CASH 2018 Annual Report

71 Fraud and other illegal activity involving our tax preparation partners or products could lead to a regulatory investigation and reputational damage to us, reduce the use and acceptance of our cards and reload network, reduce the use of our services, and could adversely affect our financial position and results of operations. Criminals are using increasingly sophisticated methods to engage in illegal activities involving prepaid cards, reload products, and tax refunds. Illegal activities involving such products and services include malicious social engineering schemes, where people are asked to provide a prepaid card or reload product in order to obtain a loan or purchase goods or services. Illegal activities may also include fraudulent payment or refund schemes and identity theft. We rely upon third party tax preparers for tax preparation and other services, which subjects us to risks related to the vulnerabilities of those third parties. Even a single significant instance of fraud could result in reputational damage to us, which could reduce the use and acceptance of our cards and other products and services, cause retail distributors or their customers to cease doing business with us or them, or could lead to greater regulation that would increase our compliance costs. Fraudulent activity could also result in the imposition of regulatory sanctions, including significant monetary fines, which could adversely affect our business, operating results and financial condition. The Bureau's final rule related to certain small dollar loans will impact certain processes used by the Bank and could materially impact the Bank’s ability to grow certain aspects of the Payments division. On October 5, 2017, the Bureau issued its final rule related to certain small dollar loans. Affecting primarily shorter term (e.g., 45 days or less) loans with an Annual Percentage Rate of 36% or more, the rule generally requires a provider of such loans to determine the consumer borrower’s ability to repay; an alternative to the ability-to-repay determination is provided for loans that do not exceed $500 and meet certain other requirements. In addition to these restrictions, the Bureau also imposes certain requirements related to the collection of longer-term loans with an Annual Percentage Rate of 36% or more; specifically, the final rule requires that, where the creditor (like the Bank) has access to the consumer’s bank account for repayment of the loan proceeds, the creditor must provide certain notices to the consumer about upcoming payments and transactions via model forms the Bureau also published. In addition, a creditor is prohibited from attempting to withdraw payment from a consumer’s bank account where such repayment has been declined for two consecutive payment attempts. At such time, the creditor is required to get a new, specific authorization from the consumer to debit the bank account. Implementation of these requirements for these types of products may negatively impact products and services that we could offer either directly or in connection with a third-party loan marketer. This rule is scheduled to become effective in August 2019, although the Bureau stated that it will publish proposed revisions to the “ability to repay” components of the rule in January 2019. In response to this, in early November 2018, a U.S. federal judge in Texas stayed compliance with the regulation until such time as he determines to lift the stay, which likely will not be before March 2019 when the parties provide further reports to the judge. As such, as of the date of this Annual Report on Form 10-K, the impact of this regulation on the Bank and the parties with which it markets loans that would otherwise be subject to the final rule’s requirements as originally published cannot be determined. Premium financing activity may result in increased exposure to credit risk and fraud. We acquired the premium finance loan portfolio and related assets of AFS/IBEX Financial Services, Inc. in December 2014 and continue, through that platform, to serve businesses and insurance agencies nationwide with commercial insurance premium financing products. We rely on insurance agents and brokers to produce these commercial loans, which are made to borrowers who borrow funds to pay premiums on property and casualty insurance policies. Typically, the financing arrangement with the borrower provides for periodic payments to the lender to secure the insurance policy with an insurer, and the lender is entitled to any unearned premium due from the insurer in the event of policy cancellation, with any excess returned to the insured/borrower after the loan has been paid off. The financing arrangement typically includes a limited power of attorney to permit the lender to cancel the insurance policy in the event of default. Typically, premium finance loans are designed to amortize faster than the unearned premium that has been paid, either as a down payment, or periodically is earned, so that the value of the unearned premium exceeds the outstanding financed amount, providing collateral to the lender. If the borrower fails to pay on the premium finance loan, then the financed insurance policy must be cancelled to avoid losses with respect to unearned premiums. We must consider both the creditworthiness of the borrower as well as the creditworthiness of the insurer (for the ability to return the unearned premium). There is also an operational risk of assuring that the insurance policy is cancelled on a timely basis to prevent unearned premium from dissipating once the policy can be cancelled. Further, since we are not involved in the marketing of the loans, we are therefore exposed to the risk of fraud by third-party marketers.