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On February 11, the U.S. District Court for the District of New Jersey denied a motion to dismiss a putative class action against a debt collector and its legal counsel, holding that the plaintiff debtor made a plausible claim under the FDCPA that the debt collector was required by New Jersey’s Consumer Financing Licensing Act (NJCFLA) to be licensed as a consumer lender. According to the opinion, the plaintiff had defaulted on his credit card debt and, nine years later, received a letter from the defendant’s legal counsel seeking payment of the balance due. The plaintiff filed a proposed class action arguing that the letter violated the FDCPA because the debt collector had not been licensed with the New Jersey Department of Banking and Insurance prior to purchasing the debt, and therefore lacked the authority to collect on the debt. The defendant debt collector moved to dismiss the complaint, claiming, among other things, that it was exempt from the licensing requirements because it did not qualify as a “consumer loan business” under the NJCFLA. The debt collector argued that it never exceeded the state’s interest rate cap and therefore was exempt from the licensing requirements. However, the plaintiff argued that the defendant’s licensing violation arose from a second part of the “consumer loan business” definition, under which the licensing requirements apply because the defendant “directly or indirectly engag[es] . . . in the business of buying. . . notes.” The district court agreed with the plaintiff, stating that “[t]his statutory language does not narrow the category of lenders falling under that definition according to the interest rates that they charge.”
On January 22, the Connecticut Governor signed HB 5765 to allow essential and nonessential federal employees, who are otherwise ineligible to receive unemployment assistance, to apply for zero-interest bank loans of up to $5,000 while the government remains shut down. Federal employees may be eligible for more if the partial government shutdown extends for a longer period. Under the new program, the loans have a 90-day grace period in which banks may not require repayment or charge interest on principal. The grace period begins when the affected employee’s federal agency is funded and is followed by a 180-day repayment period. Among other things, HB 5765 permits municipalities to defer property tax payments from impacted federal employees based on outlined eligibility criteria. According to a press release issued by the Governor, the coordination—where loans will be backed by the state—marks the first public-private partnership in the nation between a state and private banks and credit unions. The act takes effect immediately.
On January 11, the U.S. District Court for the District of Minnesota granted a motion for class certification in a case challenging a company’s payday lending practices under several Minnesota consumer protection statutes and common law. The plaintiffs filed the proposed class action alleging, among other things, that the company, which generates leads for payday lenders, failed to disclose that it was not licensed in the state, and that the loans may not be legal in Minnesota. The Minnesota Attorney General had notified the company in 2010 and 2012 that it was subject to Minnesota law restricting payday loans and that it was “aiding and abetting lenders that violate Minnesota law.” The court found that the plaintiffs identified “questions of law or fact common to the class that are capable of class-wide resolution,” which “predominate over any questions affecting only individual members.” The court noted that a class action would fairly promote the interests of the class and ensure judicial economy, and that even though the plaintiffs’ proposed method for measuring the amount of damages would require individual inquiry, “it is less consuming than issues requiring individual testimony and will not overwhelm the liability and damages issues capable of class-wide resolution.”
Regulators encourage financial institutions to work with borrowers impacted by government shutdown; FHA also issues shutdown guidance
On January 11, the Federal Reserve Board, CSBS, CFPB, FDIC, NCUA, and OCC (together, the “Agencies”) released a joint statement (see also FDIC FIL-1-2019) to encourage financial institutions to work with consumers impacted by the federal government shutdown. According to the Agencies, borrowers may face temporary hardships when making payments on mortgages, student loans, auto loans, business loans, or credit cards. FDIC FIL-1-2019 states that prudent workout arrangements, such as extending new credit, waiving fees, easing limits on credit cards, allowing deferred or skipped payments, modifying existing loan terms, and delaying delinquency notice submissions to credit bureaus, will not be subject to examiner criticism provided the efforts are “consistent with safe-and-sound lending practices.”
Separately, on January 8, Federal Housing Administration (FHA) Commissioner Brian Montgomery issued a letter regarding the shutdown reminding FHA-approved lenders and mortgagees of their ongoing obligation to offer special forbearance to borrowers experiencing loss of income and to evaluate borrowers for available loss mitigation options to prevent foreclosures. In addition, FHA also encourages mortgagees and lenders to waive late fees and suspend credit reporting on affected borrowers.
On October 22, the Georgia Supreme Court held that legal settlement cash advances are not “loans” under the state’s Payday Lending Act (PLA) and the Industrial Loan Act (ILA) when the obligation to repay is contingent upon the success of the underlying lawsuit. The decision results from a class action lawsuit bought by clients of a legal funding company. After being involved in automobile accidents, appellants signed financing agreements with a legal funding company, which advanced them funds while their personal injury lawsuit was pending. Per the terms of their financing agreements, appellants were required to repay the funds only if their personal injury lawsuits were successful. They were successful and the settlement company soon sought to recover funds pursuant to the terms of the agreement. The appellants objected and brought suit, alleging, among other things, that the financing agreements they executed violated the state’s PLA and ILA because they were usurious loans and a product of unlicensed activity. The state trial court concluded that the PLA applied to the agreements but that the ILA did not. The state appeals court concluded that neither statute applied, determining that because the repayment obligation was contingent on the success of the lawsuit, it was not a “loan” under either the PLA or the ILA. The state supreme court agreed, holding that “an agreement that involves . . . a contingent and limited obligation of repayment is not a ‘contract requiring repayment,’” as required by the ILA’s definition of “loan.” Similarly, the financing arrangement did not constitute an agreement pursuant to which “funds are advanced to be repaid,” which would make it a loan under the PLA. Appellants also argued that the contingent repayment obligation in the financing agreement was illusory, contending that the legal funding company agrees to such an arrangement only when the risk the lawsuit will fail is “close to null.” The court rejected this claim, however, noting that nothing in the pleadings suggested that the agreements were shams.
On September 30, the California governor signed AB 237, which establishes a pilot program under the California Financing Law with the stated purpose of encouraging lenders to provide affordable small dollar loans to consumers. Significant features of the program include: (i) an increase to the upper limit of a permissible loan, from $2,500 to $7,500; and (ii) the authorized imposition of specified alternative interest rates and charges on unsecured loans of at least $300 and less than $2,500.
Under California’s Pilot Program for Increased Access to Responsible Small Dollar Loans (Pilot Program), licensees who choose to participate in the Pilot Program will be required to apply and pay a specified fee to the Commissioner of Business Oversight (Commissioner). Participating licensees will also be required, among other things, to (i) determine a borrower’s ability to repay the loan, factoring in all verifiable outstanding credit and capping total monthly debt service payments at 50 percent of the borrower’s gross monthly income for loans of $2,500 or less and 36 percent for loans greater than $2,500; (ii) establish terms of 180 days or more for loans with principal balances of at least $1,500, but less than $2,500, upon origination; (iii) establish terms of no less than one year and no more than five years for loans with principal balances exceeding $2,500; (iv) implement policies and procedures for the purpose of answering borrower questions and performing reasonable background checks on any finders associated with the licensee’s participation in the Pilot Program (AB 237 permits approved licensees to use the services or one more finders); and (v) reduce the interest rate of each subsequent loan made to the same borrower by a minimum of one percentage point under certain conditions. In addition, AB 237 allows the Commissioner to charge a licensee certain fees associated with the use of a finder, stipulates examinations requirements for licensees and finders, and establishes deadlines and requirements for the Commissioner when submitting required findings from the Pilot Program. The Pilot Program will run through January 1, 2023.
Governor Brown issued a message in conjunction with his signing AB 237 expressing his concern, among others, that increasing the cap on small dollar loans without also providing stricter regulatory oversight may lead to “unintended consequences.” Governor Brown requested that the state’s Department of Business Oversight “increase their vigilance and more carefully oversee both lenders and finders to ensure their actions comply with existing law.”
On September 28, the FDIC announced a list of administrative enforcement actions taken against banks and individuals in August. Included among the actions is a removal and prohibition and civil money penalty assessment issued against an individual acting as an institution-affiliated party of a New Jersey-based bank for allegedly engaging in unsafe or unsound practices and breaches of fiduciary duty while employed as the bank’s chief lending officer. Among other claims, the respondent allegedly “originated loans and extended the maturity dates on existing loans to borrowers despite their inability to repay the loans, and caused inaccurate past-due reports on the loans to be provided to the Board of Directors of the Bank (Board), thereby preventing the Board from discovering that the borrowers were not making their payments to the Bank on a timely basis.”
Also on the FDIC’s list of August orders are five Section 19 orders, which allow applicants to participate in the affairs of an insured depository institution after having demonstrated “satisfactory evidence of rehabilitation,” six terminations of consent orders, and three terminations of orders for restitution. The FDIC database containing all August enforcement decisions and orders may be accessed here.
There are no administrative hearings scheduled for October 2018.
District Court denies service provider’s motion to dismiss on several grounds, rules Bureau’s structure is constitutional
On August 3, the U.S. District Court for the District of Montana denied a Texas-based service provider’s motion to dismiss a suit brought by the CFPB over allegations that the service provider engaged in unfair, deceptive, and abusive acts or practices in violation of the Consumer Financial Protection Act (CFPA) by assisting three tribal lenders in the improper collection of short-term, small-dollar loans that were, in whole or in part, void under state law. (See previous InfoBytes coverage here.) The defendants moved to dismiss the claims on multiple grounds: (i) the Bureau’s structure is unconstitutional; (ii) the claims are not permitted under the CFPA; (iii) the complaint “fails to, and cannot, join indispensable parties;” and (iv) certain claims are time-barred.
In answering the service provider’s challenges to the Bureau’s constitutionality, the court ruled that the CFPB’s structure is legal and cited to orders from nine district courts and an en banc panel of the D.C. Circuit Court, which also rejected similar arguments. (See Buckley Sandler Special Alert.) Addressing whether the Bureau’s claims were permitted under the CFPA, the court ruled that other courts have held that enforcing a prohibition on amounts that consumers do not owe is different from establishing a usury limit, and that moreover, “[t]he fact that state law may underlie the violation . . . does not relieve [d]efendants . . . of their obligation to comply with the CFPA.” Regarding the defendants’ argument that the complaint should be dismissed on the grounds of failure to join an indispensable party because the tribal lenders possess sovereign immunity to the suit, the court wrote that “[u]nder these circumstances, the Court will not create a means for businesses to avoid regulation by hiding behind the sovereign immunity of tribes when the tribes themselves have failed to claim an interest in the litigation.” Furthermore, the court found that the remedies sought by the Bureau would not “impede the [t]ribal [l]enders’ ability to collect on their contracts or enforce their choice of law provisions directly.” Finally, the court stated that, among other things, the service provider failed to show that the Bureau’s suit fell outside the CFPA’s three-year statute of limitations for filing claims after violations have been identified.
On May 15, the Louisiana governor signed SB171, which amends a state statute that prescribes when a person acquiring or controlling ownership interest in a consumer loan licensee must obtain approval from the state’s commissioner. Under SB171, written approval by the commissioner must now be received for any person acquiring or controlling “ percent or more of the ownership interest in a licensee”—an amount previously set at 50 percent or more. The amendments also strike the requirement that “[a]ny person who acquires or anticipates acquiring a  percent interest in a licensee shall file for a new license prior to acquiring ownership of said interest either incrementally over a period of time or as one transaction.” The amendments became effective upon signature by the governor.
On April 25, the Oklahoma governor signed into law an act that allows lenders to charge borrowers convenience fees for making payments via debit card, electronic funds transfer, electronic checks or other electronic means. SB 1151 provides that the nonrefundable fees shall not exceed the lesser of (i) the actual third party costs incurred by the lender for accepting and processing electronic payments; and (ii) four percent of the electronic payment transaction. Lenders must notify borrowers of the amount of the fee prior to completing a transaction and provide an opportunity to cancel the transaction without a fee. The law takes effect November 1.
- Jeffrey S. Hydrick to discuss "State legislative update" at the NMLS Annual Conference & Training
- Kathryn L. Ryan to speak at the "Business model primer" at the NMLS Annual Conference & Training
- Daniel P. Stipano to discuss "Dynamic customer due diligence and beneficial ownership from KYC to ongoing CDD and the new rule implementation" at the Puerto Rican Symposium of Anti-Money Laundering
- Jon David D. Langlois to discuss "Regulatory risks of convenience fees" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Michelle L. Rogers to discuss "Preparing for servicing exams in the current regulatory environment" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- APPROVED Webcast: NMLS Annual Conference & Ombudsman Meeting: Review and recap
- Brandy A. Hood to discuss "Keeping your head above water in flood insurance compliance" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Melissa Klimkiewicz to discuss "Servicing super session" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Jessica L. Pollet to discuss "Law & compliance speedsmarts" at the American Financial Services Association Law & Compliance Symposium
- Daniel P. Stipano to discuss "Lessons learned from recent high profile enforcement actions" at the Florida International Bankers Association AML Compliance Conference
- Moorari K. Shah to provide "Regulatory update – California and beyond" at the National Equipment Finance Association Summit
- Sasha Leonhardt and John B. Williams to discuss "Privacy" at the National Association of Federally-Insured Credit Unions Spring Regulatory Compliance School
- Aaron C. Mahler to discuss "Regulation B/fair lending" at the National Association of Federally-Insured Credit Unions Spring Regulatory Compliance School
- Heidi M. Bauer to discuss "'So you want to form a joint venture' — Licensing strategies for successful JVs" at RESPRO26
- Jonice Gray Tucker to to discuss "DC policy: Everything but the kitchen sink" at CBA Live
- Jonice Gray Tucker to discuss "Small business & regulation: How fair lending has evolved & where are we heading?" at CBA Live
- Daniel P. Stipano to discuss "Lessons learned from ABLV and other major cases involving inadequate compliance oversight" at the ACAMS International AML & Financial Crime Conference
- Daniel P. Stipano to discuss "A year in the life of the CDD final rule: A first anniversary assessment" at the ACAMS International AML & Financial Crime Conference
- Moorari K. Shah to discuss "State regulatory and disclosures" at the Equipment Leasing and Finance Association Legal Forum
- Hank Asbill to discuss "Pay no attention to the man behind the curtain: Addressing prosecutions driven by hidden actors" at the National Association of Criminal Defense Lawyers West Coast White Collar Conference
- Daniel P. Stipano to discuss "Keep off the grass: Mitigating the risks of banking marijuana-related businesses" at the ACAMS AML Risk Management Conference
- Daniel P. Stipano to discuss "Mid-year policy update" at the ACAMS AML Risk Management Conference
- Benjamin W. Hutten to discuss "Requirements for banking inherently high-risk relationships" at the Georgia Bankers Association BSA Experience Program