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Financial Services Law Insights and Observations

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  • District Court moves puppy financing action forward

    Courts

    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.

    Courts TILA CLA Usury State Issues Standing APR Interest Rate

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  • Colorado UCCC administrator issues guidance on alternative loan changes

    State Issues

    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.

    State Issues Payday Lending Consumer Finance Interest Rate Usury ACH

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  • Fifteen states urge the 4th Circuit against allowing non-tribal payday lenders to receive tribal immunity

    State Issues

    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.

    State Issues State Attorney General Payday Lending Usury Interest Rate

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  • Colorado voters pass initiative capping interest on payday loans at 36 percent

    State Issues

    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.

    State Issues Payday Lending Consumer Finance Interest Rate Usury

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  • District Court denies arbitration bid, rules clauses signed by borrowers are invalid

    Courts

    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.

    Courts Payday Lending Arbitration Interest Rate Usury

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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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  • CFPB urges 9th Circuit to reverse district court’s order and impose higher penalty in tribal lending action

    Courts

    On October 19, the CFPB filed its opening brief before the U.S. Court of Appeals for the 9th Circuit in Consumer Financial Protection Bureau v. CashCall, Inc., an action brought by the CFPB to limit the reach of the so-called “tribal model” of online lending. In the original action, the court found that an online loan servicer that operated on tribal lands engaged in deceptive practices by collecting on loans that exceeded the usury limits in various states, and ordered it and its affiliates to pay a $10 million penalty, far short of the Bureau’s request. (Previously covered by InfoBtyes here and here.) The CFPB appealed, arguing that the district court erred by imposing a civil penalty that was “inappropriately low” and by refusing to order appropriate restitution. In its brief, the Bureau argued that the district court misapplied the law when finding that restitution was not “an appropriate remedy.” According to the Bureau, the district court believed it had discretionary power to deny restitution, based on the court’s view of the equities. But the district court had no such discretion, the Bureau asserted, claiming that if a plaintiff proves a violation and resulting harm, it is entitled to restitution under the CFPA. In addition, the Bureau argued that the district court should not have denied restitution on the grounds that the servicer had not acted in bad faith. The Bureau argued that allowing the servicer to earn $200 million in ill-gotten gains while paying a $10 million penalty leaves companies with “little incentive to follow the law.” The Bureau also argued that the loan servicer’s actions were reckless and warranted a higher civil penalty. The district court had concluded that the servicer did not act recklessly because its primary counsel opined that it could contract around state law. In response, the Bureau asserted that the servicer had “ample reason to know” its attempts to circumvent state usury laws posed an unjustifiably high risk that it was “collecting amounts consumers did not owe” after multiple lawyers warned the servicer that its attempts to avoid state law “likely” would not work.”

    Courts CFPB Ninth Circuit Appellate Payday Lending CFPA Usury State Issues

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  • New Jersey appeals court says choice-of-law exception may apply in interest rate class action suit

    Courts

    On October 9, the Superior Court of New Jersey Appellate Division reversed a trial court’s decision to revive a proposed class action that challenged, among other things, interest rates of over 30 percent on car title loans. According to the appellate court, the trial court dismissed the case because Delaware, not New Jersey, had a more substantial relationship with the parties’ dispute. While the plaintiff’s contract with the Delaware-based title loan company stipulated that Delaware law applied even though she resided in New Jersey, the appellate court said that under the second exception of the test established by Instructional Systems Inc. v. Computer Curriculum Corp., New Jersey courts will uphold the contractual choice unless the “application of the law of the chosen state would be contrary to the fundamental policy of the state which has a materially greater interest than the chosen state in the determination of the particular issue and which . . . would be the state of the applicable law in the absence of an effective choice of law by the parties.”

    “In her certification, plaintiff asserted that she applied for the title loan from her home in New Jersey and that defendant advised her that the loan had been approved by calling and advising her that all she had to do to pick up the money was to come to Delaware and sign the contract.” The appellate court stated that these additional facts may be sufficient to satisfy the second exception’s prerequisites, and that from a procedural standpoint, the trial court should have either converted the title loan company’s motion to dismiss to a motion for summary judgment in order to consider the new information or granted the plaintiff’s motion to file a second amended complaint.

    Courts State Issues Class Action Interest Auto Finance Usury

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  • New York Attorney General sues nine student debt relief companies

    State Issues

    On September 20, the New York Attorney General announced a lawsuit against nine student loan debt relief companies, along with their financing company, and two individuals (collectively, “defendants”), alleging that the defendants fraudulently, deceptively, and illegally marketed, sold, and financed student debt relief services to consumers nationwide. Among other things, the complaint alleges that the defendants (i) sent direct mail solicitations to consumers that deceptively appeared to be from a governmental agency or an entity affiliated with a government agency; (ii) misrepresented that they would apply fees paid by borrowers to student loan balances; (iii) charged consumers over $1,000 for services that were available for free; (iv) requested upfront payments in violation of federal and state credit repair and debt relief laws; (v) charged usurious interest rates; and (vi) provided consumers with “incomplete and harmful advice,” such as counseling borrowers to consolidate federal student loans without explaining that in certain circumstances borrowers could “lose months or years of loan payments they had already made that would qualify toward forgiveness of their loans under the Public Service Loan Forgiveness Program.” The New York Attorney General maintains that these practices violated several federal and state consumer protection statutes, including the Telemarketing Sales Rule, New York General Business Law, the state’s usury cap on interest rates as covered by New York Banking Law and New York General Obligations Law, disclosure requirements under the Truth in Lending Act, and the Federal Credit Repair Organization Act.

    State Issues State Attorney General Student Lending Debt Relief Telemarketing Sales Rule TILA Usury

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  • California Supreme Court says loans not subject to state interest rate caps may still be unconscionable

    State Issues

    On August 13, the Supreme Court of California held that interest rates on consumer loans of $2,500 or more could be considered unconscionable under Section 22302 of California’s Financial Code, notwithstanding Section 22303’s maximum interest rate cap for loans under $2,500. The U.S. Court of Appeals for the 9th Circuit asked the Supreme Court of California to address Section 22302’s application to higher cost consumer loans. In the class action that is before the 9th Circuit, consumers alleged that a lender violated the “unlawful” prong of California’s Unfair Competition Law (UCL) with an unsecured $2,600 loan carrying an APR between 96 percent and 136 percent and argued the product is “unconscionable” under Section 22302. To resolve this question, the California Supreme Court held that unconscionability is a “flexible standard” that includes the larger context surrounding the contract. The court held that, although Section 22303 specifies interest rate limitations on loans under $2,500, it does not affect whether a loan in excess of $2,500 is unconscionable, and a court may consider a loan’s interest rate in determining that a loan above this threshold violates Section 22302.

    State Issues Courts Usury Consumer Finance Installment Loans Ninth Circuit Appellate

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