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Financial Services Law Insights and Observations

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  • District Court certifies “rent-a-tribe” class action

    Courts

    On July 20, the U.S. District Court for the Eastern District of Virginia certified a “rent-a-tribe” class action alleging an individual who orchestrated an online payday lending scheme violated the Racketeer Influenced and Corrupt Organization Act (RICO), engaged in unjust enrichment, and violated Virginia’s usury law by partnering with federally-recognized tribes to issue loans with allegedly usurious interest rates. The plaintiffs alleged the defendant partnered with the tribes to circumvent state usury laws even though the tribes did not control the lending operation. The court ruled that, as there was “no substantive involvement” by the tribes in the lending operation and evidence showed that the defendant was “functionally in charge,” the lending operation—which allegedly charged interest rates exceeding Virginia’s 12 percent interest cap—could not claim tribal immunity. The plaintiffs moved to certify two RICO classes, distinguished from each other based on the lending entity, each with two sub-classes of borrowers: (i) a usury sub-class of borrowers who either paid any principal, interest, or fees on their loans; and (ii) a unjust enrichment subclass of borrowers who paid any amount on their loans. The defendant challenged class certification, arguing that “due to his changing roles” in the lending operation over the class period “differences between class members will result in a need for a series of complicated mini-trials.” In certifying the two RICO classes, the court called the defendant’s recommendation to bring individual lender suits “an unnecessary and untenable burden on the judicial system.” Furthermore, the court wrote that “[w]ith respect to [p]laintiffs’ unjust enrichment claims, [the defendant] also attempts to argue that some [p]laintiffs did not confer a benefit on [the defendant] because they paid back less than they received on their loans.” However, the court noted that because Virginia law states that any contract in violation of the state’s usury law is void, “any money paid on a void contract could constitute a benefit for the purposes of an unjust enrichment.”

    Courts Class Action RICO Consumer Finance Tribal Lending Usury Interest Rate Payday Lending State Issues

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  • District Court preliminarily approves class action settlement concerning mortgage “Pay-to-Pay” fees

    Courts

    On July 19, the U.S. District Court for the District of Minnesota granted preliminary approval of a proposed settlement in a class action against a mortgage lender (defendant) alleging breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment, as well as violations of the FDCPA and various state laws. The plaintiffs originally filed three separate putative class actions against the defendant alleging the lender violated state laws in Minnesota, North Carolina, and Texas and breached consumers’ mortgage agreements by improperly charging and collecting “Pay-to-Pay” fees when borrowers made monthly mortgage payments by telephone, interactive voice response, or the internet. The defendant denied the allegations and any wrongdoing and moved to dismiss the claims. After proceedings were stayed in all three class actions pending mediation, notices of settlement were filed in each case providing that a global settlement had been reached and that plaintiffs would be added to one lawsuit. Under the terms of the preliminarily approved settlement, the defendant agreed to pay $5 million to establish a settlement fund and resolve the plaintiffs’ claims.

    Courts Mortgages Class Action Fees State Issues Consumer Finance

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  • Connecticut amends certain mortgage licensing provisions

    On July 7, the Connecticut governor signed SB 848, which, among other things, amends certain mortgage licensing provisions in the state’s banking statutes. Amendments include defining “residential mortgage loan” to include a “shared appreciation agreement” which is defined as “a nonrecourse obligation in which an advance sum of monetary value is extended to a consumer, as a lump sum or otherwise, in exchange for an equity interest in a dwelling, residential real estate or a future obligation to repay a sum upon the occurrence of an event, including, but not limited to, the transfer of ownership, repayment maturity date, death of the consumer or as outlined and explicitly agreed to within said agreement.” Amendments also include defining an “out-of-state mortgage loan originator” as “an individual who maintains a unique identifier through the system and holds a valid mortgage loan originator license issued pursuant to the laws of any state other than this state.” Additionally, effective October 1, all individuals must “obtain a mortgage loan originator license prior to conducting such business unless such individual does not engage directly in the activities of a mortgage loan originator or conducts such business pursuant to the temporary authority provided in subsection (e).”

    New Subsection (e) provides that individuals employed by a person licensed as a mortgage lender, mortgage correspondent lender, or mortgage broker in the state will be granted temporary authority to act as a mortgage loan originator in the state for the certain period of time, provided the individual meets certain specified criteria, including that the individual has not had a loan originator licensing application denied, has not had a loan originator license revoked or suspended, has not been subject to, or served with, a cease and desist order in any governmental jurisdiction or by the CFPB, has not been convicted of a misdemeanor or felony that would preclude licensure in this state, and was registered in the system as a registered loan originator during the one-year period immediately preceding the date on which the individual submitted an application and supporting materials. Temporary licenses will remain effective until a determination is made on the status of a permanent license, and temporarily licensed individuals will “be subject to the laws of this state to the same extent as if the individual is licensed as a mortgage loan originator in this state.” The amendments are effective October 1.

    Licensing State Issues State Legislation Mortgages

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  • Connecticut amends student loan servicer provisions

    On July 7, the Connecticut governor signed SB 890, which requires student loan servicers of federal student loans to register with the Department of Banking commissioner and comply with various state requirements and consumer protection mandates. The act now requires, subject to certain exemptions, entities servicing federal student loans (directly or indirectly) to obtain a license from the commissioner. Private student loan servicers are also still required to obtain licenses from the commissioner, and no licensee or registrant will be permitted to use any name other than its legal name or a fictitious name approved by the commissioner. Among other things, the act’s amendments provide new definitions and outline servicer duties, responsibilities, and prohibitions. Additionally, the amendments grant the commissioner the authority to impose civil penalties for violations of the act’s provisions after providing notice and an opportunity for hearing, and permits the commissioner to “suspend, revoke or refuse to renew any registration filed pursuant to section 3 of this act if any fact or condition exists which, if it had existed at the time of filing for registration, would have precluded eligibility for such registration.” The amendments took effect July 1.

    Licensing State Issues State Legislation Student Loan Servicer

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  • DFPI to start accepting debt collector licensing applications on September 1

    On July 12, the Nationwide Multistate Licensing System & Registry (NMLS) published an announcement reminding debt collectors that all persons must apply for a license through the California Department of Financial Protection and Innovation (DFPI) by December 31, 2021. As previously covered by InfoBytes, last September, California enacted the “Debt Collection Licensing Act” (the Act), which requires a person engaging in the business of debt collecting in the state, as defined by the Act, to be licensed and provides for the regulation and oversight of debt collectors by DFPI. Under the Act, debt collection licenses will be required starting January 1, 2022; however, debt collectors who submit applications before January 1, 2022 will be allowed to operate while their applications are pending. However, a debt collector that submits an application after December 31 must wait for DFPI to issue a license before it can operate in the state. All required application materials must be submitted through NMLS, and NMLS reminded applicants that fingerprints must also be submitted to the California Department of Justice. The application will be available on NMLS beginning September 1.

    Find continuing InfoBytes coverage on DFPI’s debt collector licensing requirements here.

    Licensing State Issues State Regulators DFPI Debt Collection NMLS

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  • New Jersey orders company to stop selling unregistered securities

    Securities

    On July 19, the New Jersey Bureau of Securities (Bureau) announced a cease and desist order against a financial services company for allegedly selling unregistered securities in the form of interest-earning cryptocurrency accounts and failing to explain to investors that the accounts were not licensed in New Jersey. According to the order, the company has been funding its lending operations and proprietary trading business since 2019 by selling interest-bearing cryptocurrency accounts that are not protected by or registered with any federal or state securities regulator. The order notes that the company “held the equivalent of $14.7 billion from the sale of these unregistered securities in violation of the Securities Law.” In addition, the order, which become effective July 22, requires the company to stop selling any unregistered security or violating any securities law. According to the Bureau, the recent action “comes amid rising concerns over the proliferation of decentralized finance platforms like [the company] that seek to reinvent traditional financial systems such as banks and brokerages for digital asset investors,” and that “[u]nlike traditional, regulated banks and brokerage firms, however, investors’ losses are not insured against or protected by the Federal Deposit Insurance Corporation or Securities Investor Protection Corporation.”

    Securities State Issues New Jersey Cease and Desist Cryptocurrency

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  • FDIC argues “valid-when-made rule” fills statutory gaps

    Courts

    On July 15, the FDIC filed a reply in support of its motion for summary judgment in a lawsuit challenging the agency’s “valid-when-made rule.” As previously covered by InfoBytes, last August state attorneys general from California, Illinois, Massachusetts, Minnesota, New Jersey, New York, North Carolina, and the District of Columbia filed a lawsuit in the U.S. District Court for the Northern District of California arguing, among other things, that the FDIC does not have the power to issue the rule, and asserting that the FDIC has the power to issue “‘regulations to carry out’ the provisions of the [Federal Deposit Insurance Act],” but not regulations that would apply to non-banks. The AGs also claimed that the rule’s extension of state law preemption would “facilitate evasion of state law by enabling ‘rent-a-bank’ schemes,” and that the FDIC failed to explain its consideration of evidence contrary to its assertions, including evidence demonstrating that “consumers and small businesses are harmed by high interest-rate loans.” The complaint asked the court to declare that the FDIC violated the Administrative Procedures Act (APA) in issuing the rule and to hold the rule unlawful. The FDIC countered that the AGs’ arguments “misconstrue” the rule because it “does not regulate non-banks, does not interpret state law, and does not preempt state law,” but rather clarifies the FDIA by “reasonably” filling in “two statutory gaps” surrounding banks’ interest rate authority (covered by InfoBytes here).

    The AGs disagreed, arguing, among other things, that the rule violates the APA because the FDIC’s interpretation in its “Non-Bank Interest Provision” (Provision) conflicts with the unambiguous plain-language statutory text, which preempts state interest-rate caps for federally insured, state-chartered banks and insured branches of foreign banks (FDIC Banks) alone, and “impermissibly expands the scope of [12 U.S.C.] § 1831d to preempt state rate caps as to non-bank loan buyers of FDIC Bank loans.” (Covered by InfoBytes here.) In its reply in support of the summary judgment motion, the FDIC’s arguments included that the rule is a “reasonable interpretation of §1831d” in that it filled two statutory gaps by determining that “the interest-rate term of a loan is determined at the time when the loan is made, and is not affected by subsequent events, such as a change in the law or the loan’s transfer.” The FDIC further claimed that the rule should be upheld under Chevron’s two-step framework, and that §1831d was enacted “to level the playing field between state and national banks, and to ‘assure that borrowers could obtain credit in states with low usury limits.’” Additionally, the FDIC refuted the AGs’ argument that the rule allows “non-bank loan buyers to enjoy § 1831d preemption without facing liability for violating the statute,” pointing out that “if a rate violates § 1831d when the loan is originated by the bank, loan buyers cannot charge that rate under the Final Rule because the validity of the interest is determined ‘when the loan is made.’”

    Courts Agency Rule-Making & Guidance State Issues State Attorney General FDIC Madden Interest Valid When Made

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  • Maryland Court of Special Appeals: Borrower may maintain cause of action before credit grantor’s collections exceed principal amount

    Courts

    On July 1, the Court of Special Appeals of Maryland affirmed a state circuit court’s ruling, holding that “a consumer borrower may maintain a cause of action against a credit grantor under the Credit Grantor Closed End Credit Provisions (CLEC). . .before the credit grantor has collected more than the principal amount of the loan.” In 2014, the borrower entered into a loan agreement with the credit grantor. Although the borrower allegedly made numerous payments on the credit contract, her personal property was repossessed in 2017. She filed a CLEC claim against the credit grantor, alleging the company “specifically refused” to provide her with a requested written statement memorializing her account history, “including all debits and credits to her account and any monthly statements sent to [her] and all other documents which refer to payments due or received.” The credit grantor moved to dismiss, arguing, among other things, that the borrower was not entitled to monetary recovery under CLEC and that she failed to allege that she paid amounts in excess of the principal, and as such, did not assert a proper claim under CLEC. The borrower countered “that ‘CLEC damages are available regardless of whether a credit grantor has collected more than [the] principal amount of the loan,” and that furthermore, citing several cases, “‘[t]he relief that is provided by CLEC § 12-1018 has also already been determined by Maryland Appellate Courts and includes monetary, equitable and declaratory relief[.]’” The circuit court granted the credit grantor’s motion to dismiss, in part, as to the CLEC claim, holding that when relying on the plain language of the statute, the consumer was not entitled to relief.

    On appeal, the Court of Special Appeals held, based on CLEC’s plain language, statutory construction, legislative history, and precedent that a consumer can bring a claim under CLEC for damages, and/or declaratory and injunctive relief before the consumer has paid amounts in excess of principal. However, because the borrower had “failed to allege actual damages or request other appropriate relief under CLEC,” the Court of Special Appeals affirmed the judgment of the circuit court dismissing her CLEC claim.

    Courts State Issues Consumer Finance Consumer Lending

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  • Colorado expands student loan servicer provisions

    On June 29, the Colorado governor signed SB21-057, which expands the Colorado Student Loan Servicers Act by adding new provisions covering private lenders, creditors, and collection agencies connected to postsecondary non-federal student loans. The act adds “Part 2” to the Colorado Revised Statutes, which, among other things, provides new definitions and stipulates that on or after September 1, lenders may not offer or make a private education loan to a state resident without first registering with the administrator and then annually providing specific loan data and contact information. Additionally, the act (i) outlines cosigner disclosure requirements and specifies that private education lenders are required to grant a release to cosigners provided certain conditions are met; (ii) provides that if a cosigner dies, the lender will not attempt to collect against the cosigner’s estate except for payment default; (iii) expands disability discharge requirements so that a borrower or cosigner may be released from payment obligations if permanently disabled; (iv) requires lenders to provide additional disclosures related to loans that will be used to refinance an existing loan; (v) outlines prohibited conduct concerning unfair, deceptive, or abusive acts or practices, such as placing a loan into default or accelerating a loan while a borrower is seeking a loan modification or enrolling in a flexible repayment plan; (vi) discusses debt collection prerequisites; and (vii) allows borrowers to bring a private right of action, including a counterclaim, against a lender or collection agency to recover or obtain actual damages or $500 (whichever is greater), restitution, punitive damages, injunctive relief, credit report corrections, attorney fees and costs, among others. Additionally, if it is proven that a lender or a collection agency has provided false information, the court will award the borrower the greater of treble damages or $1,500. Moreover, a violation of Part 2 is defined as a deceptive trade practice. Lenders or collection agencies that fail to comply with the outlined provisions will be liable for, among other things, actual damages sustained by a borrower or cosigner, as well as a monetary award equal to three times the total amount collected from the borrower in violation of Part 2. The act takes effect immediately.

    Licensing State Issues State Legislation Student Lending Student Loan Servicer Colorado

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  • Vermont rescinds combination license option

    On July 6, the Nationwide Multistate Licensing System & Registry (NMLS) published a notice announcing the rescission of the Vermont Department of Financial Regulation’s “Combination of License Types” option. Between July 1 and September 30, companies that hold a combination license must transition back to the following appropriate licenses in order to conduct business in the state: lender license, mortgage broker license, loan solicitation license, and/or loan servicer license. Companies will need to file a company form application (MU1) and an individual form (MU2) for each of their control persons, and electronic surety bonds will need to be obtained for each new license to pass NMLS’s completeness check. However, companies will only need to update their MU1 and MU2s, and not need to re-enter information that has already been provided. Additionally, companies are required to complete the transition process for each branch that holds a combination license. NMLS reminds companies that this transition is not optional.

    Licensing NMLS State Issues Vermont

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