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Financial Services Law Insights and Observations

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  • District Court: New Jersey licensing requirements apply to debt collector

    Courts

    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.”

    Courts Debt Collection FDCPA Licensing State Issues Consumer Lending

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  • Connecticut allows federal employees impacted by shutdown to apply for zero-interest loans

    State Issues

    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.

    State Issues State Legislation Shutdown Relief Consumer Lending Consumer Finance

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  • District Court certifies class action against lead generator’s payday lending practices

    Courts

    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.”

    Courts Payday Lending Class Action State Issues Consumer Lending

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  • Regulators encourage financial institutions to work with borrowers impacted by government shutdown; FHA also issues shutdown guidance

    Federal Issues

    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.

    Federal Issues Federal Reserve OCC FDIC CSBS NCUA FHA Consumer Lending Mortgages Credit Report Shutdown Relief

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  • Georgia Supreme Court holds legal settlement advances are not loans under state laws

    Courts

    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.

    Courts State Issues Installment Loans Consumer Lending Payday Lending Class Action Usury

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  • California law establishes small dollar lending pilot program

    State Issues

    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.”

    State Issues State Legislation Small Dollar Lending Consumer Lending Licensing

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  • FDIC publishes August enforcement actions, fines individual for inaccurate past-due loan reports

    Federal Issues

    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.

    Federal Issues FDIC Enforcement Consumer Lending

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  • District Court denies service provider’s motion to dismiss on several grounds, rules Bureau’s structure is constitutional

    Courts

    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.

    Courts CFPB Consumer Finance CFPA Consumer Lending Usury State Issues Single-Director Structure

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  • Louisiana governor signs amendments relating to consumer loan licensing

    State Issues

    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 “[25] 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 [75] 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.

    State Issues State Legislation Licensing Consumer Lending

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  • Oklahoma law allows lenders to charge convenience fees for electronic payments

    State Issues

    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.

    State Issues State Legislation Consumer Lending Electronic Payments Fees

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