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On May 4, the Oklahoma governor signed SB 1687, which adjusts the amounts a supervised lender may charge in lieu of a loan finance charge on loans carrying principals of $3,000 or less. Previously, the principal limit was $300. The amendments outline specific allowable loan charges based on principal amount that may be made on qualifying loans. Additionally, for loans greater than $1,620 but not more than $3,000, lenders are allowed an acquisition charge for making the loan that may not exceed one-tenth of the amount of the principal. The threshold rate changes are effective July 1.
Special Alert: Federal court says state bank, fintech partner must face Maryland’s allegation of unlicensed lending before state ALJ
A federal court late last month told a state-chartered bank and its fintech partner that they must return to a state administrative law proceeding to fight a Maryland enforcement action alleging that their failure to obtain a license to lend and collect on loans violated state law — potentially rendering the terms of certain loans unenforceable.
The Missouri-chartered bank and its partners attempted to remove an action brought by the Office of the Maryland Commissioner of Financial Regulation to the U.S. District Court for the District of Maryland, but the district court determined that removal was not proper and that Maryland’s Office of Administrative Hearings was the appropriate venue.
OCFR initially filed charges in January 2021 in Maryland’s Office of Administrative Hearings against the bank and its partner asserting the bank made installment and consumer loans and extended open-ended or revolving credit in the state without being licensed or qualifying for an exception to licensure. As a result, OCFR said they “‘may not receive or retain any principal, interest, or other compensation with respect to any loan that is unenforceable under this subsection.’” It said that not only are the bank’s loans to all Maryland consumers possibly unenforceable, but also that the bank, or its agents or assigns, could in the alternative be “prohibited from collecting the principal amount of those loans from any of these consumers or from collecting any other money related to those loans.”
The OCFR’s charge letter also said the fintech company that provided services to the bank violated the Maryland Credit Services Business Act by providing advice and/or assistance to consumers in the state “with regard to obtaining an extension of credit for the consumer when accepting and/or processing credit applications on behalf of the Bank without a credit services business license.” Additionally, the OCFR alleged violations of the Maryland Collection Agency Licensing Act related to whether the fintech company engaged in unlicensed collection activities, thus subjecting it to the imposition of fines, restitutions, and other non-monetary remedial action.
The defendants filed a notice of removal to federal court last year while the enforcement action was still pending before the OAH; OCFR moved to remand the case back to the agency.
In granting the OCFR’s motion to remand, the court concluded that the OCFR persuasively argued that the defendants have not properly removed this case from the OAH for several reasons, including that the OAH does not function as a state court. “Pursuant to 28 U.S.C. § 1441, a defendant may remove to federal court ‘any civil action brought in a State court of which the district courts of the United States have original jurisdiction.’” However, the court determined that, while defendants correctly observed that the OAH possesses certain “court-like” attributes, its limitations clearly showed that it does not function as a state court.
In reaching this conclusion, the court considered several undisputed facts, including that the OCFR is a unit of the Maryland Department of Labor “responsible for, among other things, issuing licenses to entities wishing to issue loans to consumers in Maryland and investigating violations of Maryland’s consumer loan laws.” The court also said that, while OCFR has authority under Maryland law to investigate potential violations of law or regulation and has the ability to issue cease and desist orders, revoke an individual’s license, or issue fines, it cannot enforce its own subpoenas or orders — and that its decisions are not final and may be appealed to a state circuit court.
The defendants had argued that the case involved a federal question as a result of the complete preemption of state usury laws by Section 27 of the FDI Act. The court said licensure, not state usury law claims, was the issue at hand.
During a status conference held last month to discuss OCFR’s motion to remand, defendants requested an opportunity to file a motion certifying the case for appeal. The court will hold in abeyance its remand order pending resolution of that motion. Parties’ briefings are due by the end of May.
If you have any questions regarding the ruling or its ramifications, please contact a Buckley attorney with whom you have worked in the past.
On November 2, the House Financial Services Committee’s Task Force on Financial Technology held a hearing titled “Buy Now, Pay More Later? Investigating Risks and Benefits of BNPL and Other Emerging Fintech Cash Flow Products,” urging regulators to examine the BNPL industry. The committee memorandum highlighted the rise in consumers products offered by fintechs, such as BNPL, earned wage access, and overdraft avoidance products, and warned that while these products may help consumers manage their personal cash flow, they also have the potential to create unsustainable levels of debt. FSC staff noted that many lending disclosure requirements, including those under TILA, may not apply to several of these products, thus creating concerns regarding consumers’ understanding of the associated risks. Pointing out that payments made on many of these products are not reported to credit bureaus, FSC staff raised the issue of whether consumers are missing out on opportunities to build credit.
The task force heard from several industry witnesses who discussed, among other things, current federal and state consumer protection regulations that apply to BNPL products. One witness stressed the importance of “balanced and thoughtful regulation” that benefits consumers and merchants using these new payment solutions, and noted that the industry is actively working with credit bureaus on ways to share repayment data. House Financial Services Chair Maxine Waters (D-CA) also urged the CFPB to “look[ ] deeply” at these emerging products to gain a better understanding of how they may impact low- and moderate-income consumers and borrowers of color. Representative Blaine Luetkemeyer (R-MO) noted, however, that these products “allow people to purchase products, [and] pay for them in a timely manner as they can afford them.” Representative Warren Davidson (R-OH) agreed, stressing that policymakers need to “avoid punishing new products for not fitting within regulatory buckets that were already built” and “should avoid overly impairing consumer choices on how they spend money.”
On October 21, the National Credit Union Administration Board approved a final rule by a 2-1 vote to expand the range of permissible activities and services that credit union service organizations (CUSOs) may engage in. Under the final rule, CUSOs will be allowed to originate, purchase, sell, and hold any type of loan a federal credit union is permitted to, including auto and payday loans. The final rule also provides the Board “additional flexibility to approve permissible CUSO activities and services outside of notice and comment rulemaking.” NCUA Vice Chairman Kyle Hauptman stated the rule “gives credit unions the tools to compete more effectively in the digital marketplace.” However, NCUA Chairman Todd Harper opposed the final rule, warning that because NCUA “lacks the third-party vendor authorities that the other federal banking agencies and several state regulators have, the NCUA has no power to supervise CUSOs for compliance with federal consumer financial protection laws and regulations and compliance with prudential standards like concentration limits, maximum loan-to-value ratios, and minimum capital levels.” The final rule takes effect 30 days after publication in the Federal Register.
On August 13, the Illinois governor signed SB 1561, which amends the Illinois Human Rights Act to include provisions regarding third-party loan modification service providers. According to the bill, it is a civil rights violation for a third-party loan modification service provider because of unlawful discrimination, familial status, or an arrest record, to (i) refuse to engage in loan modification services or to discriminate in making such services available; or (ii) alter the terms, conditions, or privileges of such services. The bill also clarifies that a third-party loan modification service provider is a person or entity, licensed or unlicensed, that “provides assistance or services to a loan borrower to obtain a modification to a term of an existing real estate loan or to obtain foreclosure relief,” but does not include lenders, brokers or appraisers of mortgage loans, or the servicers, subsidiaries, affiliates, or agents of the lender. Among other things, the bill provides that, in relation to real estate transactions, the failure of the Department to notify a complainant or respondent in writing for not completing an investigation on the allegations set forth in a charge within 100 days shall not deprive the Department of jurisdiction over the charge. This bill is effective January 1, 2022.
On July 27, the CFPB published a special issue brief finding that consumer applications for auto loans, new mortgages, and revolving credit cards had, for the most part, returned to pre-pandemic levels by May 2021. The brief compares the number of applications made in these categories before the pandemic to the number being made now and provides a state-by-state analysis of the change in applications. Highlights of the brief include: (i) sub-prime borrower credit applications increased in conjunction with federal stimulus payments; (ii) auto loan inquiries dropped 52 percent by the end of March 2020 but returned to their usual pre-pandemic trend by January 2021; however, the Bureau reports wide geographic variability in the demand for auto loans while changes in credit card applications were generally uniform; (iii) new mortgage credit inquiries experienced a smaller drop in March 2020 compared to other credit types but later saw a surge, with inquiries exceeding the usual, seasonally adjusted volume by 10 to 30 percent—a reflection of unusually high activity seen throughout the pandemic; (iv) revolving credit card inquiries declined by over 40 percent and took the longest to rebound, not returning to normal levels until March 2021; and (v) consumers with deep subprime credit scores represented the largest decline in auto loan inquiries compared to prior years, followed by inquiries from consumers with subprime credit scores, with both categories of consumers also showing declines in new mortgage and revolving credit card inquiries. “While consumer credit applications have generally recovered to pre-pandemic levels in the aggregate, we see important differences across consumers,” acting CFPB Director David Uejio stated. “Both borrowers with superprime and subprime credit scores are still not applying for credit as much as they were pre-pandemic. We will continue to keep a close watch on the marketplace as the economic recovery continues, to help ensure all consumers have access to financial products and services that are fair, transparent, and competitive.”
Maryland Court of Special Appeals: Borrower may maintain cause of action before credit grantor’s collections exceed principal amount
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.
Earlier this year, the Wyoming governor signed HB 8 to authorize sales-finance activities for some licensees and establish procedures and calculations for refunding certain credit-insurance products upon prepayment. Among other things, this act exempts certain supervised financial institutions from certain notice and fee requirements in the Wyoming Uniform Consumer Credit Code (the Code) and generally restructures the Code to repeal statutes for consumer-related and supervised loans, consolidating the provisions for those loans into existing laws for consumer loans. Regarding the MLA, the act authorizes that “the administrator may seek an appropriate remedy, penalty, action or license revocation or suspension.” This act is effective July 1.
On June 14, the CFPB released a report analyzing differences in certain loan and borrower characteristics and general lending patterns for lenders below and above the 100-loan closed-end threshold set by the 2020 HMDA final rule. As previously covered by InfoBytes, last year the Bureau issued a final rule permanently raising coverage thresholds for collecting and reporting data about closed-end mortgage loans under HMDA from 25 to 100 loans.
While the Bureau notes that the “analysis is necessarily limited and preliminary,” the report’s findings, which analyzed publicly available HMDA data from 2019 for which the 25-loan threshold still applied, show, among other things, that (i) lenders that are exempt under the 2020 final rule (those whose origination volume exceeds the 25-loan threshold but falls below the 100-loan threshold) “do not appear to be more likely to lend to Black and non-White Hispanic borrowers than larger volume lenders”; (ii) these lenders may be more likely to lend to non-natural person borrowers such as trusts, partnerships, and corporations; (iii) a higher percentage of these loans are secured by properties in low-to-moderate income (LMI) census tracts, properties in rural areas, second liens, and investment properties; (iv) these lenders tend to make more loans to borrowers who appear to have higher income levels than large lenders’ borrowers; and (v) a slightly higher percentage of loans made by these lenders are secured by manufactured homes than by lenders with origination volumes over 300. According to the Bureau’s blog post, the “findings are consistent with a possible explanation that lenders below the 2020 rule’s 100-loan closed-end threshold are making more loans to investors buying up property in [LMI] census tracts for rental or resale.”
On May 20, the Connecticut Supreme Court held that a lender accused of issuing usurious consumer loans without being properly licensed is protected by tribal sovereign immunity. In 2014, the Connecticut Department of Banking initiated an enforcement action against two lenders and a tribal officer of one of the lenders, claiming the lenders violated Connecticut’s banking and usury laws by making high-interest consumer loans over the internet without a license. The commissioner issued cease-and-desist orders and imposed civil penalties on the lenders. The lenders filed a motion in Connecticut Superior Court to dismiss the administrative proceedings for lack of jurisdiction, claiming they were arms of a federally recognized tribe and entitled to tribal sovereign immunity. The Superior Court vacated the orders against the lenders and remanded the case for an evidentiary hearing on whether the lenders are entitled to sovereign immunity.
The Connecticut Supreme Court reversed in part the Superior Court’s order, finding that the lower court should have applied the “Breakthrough factors” adopted by the U.S. Court of Appeals for the Fourth, Ninth, and Tenth Circuits to determine whether the lenders were arms of the tribe. These factors include analysis of (i) “the method of creation” of the entities; (ii) the stated purpose of the entities; (iii) “the structure, ownership, and management of the entities,” which includes the amount of control the tribe has over them; (iv) the tribe’s intent with respect to extending its sovereign immunity to the entities; and (v) “the financial relationship between the tribe and the entities.” Applying these factors, the Connecticut Supreme Court found that one of the lenders was entitled to sovereign immunity because the lender was created under tribal law, is controlled by directors appointed by the tribal council for the purpose of promoting tribal economic development and welfare, and there was a “significant financial relationship” between the tribe and the lender. With respect to the other lender, the court found that there was insufficient evidence to show that it is an arm of the tribe and that further proceedings were necessary to determine its right to sovereign immunity.
- Steven vonBerg to speak at closing “super session“ on compliance topics at MBA Legal Issues and Regulatory Compliance Conference
- Buckley Webcast: Fifth Circuit muddles CFPB’s plans to use in-house judges in enforcement proceedings
- Jeffrey P. Naimon to discuss “Understanding the ESG impact on compliance” at the ABA’s Regulatory Compliance Conference