “steering” the customer to the “more expensive product”  with less consumer protections. FTC actions.

21. Questions & Answers Questions?

22. Contact Information • Ronald Gorsline • Hudson Cook, LLP • 6005 Century Oaks Dr. • Suite 500 • Chattanooga, TN 37416 • 423-490-7560 •  rgorsline@hudco.com • Donald Kochersberger • Streubel Kochersberger Mortimer LLC • 320 Gold Ave. SW • Suite 610 • Albuquerque, NM 87102 • 505-848-8581 • DKochersberger@skm-law.com