Skip to main content
Menu Icon
Close

InfoBytes Blog

Financial Services Law Insights and Observations

Filter

Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.

  • CFPB sues pawn lenders for MLA violations

    Federal Issues

    On November 12, the CFPB filed a complaint against a Texas-based pawn lender and its wholly owned subsidiary (together, “lenders”) for allegedly violating the Military Lending Act (MLA) by charging active-duty servicemembers and their dependents more than the allowable 36 percent annual percentage rate on pawn loans. According to the Bureau, between June 2017 and May 2021, the two lenders together allegedly made more than 3,600 pawn loans carrying APRs that “frequently exceeded” 200 percent to more than 1,000 covered borrowers. The Bureau further claimed that the lenders failed to make all loan disclosures required by the MLA and forced borrowers to waive their ability to sue. The identified 3,600 pawn loans only represent a limited period for which the Bureau has transactional data, the complaint stated, adding that the pawn stores located in Arizona, Nevada, Utah, and Washington that originated these loans only comprise roughly 10 percent of the Texas lender’s nationwide pawn-loan transactions. As such, that Bureau alleged that the lenders—together with their other wholly owned subsidiaries—made additional pawn loans in violation of the MLA from stores in these and other states. The Bureau seeks injunctive relief, consumer restitution, disgorgement, civil money penalties, and other relief, including a court order enjoining the lenders from collecting on the allegedly illegal loans and from selling or assigning such debts.

    As previously covered by InfoBytes, the Bureau issued a prior consent order against an affiliated lender in 2013, which required the payment of $14 million in consumer redress and a $5 million civil money penalty. The affiliated lender was also ordered to cease its MLA violations. In its current action, the Bureau noted that because the Texas lender (who was not identified in the 2013 action) is a successor to the prior affiliated lender, it is therefore subject to the 2013 order. Accordingly, the Bureau alleged that the Texas lender’s violations of the MLA also violated the 2013 order.

    Federal Issues CFPB Enforcement Military Lending Military Lending Act Consumer Finance Interest Rate APR Nonbank CFPA Servicemembers

  • OCC issues semi-annual Interest Rate Risk Statistics Report

    Federal Issues

    On October 20, the OCC published the fall 2021 edition of the Interest Rate Risk Statistics Report. The report presents interest rate risk data gathered during examinations of OCC-supervised midsize and community banks and federal savings associations with reported data by asset size, charter type, and minority depository institutions. The OCC’s supervisory process for the fall 2021 report reviewed banks’ reported data from September 30, 2019 to June 30, 2021, including exposures, risk limits, and non-maturity deposit assumptions. The OCC notes that the statistics presented within the report “are for informational purposes only and do not represent OCC-suggested limits or exposures.”

    Federal Issues OCC Interest Rate Risk Management Bank Regulatory

  • District Court allows usury claims to proceed, says class action waivers do not bar certification

    Courts

    On October 14, the U.S. District Court for the Eastern District of Virginia granted class certification in an action alleging a payday lending operation violated RICO and Virginia’s usury law by partnering with federally-recognized tribes to issue loans with allegedly usurious interest rates. The plaintiffs alleged that the defendants (“founders, funders, [or] closely held owners of [a lender] that serviced the high-interest loans made by certain tribal lending entities”) participated in a lending scheme to circumvent state usury laws. The plaintiffs seek declaratory and injunctive relief, damages, and attorney’s fees and costs arising from claims alleging that the defendants, among other things: (i) used income derived from the collection of unlawful debt to further assist the operations of the enterprise; (ii) participated in an enterprise involving the unlawful collection of debt; (iii) collected unlawful debt; (iv) entered into unlawful agreements; (v) issued unlawful loans with interest rates exceeding 12 percent; and (vi) were thus unjustly enriched. The court granted class certification after finding that the existence of a class action waiver in loan agreements between plaintiffs and tribal lenders did not bar class certification. The court explained that “[b]ecause the class action waivers exist to ‘make unavailable to the borrowers the effective vindication of federal statutory protections and remedies,’ the prospective waiver doctrine applies.” The waivers were thus unenforceable.

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

  • CFPB examines subprime auto loans

    Federal Issues

    On September 30, the CFPB released a Data Point report, titled Subprime Auto Loan Outcomes by Lender Type, which examines interest rate and default risk trends across different types of subprime lenders, including how much of the variation of interest rates charged among subprime lenders can be explained by differences in default rates and how much is left to be explained. The report found notable average differences across lender types in the borrowers they serve and the types of vehicles they finance. Banks and credit unions offering subprime auto loans typically lend to borrowers with higher credit scores compared to finance companies and buy-here-pay-here dealerships, the report noted, adding that different lenders also charge very different interest rates on average. According to the report’s sample, a bank’s average subprime loan interest rate is approximately 10 percent, compared to 15 to 20 percent at finance companies and buy-here-pay-here dealerships. The report found that higher default rates were found at lenders that charged higher interest rates, and that “the likelihood of a subprime auto loan becoming at least 60 days delinquent within three years is approximately 15 percent for bank borrowers and between 25 percent and 40 percent for finance company and buy-here-pay-here borrowers.”

    However, the report presented statistical analysis that called into question whether differences in default rates fully explained the average differences in interest rates across subprime lender types. As an example, an average borrower with a 560 credit score or higher would have the same default risk whether the borrower obtained a loan from a bank or a small buy-here-pay-here lender, but the estimated interest rate would be nine percent with a bank loan versus 13 percent from a small buy-here-pay-here lender. The report noted that there are other variables, not observed in the data collected, that may explain differences in interest rates charged by different types of auto lenders, such as down payments, vehicle values, variations in borrowers’ access to information, borrowers’ financial sophistication, and variations within lenders’ business practices and incentives.

    Federal Issues CFPB Auto Finance Subprime Credit Scores Consumer Finance Interest Rate

  • District Court: Maryland escrow law does not confer private right of action

    Courts

    On September 22, the U.S. District Court for the District of Maryland granted a national bank’s motion for summary judgment in an action claiming the bank allegedly failed to pay interest on mortgage escrow accounts. The plaintiff filed a putative class action asserting various claims including for violation of Section 12-109 of the Maryland Consumer Protection Act (MCPA), which requires lenders to pay interest on funds maintained in escrow on behalf of borrowers. In response, the bank filed a motion to dismiss on the basis that the MCPA is preempted by the National Bank Act and by 2004 OCC preemption regulations. In 2020, the court denied the bank’s motion to dismiss after it determined, among other things, that under Dodd-Frank, national banks are required to pay interest on escrow accounts when mandated by applicable state or federal law. (Covered by InfoBytes here.) Citing previous decisions in similar escrow interest cases brought against the same bank in other states (covered by InfoBytes here and here), the court stated that Section 12-109 “does not prevent or significantly interfere with [the bank’s] exercise of its federal banking authority, because [Section] 12-109’s ‘interference’ is minimal, when compared with statutes that the Supreme Court has previously found were preempted.” The court further noted that state law—which “still allows [the bank] to require escrow accounts for its borrowers”—provides that the bank must pay a small amount of interest to borrowers if it chooses to maintain escrow accounts.

    However, in its most recent ruling, the court held that the MCPA does not authorize the plaintiff to sue either. “[T]his court finds that § 12-109 does not confer a private right of action,” the court wrote, adding that the plaintiff’s breach of contract claim could not get around a notice-and-cure provision in her mortgage agreement that she had not complied with before suing. The plaintiff argued that these requirements did not apply because “her self-styled breach of contract claim is actually a statutory claim because the allegedly breached contractual provision is one which pledges general adherence to applicable law.” The court disagreed, stating that under the plaintiff’s theory “any claim for breach of contract, which also violated a federal or state law, would be vaulted to a privileged hybrid status. Such claims would enjoy an unlimited private right of action (regardless of whether the underlying statute created one) and. . .would be unbounded by any of the provisions or conditions precedent detailed in the contract itself.” The court also ruled that the plaintiff’s escrow statements, which “correctly reflected that her account was not accruing interest,” are themselves “not rendered deceptive by the mere fact that Plaintiff believes such interest is owed.”

    Courts State Issues Escrow Mortgages Class Action Dodd-Frank National Bank Act Interest Rate Consumer Finance

  • District Court: Arbitration provision is severable from a voided loan contract

    Courts

    On September 16, the U.S. District Court for the Southern District of Alabama granted a defendant tribal payday lender’s motion to dismiss and compel arbitration, ruling that an arbitration agreement in a loan contract is still valid even if an arbitration panel found the contracts were void. The plaintiff initiated an arbitration proceeding against the defendant alleging that payday loan contracts carrying interest rates between 200 and 830 percent were void because the defendant was not licensed under the Alabama Small Loans Act to extend such loans. An American Arbitration Association panel determined, among other things, that the defendant had waived any tribal sovereign immunity, “the transactions involved off-reservation commercial activities to which sovereign immunity does not apply,” and that the loans were entirely void because each of the loans was extended without a license. The plaintiff filed suit in state court to confirm the arbitration award and pursue a class action on the premise that the loans are usurious and should be declared void. The defendant removed the case to federal court and asked the court to dismiss the proposed class action and compel arbitration. The district court agreed with the defendant that the arbitration agreement in the voided loan contract remained binding despite the arbitrator’s earlier determination in the plaintiff’s favor. Specifically, the court disagreed with the plaintiff’s argument that the arbitrator’s determination meant that “no aspect of the contact survives,” stating that the plaintiff “overlooks a central tenet in binding precedential arbitration law: severability.” According to the court, “‘[a]s a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract.’”

    Courts Arbitration Tribal Lending Usury Payday Lending Class Action State Issues Interest Rate

  • 9th Circuit says tribal lenders can arbitrate RICO class claims

    Courts

    On September 16, a split U.S. Court of Appeals for the Ninth Circuit 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 appellate court’s decision reversed a district court’s ruling that an arbitration agreement entered between tribal lenders and borrowers was unenforceable because it impermissibly waived borrowers’ rights to pursue federal statutory claims. As previously covered by InfoBytes, in April the U.S. District Court for the Northern District of California granted class certification to residents who received loans from an online lender, allowing them to pursue class Racketeer Influenced and Corrupt Organizations Act (RICO) claims based on allegations they were charged interest rates that exceeded state limits for lenders claiming tribal immunity. The class of borrowers include California residents who collected loans from an Oklahoma-based tribe, and California residents who received loans from a Montana-based tribe. The district court also ruled that the entire arbitration agreement, including provisions containing a class action waiver, was unenforceable. The lenders appealed.

    On appeal, the 9th Circuit 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. “We do not dispute that [b]orrowers have a reasonable argument that the arbitration agreement as written precludes them from asserting their RICO claims or other federal claims in arbitration. . . . And if that is true, the arbitration agreement is likely unenforceable as a prospective waiver,” the majority wrote. “But, when 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 added.

    The 9th Circuit’s opinion differs from decisions issued by other appellate courts, which found that certain delegation provisions were unenforceable for various reasons after reviewing whether an arbitration agreement as a whole was unenforceable due to prospective waiver of federal claims. (See InfoBytes coverage of the 3rd and 4th Circuit decisions here and here.) The majority stated that the other appellate courts “considered the wrong thing by ‘confus[ing] the question of who decides arbitrability with the separate question of who prevails on arbitrability.’” According to the majority, “[t]he proper question is not whether the entire arbitration agreement constitutes a prospective waiver, but whether the antecedent agreement delegating resolution of that question to the arbitrator constitutes prospective waiver.”

    Courts Arbitration Tribal Lending RICO Interest Rate Usury Ninth Circuit Appellate

  • Massachusetts announces $27 million settlement with auto lender

    State Issues

    On September 1, the Massachusetts attorney general announced “the largest settlement of its kind” with a Michigan-based auto finance company (defendant) resolving allegations of predatory lending and deceptive debt collection practices. The defendant allegedly made high-interest subprime auto loans that it knew or should have known that many borrowers would be unable to repay. The assurance of discontinuance states that some of the company’s borrowers were subject to hidden finance charges, which resulted in violations of Massachusetts’s 21 percent usury cap. The defendant also allegedly “failed to inform investors that it topped off securitization loan pools with higher-risk loans.” Under the terms of the settlement, the defendant must pay a total of $27.2 million and provide debt relief and credit repair to over 3,000 borrowers across the state who are expected to be eligible for settlement funds. The settlement also requires that the defendant make changes to its loan handling practices. According to the AG, this action “is part of her Office’s ongoing industry-wide review of securitization practices in the subprime auto loan market.”

    State Issues Massachusetts Auto Finance Interest Rate

  • OCC cites preemption decision in valid-when-made rule challenge

    Courts

    On August 24, the OCC filed a statement of recent decision in support of its motion for summary judgment in an action brought against the agency by several state attorneys general challenging 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). The final rule was designed to effectively reverse the U.S. Court of Appeals for the Second Circuit’s 2015 Madden v. Midland Funding decision and provide that “[i]nterest on a loan that is permissible under [12 U.S.C. § 85 for national bank or 12 U.S.C. § 1463(g)(1) for federal thrifts] shall not be affected by the sale, assignment, or other transfer of the loan.” (Covered by a Buckley Special Alert.) The states’ challenge argued that the rule “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 non-banks. 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.” (Covered by InfoBytes here.) Both parties sought summary judgment, with the OCC arguing that the final rule validly interprets the National Bank Act (NBA) and that not only does the final rule reasonably interpret the “gap” in section 85, it is consistent with section 85’s “purpose of facilitating national banks’ ability to operate their nationwide lending programs.” Moreover, the OCC asserted that 12 U.S.C. § 25b’s preemption standards do not apply to the final rule, because, among other things, the OCC “has not concluded that a state consumer financial law is being preempted.” (Covered by InfoBytes here.)

    In its August 24 filing, the OCC brought to the court’s attention a recent order issued by the U.S. District Court for the Western District of Wisconsin. As previously covered by InfoBytes, the Wisconsin court reviewed claims under the FDCPA and the Wisconsin Consumer Act (WCA) against a debt-purchasing company and a law firm hired by the company to recover outstanding debt and purported late fees on the plaintiff’s account in a separate state-court action. Among other things, the court examined whether the state law’s notice and right-to-cure provisions were federally preempted by the NBA, as the original creditor’s rights and duties were assigned to the debt-purchasing company when the account was sold. The court ultimately concluded that the WCA provisions “are inapplicable to national banks by reason of federal preemption,” and, as such, the court found “that a debt collector assigned a debt from a national bank is likewise exempt from those requirements” and was not required to send the plaintiff a right-to-cure letter “as a precondition to accelerating his debt or filing suit against him.”

    Courts State Issues OCC State Attorney General Valid When Made Interest Rate Consumer Finance National Bank Act Madden Preemption Fintech Nonbank Agency Rule-Making & Guidance Bank Regulatory

  • Virginia announces consent judgment against investment firm

    State Issues

    On August 24, the Virginia attorney general announced a consent judgment entered on August 16 against a Virginia-based investment company and its managing member (collectively, "defendants") to resolve allegations that they violated Virginia’s consumer finance statutes. The consent judgment settled a lawsuit in which the AG alleged that defendants “made loans to distressed homeowners and charged interest or other compensation greatly exceeding an effective annual interest rate of 12 percent, without being licensed as a consumer finance company or coming within another exemption to Virginia’s usury laws.” According to the AG, the complaint alleged that a representative of the defendant investment company approached a Virginia Beach homeowner facing foreclosure and presented her with an agreement in which the defendants would provide the amount needed to stop the foreclosure in exchange for permission to list and sell the homeowner’s separate Virginia Beach property at an above-market commission rate or, if the sale did not occur, to purchase that property at a significantly below market price. Under the terms of the consent judgment, the defendants, among other things are: (i) permanently enjoined from violating specific consumer finance statutes, including by “making any loan requiring a collateral sale and/or purchase to Virginia consumers”; (ii) required to pay $11,000 in attorneys’ fees and costs; and (iii) required to provide certain restitution and/or forbearance relief to consumers identified by the defendants pursuant to the consent judgment as well as “to any Virginia consumer who comes forward within two (2) years after entry of the Consent Judgment with evidence establishing that he or she received a loan requiring a collateral sale and/or purchase from [defendants]” during the period from January 1, 2018 to the present.

    State Issues State Attorney General Enforcement Usury Licensing Consumer Finance Interest Rate

Pages

Upcoming Events