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On January 23, the U.S. District Court for the District of Minnesota denied two financing companies’ (collectively, “defendants”) motions to dismiss an action alleging the defendants violated the Consumer Leasing Act (CLA), TILA, and a Minnesota law prohibiting usurious contracts through a transaction to purchase a puppy. According to the opinion, the plaintiff financed the purchase of a puppy through the defendants, which allowed her to take possession of the puppy in exchange for 24 monthly payments through an agreement styled as a “Consumer Pet Lease.” The agreement had an APR of 120 percent. The plaintiff filed suit against the defendants alleging the companies violated (i) the CLA by failing to disclose the number of payments owed under the agreement prior to execution; (ii) TILA by failing to adequately disclose the finance charge, the APR, and the “total of payments” as required under the Act; and (iii) the state’s usury law cap of 8 percent for personal debt. The defendants moved to dismiss the action challenging the plaintiff’s standing, among other things. The court, rejected the defendants arguments, finding that the consumer adequately alleged injury by stating she “would” have, not “might” have, pursued other funding had the defendants disclosed the actual interest rate. Additionally, the court determined the consumer plausibly alleged a CLA violation because the agreement contains information the plaintiff could view as “conflicting and confusing.” With respect to the TILA claims, the plaintiff argued that, although the agreement is styled as a lease, it is actually a credit sale, and the court rejected one of the defendant’s arguments that it was not a creditor, but rather a servicer not subject to TILA. Lastly, the court held the plaintiff adequately pleaded her state usury claim, but noted the claim’s viability would be better informed by discovery. Accordingly, the court denied the defendants’ motions to dismiss.
On January 22, the California Department of Business Oversight (DBO) announced a $900,000 settlement with a California-based lender for allegedly steering borrowers into high-interest loans to avoid statutory interest rate caps. According to the DBO, the lender’s practice of overcharging interest and administrative fees violated the California Financing Law, which caps interest on small-dollar loans up to $2,499 at rates between 20 percent and 30 percent, but does not provide a cap for loans of $2,500 and higher. The DBO also asserts that the lender’s brochures, which advertised loans of “‘up to $5,000’ without stating that the minimum loan amount offered by [the lender] was $2,501,” were false, misleading, or deceptive. Moreover, the lender allegedly failed to allow certain borrowers the opportunity to make advance payments “in any amount on any loan contract at any time.”
Additionally, the DBO alleges that the lender overcharged roughly $700,000 in payday loan transactions by (i) collecting charges twice; (ii) allowing borrowers to take out a new loan before paying off the old one; and (iii) depositing some borrowers’ checks prior to the specified date in the loan agreement without their written authorization.
Under the terms of the consent order, the lender will, among other things, provide $800,000 in refunds to qualifying borrowers, pay $105,000 in penalties and other costs, and provide accurate verbal disclosures to borrowers concerning loan amounts and interest rate caps.
On January 4, the administrator of the Colorado Uniform Consumer Credit Code issued a memo providing introductory guidance on alternative charge loans in response to Proposition 111, which amends the state’s Deferred Deposit Loan Act (DDLA) and takes effect February 1. (See previous InfoBytes coverage here.) Among other things, Proposition 111 reduces the maximum annual percentage rate that may be charged on deferred deposits or payday loans to 36 percent, eliminates an alternative APR formula based on loan amount, prohibits lenders from charging origination and monthly maintenance fees, and amends the definition of an unfair or deceptive practice.
The memo—issued in response to creditors currently offering loans under the DDLA who have expressed an interest in offering loans imposing the alternative charges allowed by Colo. Rev. Stat. § 5-2-214—explains that such alternative charges may only be charged if (i) the financed amount is $1000 or less; (ii) the minimum loan term is at least 90 days but no more than 12 months; (iii) installment payments are scheduled in substantially equal periodic intervals; (iv) Truth-In-Lending disclosures show the loan is unsecured; (v) a creditor has not taken any collateral as security for the loan, including a post-dated check or certain ACH authorization; (vi) an ACH agreement reached with a consumer is voluntary and not required by the loan; and (vii) the loan has not been refinanced more than three times in one year.
Fifteen states urge the 4th Circuit against allowing non-tribal payday lenders to receive tribal immunity
On December 27, 2018, fifteen state Attorneys General filed an amici brief with the U.S. Court of Appeals for the 4th Circuit opposing the use of structures in which non-tribal payday lenders affiliate with tribal lenders to benefit from their tribal immunity and avoid state usury caps. The brief was filed in an appeal from a district court ruling, which held that a Michigan-based payday lender could not claim tribal immunity in a consumer class action because it could not prove it was an actual tribal entity. The Attorneys General argue that granting tribal immunity to non-tribal lenders would “bar enforcement of state consumer protection laws as well as, potentially, investigations into their activities.” The brief rejects the payday lender’s arguments that the plaintiff should bear the burden of negating “arm-of-the-tribe immunity” and instead urges the court to place the burden on the entity seeking the immunity. Allowing a non-tribal entity to benefit from sovereign immunity without “rigorous demonstration”, the Attorneys General argue, “may well undermine the purpose for tribal immunity” and “would have serious consequences for States’ ability to protect consumers.”
The brief was filed by the District of Columbia and the States of Connecticut, Hawaii, Iowa, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, North Carolina, Pennsylvania, Vermont, and Virginia.
On December 19, the FDIC announced an advance notice of proposed rulemaking (ANPR) requesting comments on the agency's brokered deposit and interest rate cap regulations. (See also FDIC FIL-87-2018.) These regulations were originally implemented in the late 1980s and early 1990s, and apply to less than well-capitalized insured depository institutions. According to the FDIC, there have been “significant changes in technology, business models, the economic environment, and products since the regulations were adopted.” Currently, Section 29 of the Federal Deposit Insurance Act restricts less than well-capitalized insured depository institutions from accepting brokered deposits, and places restrictions on interest rates that these insured depository institutions can offer. The ANPR includes a series of questions seeking feedback on a number of issues, including (i) ways in which the FDIC can improve the implementation of Section 29 “while continuing to protect the safety and soundness of the banking system;” (ii) whether the definition of a brokered deposit is too narrow or too broad; (iii) whether there have been specific changes within the financial services industry since the regulations were adopted that should be considered; (iv) whether there should be changes to the agency’s national rate calculation; and (v) how rates offered by internet or electronic-based financial institutions should be calculated.
The ANPR further notes that the Economic Growth, Regulatory Relief, and Consumer Protection Act created an exception from brokered deposit consideration for some reciprocal deposits. (See previous InfoBytes coverage here.)
On December 3, the OCC released its Semiannual Risk Perspective for Fall 2018, identifying and reiterating key risk areas that pose a threat to the safety and soundness of national banks and federal savings associations. The report focuses on risks to the federal banking system based on five areas: the operating environment, bank performance, special topics in emerging risk, trends in key risks, and supervisory actions. Overall, loans and bank profitability grew in 2018 as the U.S. economy continued to grow. Moreover, recent examination findings indicate incremental improvements in banks’ general risk management practices. Specific risk areas of concern noted by the OCC include: (i) the origination quality of new loans and potential embedded risks from previously successive years of relaxed underwriting standards; (ii) an increasingly complex operating environment, including the continually evolving threat to cybersecurity; (iii) elevated money-laundering risks; and (iv) rising market interest rates, including certain risks associated with heightened competition for deposits.
The report also notes that outstanding enforcement actions continue to decline since peaking in 2010, which, according to the OCC, reflects an overall improvement in, among other things, banks’ risk management practices. The leading cause of current enforcement actions continues to be compliance or operational failures.
Auto lender pays $11.8 million to resolve investigation into add-on product and loan extension program
On November 20, the CFPB announced a settlement with a Texas-based auto lender to resolve allegations that the lender violated the Consumer Financial Protection Act by deceptively marketing an auto-loan guaranteed asset protection (GAP) add-on product and misrepresenting the impact on consumers of obtaining a loan extension. Regarding the GAP add-on product, which was intended to cover a “gap” between the consumer’s primary auto insurance payout and the consumer’s outstanding loan balance in the event of a total vehicle loss, the CFPB alleged that the lender failed to disclose to consumers that if their loan-to-value was greater than 125 percent, they would not receive the “true full coverage” advertised with the GAP add-on product. Regarding extensions of auto loans, the CFPB alleged, among other things, that the lender failed to “clearly and prominently” disclose that interest accrued during a loan extension would be paid before principal when the consumer resumed making payments on the extended loan. Under the order, the lender must, among other things, (i) pay $9.29 million in consumer restitution; (ii) clearly and prominently disclose the terms of the GAP add-on product and loan extension; and (iii) pay $2.5 million in a civil money penalty.
On November 6, Colorado voters approved a ballot initiative (officially referred to as Proposition 111) to reduce the maximum annual percentage rate that may be charged on deferred deposits or payday loans to 36 percent. In addition, Proposition 111 eliminates an alternative APR formula based on loan amount, prohibits lenders from charging origination and monthly maintenance fees, and amends the definition of an unfair or deceptive practice. The measure takes effect February 1, 2019.
On October 18, the U.S. District Court for the Western District of Washington denied a motion to compel arbitration, holding that an arbitration clause was invalid under the “effective vindication” exception to the Federal Arbitration Act (FAA). According to the opinion, borrowers received several loans from an online payday lender, incorporated under tribal law, which charged usurious, triple-digit interest rates on the loans. Per the terms of the loan agreements, the borrowers consented to binding arbitration for any disputes and agreed per the choice-of-law provision that tribal law applied, effectively waiving any protections they might have enjoyed under federal and state law. The lender moved to arbitrate, which the borrowers opposed, arguing that the arbitration agreement was unenforceable under the “effective vindication” exception to arbitration because it implicitly waives a consumer’s state and federal statutory rights. The district court agreed, finding that the arbitration clause operated as a prospective waiver of most federal statutory remedies. The court found that while the FAA gives parties the freedom to structure arbitration agreements as they choose, that freedom does not extend to a substantive waiver of federally protected statutory rights. The lender also argued that the arbitrator, rather than the court, should decide if the agreement’s choice-of-law provision was invalid. The court disagreed, ruling that questions of arbitrability are for the courts to decide, not the arbitrators. Finally, the lender asked to sever the choice-of-law provision of the arbitration agreement. The court rejected such an approach, holding that when the “offending provisions” of an arbitration agreement “go to the essence of the contract,” they cannot be severed.
On September 19, the California governor signed AB 3212 that provides several benefits and protections to servicemembers under the state’s Military and Veterans Code. The legislation’s protections apply to members of the National Guard, State Military Reserve, and the Naval Militia called to full-time active state service or full-time active federal service, as well as other individuals called to full-time active duty for a period in excess of seven days in any 14-day period. Highlights of the amendments include:
- Extension of Interest Rate Protection. The legislation extends the prohibition on charging an interest rate in excess of six percent on any obligations bearing interest to 120 days after military service. The legislation also extends the six percent interest rate protection for student loans to one year after military service, which previously only applied to mortgage obligations.
- Written response for Good Faith Requests for Relief. The legislation requires that any person who receives a good faith request from a servicemember for relief and believes the servicemember is not entitled to the relief to provide, within 30 days of the request, a written response acknowledging the request. The written response must include (i) the basis for asserting that the request was incomplete or that the servicemember is not entitled to the relief; (ii) information/materials that are missing, if the servicemember’s request was deemed incomplete; and (iii) contact information. If the written response is not provided, the person waives any objection to the request, and the servicemember shall be entitled to the relief requested.
- Extension of the Default Judgment Protection. At any stage in any action or proceeding in which a servicemember is involved, the court may stay an action or proceeding during the period of military service or 120 days thereafter (previously 60 days).
- Inclusion of Motor Vehicles in the Lease Termination Protection. Existing state law allows for the termination of leases of premises that are occupied for dwelling, professional, business, agricultural, or similar purposes by the servicemember, upon entry into military service. The legislation now mirrors the federal Servicemember Civil Relief Act protections for motor vehicle lease termination. Specifically, it provides that a servicemember may terminate a motor vehicle lease after the servicemember’s entry into military service for a period of not less than 180 days. Additionally, it provides for cancelation of leases executed while in a period of military service if the servicemember receives military orders for a change of permanent station from a location in the continental U.S. to a location outside the continental U.S., or from a location in a state outside the continental U.S. to any location outside that state, or to deploy for a period not less than 180 days.
- Kathryn L. Ryan to discuss "NMLS usage" at the NMLS Annual Conference & Training
- 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
- Michelle L. Rogers to discuss "Preparing for servicing exams in the current regulatory environment" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Jon David D. Langlois to discuss "Regulatory risks of convenience fees" 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
- 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 discuss "Small business & regulation: How fair lending has evolved & where are we heading?" at CBA Live
- Jonice Gray Tucker to to discuss "DC policy: Everything but the kitchen sink" 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