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On June 6, a majority of nonrecused active judges on the U.S. Court of Appeals for the Ninth Circuit vacated a previously issued opinion that said tribal lenders could arbitrate Racketeer Influenced and Corrupt Organizations Act (RICO) class action claims, saying it will rehear the case en banc. As previously covered by InfoBytes, last September the 9th Circuit panel majority concluded that “an agreement delegating to an arbitrator the gateway question of whether the underlying arbitration agreement is enforceable must be upheld unless that specific delegation provision is itself unenforceable.” The panel reviewed whether California residents who received loans from an online lender were allowed to pursue class RICO claims based on allegations that they were charged interest rates exceeding state limits from lenders claiming tribal immunity. The district court granted class certification and ruled that the entire arbitration agreement, including provisions containing a class action waiver, was unenforceable. On appeal, the panel majority cited to the U.S. Supreme Court’s decision in Rent-A-Center, West, Inc. v. Jackson, which determined, among other things, that when a party challenges an entire agreement—not just an arbitration provision—deciding “gateway” issues such as enforceability must be delegated to an arbitrator. “[W]hen there is a clear delegation provision, that question is . . . for the arbitrator to decide so long as the delegation provision itself does not eliminate parties’ rights to purse their federal remedies,” the majority wrote. The dissenting judge held, however, that the panel majority “misunderstood the effect of the choice-of-law provisions in the agreements,” arguing that the provisions curtail an arbitrator’s authority by allowing application of “only tribal law and a small and irrelevant subset of federal law,” thus preventing an arbitrator “from applying the law necessary to determine whether the delegation provisions and the arbitration agreements are valid.” He further contended that the panel majority’s decision diverged from decisions reached by several sister circuits, which “have consistently condemned the arbitration agreements embedded in tribal internet payday loan agreements, including those used by the very same lenders as in this case.”
On May 12, the U.S. District Court for the Eastern District of Virginia preliminarily approved a nearly $500 million class action settlement resolving allegations that tribal online lending companies charged usurious interest rates. Plaintiffs’ filings outline their class action against tribal entities, as well as several of the entities’ non-tribal business partners (individual defendants), for making and collecting on high-interest loans.
The U.S. Court of Appeals for the Fourth Circuit previously upheld a district court’s denial of defendants’ bid to dismiss or compel arbitration in the case (covered by InfoBytes here). The 4th Circuit concluded that the arbitration clauses in the loan agreements impermissibly forced borrowers to waive their federal substantive rights under federal consumer protection laws, and contained an unenforceable tribal choice-of-law provision because Virginia law caps general interest rates at 12 percent. As such, the appellate court stated that the entire arbitration provision was unenforceable. “The [t]ribal [l]enders drafted an invalid contract that strips borrowers of their substantive federal statutory rights,” the appellate court wrote. “[W]e cannot save that contract by revising it on appeal.”
The 4th Circuit also declined to extend tribal sovereign immunity to the tribal officials, determining that while “the tribe itself retains sovereign immunity, it cannot shroud its officials with immunity in federal court when those officials violate applicable state law.” The appellate court further noted that the “Supreme Court has explicitly blessed suits against tribal officials to enjoin violations of federal and state law.”
Following more than three years of litigation, the parties eventually reached a settlement that will include tribal officials canceling approximately $450 million in debt. As part of the settlement, the tribal officials will eliminate the balance on any outstanding loans on the basis that the debts are disputed, cease all collection activity, and will not sell, transfer, or assign any outstanding loans for collection. Tribal officials will also request deletion of any negative tradelines for loans in the name of tribal officials or tribal corporations, and will pay an additional $1 million to cover the costs of notice and administration for the settlement and $75,000 to go towards service awards. Additionally, the individual defendants will create a $39 million common fund that will go to class members who repaid unlawful amounts on their loans. Class counsel is also seeking attorneys’ fees and costs totaling around $13 million.
On May 4, the Connecticut Banking Commissioner issued a temporary cease and desist order against an unlicensed California-based marketplace lender after determining it had reason to believe the respondent allegedly violated several provision of the Connecticut General Statutes, as well as Section 1036 of the CFPA. The respondent operates a mobile application to help consumers take out small-dollar loans and solicits lenders via its website through advertisements claiming it “takes the work out of lending by vetting and organizing a marketplace of loan requests” where “[b]orrowers set their own terms and provide appreciation tips to lenders who agree to fund a loan, allowing for mutually beneficial financial outcomes.” Consumers initiate loans on the respondent’s platform for a certain amount, which includes optional monetary tips for both the lender and the respondent of up to 12 and 9 percent of the loan amount respectively. The Commissioner’s investigation noted that while the respondent touted the tips as being optional and not required for submitting a loan request or receiving funding, 100 percent of the loans originated to Connecticut consumers from June 2018 to August 2021 included a tip. When the tips were factored into the finance charge, the APRs of the Connecticut consumers’ loans ranged from 43 percent to over 4,280 percent. During the identified time period, loan disclosures identified the amount of the tips for each loan; however, starting in April 2021, the revised disclosures and promissory notes removed any itemization of the tips, and promissory notes allegedly “failed to indicate any obligation of the borrower to pay tips on their loans.” According to the Commissioner, the corresponding disclosures “stated that only one payment, for the principal loan amount, was due at the end of the loan,” however on the loan’s due date, the total loan amount including tips was withdrawn from the consumer’s account. Additionally, disclosures allegedly informed consumers that the APR on the loans was zero percent even though all the loans carried much higher APRs.
The Commissioner further concluded that the respondent prohibited direct communication between consumers and lenders and charged several fees on delinquent loans, including late fees and recovery fees for its collection efforts. Moreover, at least one of the contracted collection agencies was not licensed in the state, nor was the respondent licensed as a small loan company in Connecticut, and nor did it qualify for a licensure exemption.
In issuing its order to cease and desist, order to make restitution, and notice of intent to impose a civil penalty and other equitable relief, the Commissioner stated that the respondent’s “offering, soliciting, brokering, directly or indirectly arranging, placing or finding a small loan for a prospective Connecticut borrower, without the required license” constitutes at least 1,600 violations of the Connecticut General Statutes. The Commissioner cited additional violations, which included engaging in unlicensed activities such as lead generation and debt collection, and cited the respondent for providing false and misleading information related to the terms and costs of the loan transactions in violation of both state law and the CFPA’s prohibition against deceptive acts or practices. In addition to ordering the respondent to immediately cease and desist from engaging in the alleged violations, the Commissioner ordered the respondent to repay any amounts received from Connecticut consumers in connection with their loan, plus interest.
On April 28, the U.S. District Court for the Southern District of New York granted in part and denied in part parties’ motions for summary judgment in a suit challenging the retroactive application of a New York statute reducing the state’s statutory interest rate on money judgments arising out of consumer debt. In doing so, the court considered S5724A, the Fair Consumer Judgment Interest Act. As previously covered by InfoBytes, the New York governor signed S5724A in December 2021, which amended the civil practice law and rules relating to the rate of interest applicable to money judgments arising out of consumer debt. Specifically, the bill provides that the interest rate that can be charged on unpaid money judgments is 2 percent and applies to judgments involving consumer debt, which is defined as “any obligation or alleged obligation of any natural person to pay money arising out of a transaction in which the money, property, insurance or services which are the subject of the transaction are primarily for personal, family or household purposes […], including, but not limited to, a consumer credit transaction, as defined in [section 105(f) of the civil practice law and rules].” The bill became effective April 30. According to the suit, a group of credit unions (plaintiffs) filed a federal class action lawsuit seeking to enjoin the enforcement or implementation of S5724A. The plaintiffs sought to invalidate the retroactive portion of S.5724A, arguing that it is an unconstitutional taking in violation of the Fifth Amendment and violative of their substantive due process rights guaranteed under the Fourteenth Amendment. The plaintiffs claimed that they are collectively owed about $3.8 million of outstanding consumer judgments, which includes approximately $1 million in interest, and sought a preliminary injunction enjoining the effective date of S572A. The plaintiffs brought suit against the Chief Administrative Judge of the New York State Courts, and the sheriffs of three New York counties in their official capacity on the basis that those parties “will be involved in enforcement of the Amendment.” The district court issued the preliminary injunction with respect to the sheriffs, relying on the credit unions’ arguments that retroactive application will “eradicate millions of dollars from the balance of judgments lawfully due and owing to judgment creditors.” The district court noted that “[r]egulatory takings … involve government regulation of private property [that is] . . . so onerous that its effect is tantamount to a direct appropriation or ouster. Thus, ‘while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking.’”
On April 22, the Illinois Department of Financial and Professional Regulation (IDFPR) published in the Illinois Register a notice of adopted rules to implement the Predatory Loan Prevention Act (PLPA or the Act). As previously covered by InfoBytes, the Act was signed into law in March 2021 to prohibit lenders from charging more than 36 percent APR on all non-commercial consumer loans under $40,000, including closed-end and open-end credit, retail installment sales contracts, and motor vehicle retail installment sales contracts. Violations of the Act constitute a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act and carry a potential fine up to $10,000. Additionally, any loan with an APR exceeding 36 percent will be considered null and void.
In general, the adopted rules require lenders to provide a disclosure to consumers about the 36 percent APR rate cap established by the PLPA, incorporate the APR calculation method required by the PLPA, and amend the rules for reporting of payday loans to the state database. The rules specify that words in the definitions are not defined to have the same meaning as in Regulation Z, including any interpretation by the CFPB. For purposes of calculating the PLPA ARP, the rules specify that the calculation excludes only certain specified bona fide fees, but includes finance charges, loan application fees, and fees imposed for participation in any plan or arrangement for a loan, “even if that charge would be excluded from the finance charge under Regulation Z.”
The IDFPR made several amendments related to rate cap disclosure notices. These specify that all loan applications must include a separate rate cap disclosure signed by the consumer (disclosures must be provided in English and in the language in which the loan was negotiated) that clearly and conspicuously states: “A lender shall not contract for or receive charges exceeding a 36% annual percentage rate on the unpaid balance of the amount financed for a loan, as calculated under the Illinois Predatory Loan Prevention Act (PLPA APR). Any loan with a PLPA APR over 36% is null and void, such that no person or entity shall have any right to collect, attempt to collect, receive, or retain any principal, fee, interest, or charges related to the loan. The annual percentage rate disclosed in any loan contract may be lower than the PLPA APR.”
The rules take effect August 1.
On April 11, a Florida county court concluded that a defendant lender and certain company officials were entitled to sovereign immunity in a case concerning alleged usury claims. The plaintiff claimed the lender used its supposed federally-recognized tribal affiliation to escape state usury regulations. The court dismissed the complaint, however, finding that the lender is an “arm of the tribe” under a six-prong test established by the U.S. Court of Appeals for the Tenth Circuit in Breakthrough Management Group, Inc. v. Chukchansi Gold Casino & Resort. The test determines whether sovereign immunity should apply by examining, among other factors, an entity’s creation, the amount of control a tribe has over the entity, and the financial relationship between the tribe and the entity. According to the court, the defendant’s evidence suggests that the tribe created the defendant as a business entity “to generate and contribute revenues” to the tribe’s general fund. The court found that insufficient detail was presented to support the plaintiff’s assertion that the defendant pays a relatively small percentage of its gross revenues to the tribe. The court added that the plaintiff also failed to present evidence proving that large portions of the defendant’s revenue were distributed to non-tribal entities. In dismissing the case with prejudice, the court also dismissed claims against three individual defendants because they were entitled to sovereign immunity. The court concluded that the plaintiff’s allegations demonstrated that the individuals committed the alleged wrongs in their capacities as employees and officers and therefore the “real party in interest” is the lender.
On April 16, the U.S. District Court for the Eastern District of Virginia granted preliminary approval of a class action settlement resolving a purported scheme to unlawfully use tribe-owned firms to make online short-term loans and charge triple-digit interest rates. According to the memorandum of law in support of plaintiffs’ motion for preliminary approval of class action settlement and the stipulation and agreement of settlement, the district court previously approved two class settlements related to the lending enterprise. The first resulted in the purported lender and others: (i) repaying over $53 million dollars in cash; and (ii) forgiving over $380 million dollars of debt owed by consumers who took out loans with three lending companies. However, these settlements did not resolve every claim surrounding the purported scheme, and did not resolve claims with the settling defendant. The plaintiffs claimed that the settling defendant assisted the purported lender’s operations despite a corporate spinoff in May 2014, alleging that “[b]ecause many [of the purported lender’s] employees with institutional knowledge of and involvement in the company’s rent-a-tribe lending business were quickly transferred to [the settling defendant], [the purported lender] required and depended on continued involvement by [the settling defendant] and its employees in operating its rent-a-tribe lending business, which involvement was freely and often provided.” Under the terms of the preliminarily approved settlement, the settling defendant must provide monetary relief to class members totaling approximately $45 million.
On March 1, the New Mexico governor signed HB 132, which amends certain provisions related to the state’s small dollar lending requirements. Among other things, the bill makes several amendments to the New Mexico Bank Installment Loan Act of 1959 (BILA) and the New Mexico Small Loan Act of 1955 (SLA) by raising the maximum installment loan amount to $10,000 and providing the following: (i) “no lender shall make a loan pursuant to the [BILA] to a borrower who is also indebted to that lender pursuant to the [SLA] unless the loan made pursuant to the [SLA] is paid and released at the time the loan is made”; (ii) only federally insured depository institutions may make a loan under the BILA with an initial stated maturity of less than one hundred twenty days; (iii) a lender that is not a federally insured depository institution may not make a loan under the BILA “unless the loan is repayable in a minimum of four substantially equal installment payments of principal and interest”; and (iv) lenders, aside from federally insured depository institutions, may not make a loan with an annual percentage rate (APR) greater than 36 percent (a specified APR increase is permitted if the prime rate of interest exceeds 10 percent for three consecutive months). When calculating the APR, a lender must include finance charges as defined in Regulation Z “for any ancillary product or service sold or any fee charged in connection or concurrent with the extension of credit, any credit insurance premium or fee and any charge for single premium credit insurance or any fee related to insurance.” Excluded from the calculation are fees paid to public officials in connection with the extension of credit, including fees to record liens, and fees on a loan of $500 or less, provided the fee does not exceed five percent of the loan’s total principal and is not imposed on a borrower more than once in a twelve-month period.
The act also expands the SLA’s scope on existing anti-evasion provisions to specify that a person may not make small dollar loans in amounts of $10,000 or less without first having obtained a license from the director. The amendments also expand the scope of the anti-evasion provisions to include (i) the “making, offering, assisting or arranging a debtor to obtain a loan with a greater rate of interest . . . through any method, including mail, telephone, internet or any electronic means, regardless of whether the person has a physical location in the state”; and (ii) “a person purporting to act as an agent, service provider or in another capacity for another entity that is exempt from the [SLA]” provided the person meets certain specified criteria, such as “the person holds, acquires or maintains, directly or indirectly, the predominate economic interest in the loan” or “the totality of the circumstances indicate that the person and the transaction is structured to evade the requirements of the [SLA].” Under the act, a violation of a provision of the SLA that constitutes either an unfair or deceptive trade practice or an unconscionable trade practice is actionable under the Unfair Practices Act.
The act also makes various amendments to a licensees’ books and records requirements to facilitate the examinations and investigations conducted by the Director of the Financial Institutions Division of the Regulation and Licensing Department. Failure to comply may result in the suspension of a license. Additionally, the act provides numerous amended licensing reporting requirements concerning the loan products offered by a licensee, average repayment times, and “the number of borrowers who extended, renewed, refinanced or rolled over their loans prior to or at the same time as paying their loan balance in full, or took out a new loan within thirty days of repaying that loan,” among other things. The act also outlines credit reporting requirements, advertising restrictions, and requirements for the making and paying of small dollar loans, including specific limitations on charges after judgment and interest.
The act takes effect January 1, 2023.
On February 23, the CFPB released a factsheet on the interest rate that is used for calculating prepaid interest under the price-based General Qualified Mortgage (QM) annual percentage rate (APR) calculation rule for certain adjustable-rate mortgages (ARMs) and step-rate loans. As previously covered by InfoBytes, the Bureau issued the General QM Final Rule in December 2020, which amended Regulation Z and revised the definition of a General QM by eliminating the General QM loan definition’s 43 percent debt-to-income ratio limit and replacing it with bright-line price-based thresholds. The fact sheet, among other things, “describes the interest rate that is used for calculating prepaid interest for purposes of this special APR calculation rule.” Additionally, the fact sheet clarifies, by section, the interest rate used to calculate the APR under the General QM ARMs special rule and the interest rate used to calculate prepaid interest under the General QM ARMs special rule.
On February 8, the U.S. District Court for the Northern District of California granted cross-motions for summary judgment in favor of the OCC and FDIC (see here and here), upholding their respective rules which clarify that interest charges that are permissible when a loan is originated “shall not be affected by the sale, assignment, or other transfer of the loan.” The judgments resolve lawsuits brought by several state attorneys general in 2020, challenging both the OCC’s final rule on “Permissible Interest on Loans that are Sold, Assigned, or Otherwise Transferred” (known also as the valid-when-made rule) and the FDIC’s final rule which clarified that under the Federal Deposit Insurance Act (FDIA), whether interest on a loan is permissible is determined at the time the loan is made and is not affected by the sale, assignment, or other transfer of the loan.
In the OCC matter, the states’ argued that the agency’s valid-when-made rule (which effectively reversed the U.S. Court of Appeals for the Second Circuit’s 2015 Madden v. Midland Funding decision, and was covered by InfoBytes here) impermissibly preempts state law, is contrary to the plain language of section 85 (and section 1463(g)(1)), and contravenes the judgment of Congress, which declined to extend preemption to nonbanks. Moreover, the states contended that the OCC failed to give meaningful consideration to the commentary received regarding the rule, essentially enabling “‘rent-a-bank’ schemes.” The OCC countered that its rule does not preempt state law but rather “merely interprets” banks’ authority to charge interest. (Covered by InfoBytes here.) The court agreed with the OCC, holding that the OCC was interpreting the scope of 12 U.S.C. § 85, not determining whether to preempt state laws, and therefore was not required to follow the procedures set forth in 12 U.S.C. § 25b as the states alleged, including consulting with the CFPB. Applying the Chevron framework, the court upheld the OCC’s interpretations of the National Bank Act and Home Owners’ Loan Act. Acting Comptroller of the Currency Michael J. Hsu issued a statement following the decision, in which he emphasized that while the court’s order “affirmed the validity of the OCC’s rule,” the “legal certainty should be used to the benefit of consumers and not be abused.” He added that the agency “is committed to strong supervision that expands financial inclusion and ensures banks are not used as a vehicle for ‘rent-a-charter’ arrangements.”
In the FDIC matter, the states argued, among other things, that the FDIC did not have the power to issue the final rule under 12 U.S.C. § 1831d, and asserted that while the FDIC may issue “regulations to carry out” the provisions of the FDIA, it cannot issue regulations that would apply to nonbanks. The states also claimed that the rule’s extension of state law preemption would facilitate evasion of state law by enabling “rent-a-bank” schemes. The FDIC countered that the states’ arguments misconstrue the rule, which does not regulate nonbanks, does not interpret state law, and does not preempt state law. Rather, the FDIC argued that the rule clarifies the FDIA by “reasonably” filling in “two statutory gaps” surrounding banks’ interest rate authority. (Covered by InfoBytes here.) The court rejected the states’ argument that the FDIC exceeded its authority, and held that under Chevron, the agency’s interpretation of 12 U.S.C. § 1831d is not unreasonable. In upholding the FDIC’s interpretation, the court stated that the final rule “does not purport to regulate either the transferee’s conduct or any changes to the interest rate once a transaction is consummated.”
- Daniel R. Alonso discussed “The importance of the FCPA in the world and its current impact” at a ‘Competitive Breakfast’ event sponsored by the international compliance firm Intedya
- Jedd R. Bellman discussed “The CFPB’s crackdown on collection junk fees and the growing anti-CFPB rhetoric” at an Accounts Recovery webinar
- Buckley Webcast: State supervision, enforcement, and multistate coordination
- Benjamin W. Hutten to discuss “Latest on AML regulations and impact of economic sanctions” at a Mortgage Bankers Association webinar
- Hank Asbill to discuss “Ethical issues at sentencing” at the 31st Annual National Seminar on Federal Sentencing
- Benjamin W. Hutten to discuss “Fundamentals of financial crime compliance” at the Practicing Law Institute
- Benjamin W. Hutten to discuss “Ongoing CDD: Operational considerations” at NAFCU’s Regulatory Compliance & BSA Seminar