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OCC cites preemption decision in valid-when-made rule challenge
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.”
Virginia announces consent judgment against investment firm
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.
Maryland affirms penalties of over $3 million against auto lender
On August 11, the Maryland attorney general announced that a circuit court in Maryland affirmed that an auto-lending company’s transactions were illegal loans, not pawn transactions, and upheld the Consumer Protection Division’s imposition of $2.2 million in restitution and a $1.2 million penalty. In its press release, the AG alleged that the company “made predatory loans at outrageous interest rates, illegally repossessed cars, and preyed on Maryland consumers,” in violation of the Maryland Consumer Loan Law, the Maryland Interest and Usury Law, and the Installment Loan-Licensing Provision. According to the memorandum of the court, the loans issued by the company were not considered to be title pawn transactions, but were instead illegal consumer loans which “violated the consumer protection statutes as respondents were not licensed to make loans in Maryland, failed to make the required disclosures to the consumer, engaged in unfair trade practices, exceeded the statutory interest rate caps, took unpermitted security interests for loans of less than $700.00 and engaged in illegal repossession activities.”
District Court certifies “rent-a-tribe” class action
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.”
District Court allows usury claims to proceed, calling tribal immunity “irrelevant”
On July 13, the U.S. District Court for the Northern District of California denied defendants’ motion for summary judgment in a consolidated class action concerning whether a now-defunct online lender can use tribal immunity to circumvent state interest rate caps. The plaintiffs took out short-term loans carrying allegedly usurious interest rates from entities run through several federally recognized tribes. While the defendants attempted to rely on tribal immunity as a defense, the court determined that California law applies to the plaintiffs and class members who took out loans in the state. According to the court, “California, with its strong history of prohibiting usury, has the materially greater interest in enforcing its usury laws and protecting its consumers from usurious conduct than either of the relevant [t]ribal [e]ntities whose connection to the loans—while not insignificant—was temporal and whose aims were to avoid state usury laws.” Calling tribal immunity “irrelevant,” the court added that the “claims here hinge on the personal conduct of the defendants. While that conduct is based in significant part on the services defendants personally engaged in or approved to be provided to the [t]ribes, the claims do not impede on the sovereignty of the [t]ribes where the [t]ribes are not defendants in this case and no [t]ribal [e]ntities remain.”
FHFA expands use of interest rate reduction
On June 30, FHFA announced changes to loan modification terms for borrowers impacted by the Covid-19 pandemic with mortgages backed by Fannie Mae or Freddie Mac who need payment reduction. According to FHFA, flex modification terms will be adjusted for Covid-19 hardships, which will make “interest rate reduction possible for eligible borrowers, regardless of the borrower’s loan-to-value ratio.” Previously, only borrowers with mark-to-market loan-to-value ratios (which compare the balance remaining on a mortgage to the current market value of a home) greater than or equal to 80 percent were eligible for an interest rate reduction. FHFA acting Director Sandra L. Thompson noted that more families qualifying for interest rate reduction will “prevent unnecessary foreclosures, help strengthen the Enterprises’ books of business, and make sustainable homeownership a reality for more families currently living with the uncertainty of forbearance.”
State AGs argue FDIC’s “valid-when-made rule” violates APA
On June 17, eight state attorneys general (from California, Illinois, Massachusetts, Minnesota, New Jersey, New York, North Carolina, and the District of Columbia) filed an opposition to the FDIC’s motion for summary judgment and reply in support of their motion for summary judgment in a lawsuit challenging the FDIC’s “valid-when-made rule.” As previously covered by InfoBytes, last August the AGs 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 in May (covered by InfoBytes here) that the AGs’ arguments “misconstrue” the rule, which “does not regulate non-banks, 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.
In response, the AGs argued 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 § 1831d to preempt state rate caps as to non-bank loan buyers of FDIC Bank loans.” Additionally, the AGs challenged the FDIC’s claim that its Provision “does not implicate rent-a-bank schemes or the true lender doctrine because the Provision only applies ‘if a bank actually made the loan,’” emphasizing that the FDIC’s “mere statement that it does not condone rent-a-bank schemes” is insufficient and that “choosing to not address true-lender issues is an insufficient response to comments that the Provision creates significant uncertainty about those issues.” Moreover, the AGs claimed that the Provision is “arbitrary and capricious” and fails to meaningfully address valid concerns and criticisms raised by commenters, and that the rule constitutes “in substance if not form, a reversal of the FDIC’s previous stance” that the FDIC is “obligated to acknowledge and explain.”
Illinois regulator proposes implementation of Predatory Loan Prevention Act
Last month, the Illinois Department of Financial and Professional Regulation (IDFPR) published proposed regulations in the state register to implement the Illinois Predatory Loan Prevention Act (Act). As previously covered by InfoBytes, the Act was signed into law in March and prohibits 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 “and 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 IDFPR’s notice of proposed rules provides definitions and loan terms, including (i) general conditions; (ii) limits on the cost of a loan; (iii) how to calculate and compute the APR for the purposes of the Act; (iv) how to determine bona fide fees charged on credit card accounts, including outlining ineligible items, providing standards for assessing whether a bona fide fee is reasonable, and specifying bona fide fee safe harbors and “[i]ndicia of reasonableness for a participation fee”; and (iii) the effect of charging fees on bona fide fees.
Additionally, the IDFPR proposes several amendments related to rate cap disclosure notices. These specify that (i) 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); (ii) lenders must “prominently display” a rate cap disclosure in both English and Spanish in any physical location and on all websites, mobile device applications, or any other electronic mediums owned or maintained by the lender; and (iii) lenders must disclose the rate cap in any written loan solicitations or advertisements.
FDIC counters states’ challenge to “valid-when made” rule
On May 20, the FDIC filed a motion for summary judgment in response to a challenge brought by eight state attorneys general to the FDIC’s valid-when-made rule. As previously covered by InfoBytes, the FDIC’s final rule clarifies 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. The AGs filed a lawsuit last year (covered by InfoBytes here) arguing, among other things, that the FDIC does not have the power to issue the rule, and asserting that while the FDIC has the power to issue “‘regulations to carry out’ the provisions of the FDIA,” it cannot issue regulations that would apply to nonbanks. 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 FDIC countered that the AGs’ arguments “misconstrue” the rule, which “does not regulate non-banks, 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. “The rule, which enjoys widespread support from the banking industry, represents a reasonable interpretation of [the FDIA], and should be upheld under Chevron’s familiar two-step framework,” the FDIC stated. Moreover, the FDIC contended, among other things, that the rule is appropriate because the FDIA does not address at what point in time the validity of a loan’s interest rate should be determined and is “silent” about what effect a loan’s transfer has on the validity of the interest rate. The FDIC also challenged the AGs’ argument that it is improperly trying to regulate non-banks, pointing out that the rule “regulates the conduct and rights of banks when they sell, assign, or transfer loans” and that “any indirect effects the rule has on non-banks do[es] not place the rule outside the agency’s authority.”
Connecticut Supreme Court says lender protected by tribal sovereign immunity
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.