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PA AG settles with collector over payday loan scheme
On April 9, the Pennsylvania attorney general announced settlements with the former CEO of a since-dissolved lender and a debt collector to resolve claims that the collector charged borrowers interest rates as high as 448 percent on loans and lines of credit. The AG alleged that the former CEO “participated in, directed and controlled” business activities related to the allegedly illegal online payday lending scheme, while the debt collector collected more than $4 million related to Pennsylvania consumers’ loan accounts. The terms of the settlement require the individual defendant to comply with relevant consumer protection laws and limits the individual defendant’s ability to work in the consumer lending industry in Pennsylvania for the next nine years. Additionally, the individual defendant is required to pay the Commonwealth $3 million.
The AG’s office noted that the U.S. District Court for the Eastern District of Pennsylvania also approved a settlement with the debt collector, which requires the company to comply with relevant consumer protection laws and, among other things, undertake the following actions: (i) ensure that all acquired debts, for which it attempts to collect, comply with applicable laws and regulations; (ii) cancel all balances on applicable accounts, take no further action to collect debts allegedly owed by Pennsylvania consumers on these accounts, and notify consumers of the cancellations; (iii) “refrain from engaging in [c]ollections on any [d]ebts involving loans made over the internet by [n]on-bank lenders that violate Pennsylvania laws,” including its usury laws; and (iv) will not sell, re-sell, or assign debt related to applicable accounts, including accounts subject to a previously-negotiated nationwide class action settlement agreement and Chapter 11 bankruptcy plan. Previous InfoBytes coverage related to the payday lending scheme can be found here, here, and here.
Illinois enacts 36 percent rate cap for consumer loans, creates state community reinvestment act
On March 23, the Illinois Governor signed the Predatory Loan Prevention Act, SB 1792, which 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. For purposes of calculating the APR, the act requires lenders to use the system for calculating a military annual percentage rate under the Military Lending Act. 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.” Additionally, a violation constitutes a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, and carries a potential fine up to $10,000. The act also contains an anti-evasion provision that prohibits persons or entities from “making loans disguised as a personal property sale and leaseback transaction; disguising loan proceeds as a cash rebate for the pretextual installment sale of goods or services; or making, offering, assisting, or arranging a debtor to obtain a loan with a greater rate or interest, consideration, or charge than is permitted by this Act through any method including mail, telephone, internet, or any electronic means regardless of whether the person or entity has a physical location in the State.”
The same day, the governor also signed SB 1608, which, among other things, creates a state version of the Community Reinvestment Act. The act will allow the state to assess whether covered financial institutions, including state-chartered banks, credit unions and non-bank mortgage lenders, are meeting the needs of local communities, including low-income and moderate-income neighborhoods. Financial institutions’ lending practices and community development/redevelopment program investments will be examined by the Secretary of Financial and Professional Regulation, who is granted the authority to conduct examinations in compliance with other state and federal fair lending laws including, but not limited to, the Illinois Human Rights Act, ECOA, and HMDA.
Both acts are effective immediately.
Court grants injunctive relief against pension advance company
On February 22, the U.S. District Court for the District of South Carolina granted the CFPB’s motion for default judgment and appointment of receiver in an action alleging defendants violated the CFPA and TILA by falsely representing that their lump-sum pension advances were not loans and that they carried no applicable interest rate. As previously covered by InfoBytes, the Bureau filed a complaint against the defendants in 2018 claiming that consumers were actually required to pay back advances with interest and were charged various fees for the product. The Bureau also alleged, among other things, that the defendants failed to provide customers with TILA closed-end-credit disclosures, and provided income streams from the advance payments as 60- or 120-month cash flow payments to third-party investors, promising between 6 and 12 percent interest rates.
In its decision, the court upheld a magistrate judge’s report and recommendations, which concluded that the Bureau’s complaint sufficiently stated “a deception claim” under the CFPA, as well as violations of TILA and Regulation Z by the corporate defendants. The magistrate judge recommended that the court grant the Bureau “a permanent injunction to prevent future violations of the law,” redress and a civil money penalty awarded jointly and severally against the defendants, and appointment of a receiver. The court overruled various objections raised by the individual defendant’, including for failure to timely raise the objection before the magistrate judge, and because certain claims were without merit. Ultimately, the court granted the Bureau a default judgment against the defendants and adopted the report and recommendations of the magistrate judge for injunctive relief, consumer redress, a civil money penalty, and the appointment of a receiver.
OCC urges court to uphold valid-when-made rule
On January 14, the OCC moved for summary judgment in an action filed by the California, Illinois, and New York attorneys general (collectively, “states”) challenging the OCC’s valid-when-made rule, arguing that the challenge is without merit and that the agency “reasonably interprets the ‘gap’ in [12 U.S.C. § 85] concerning what happens when a national bank sells, assigns, or transfers a loan.” As previously covered by InfoBytes, the OCC’s final rule was designed to effectively reverse the Second Circuit’s 2015 Madden v. Midland Funding decision and provides 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.” The states challenged the rule, arguing that it 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 contend that the OCC “failed to give meaningful consideration” to the commentary received regarding the rule, essentially enabling “‘rent-a-bank’ schemes.”
In response, the OCC argued 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 agency asserts 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.” The final rule “addresses only the ‘substantive [ ] meaning’ of § 85” and Congress “expressly exempted OCC’s interpretations of § 85 from § 25b’s requirements.” Lastly, the OCC argued that it made an “informed and reasoned decision,” including addressing issues raised during the public comment period. Thus, the court should uphold the final rule and affirm summary judgment for the agency.
Illinois legislature passes 36 percent rate cap for all consumer loans
On January 13, the Illinois legislature unanimously passed the “Predatory Loan Prevention Act,” (available in House Amendment 3 to SB 1792), which would prohibit lenders from charging more than 36 percent APR on all consumer loans. Specifically, the legislation would apply to any non-commercial loan, including closed-end and open-end credit, retail installment sales contracts, and motor vehicle retail installment sales contracts. For calculation of the APR, the legislation would require lenders to use the system for calculating a military annual percentage rate under the Military Lending Act. Any loan made in excess of 36 percent APR would be considered null and void and no entity would have the “right to collect, attempt to collect, receive, or retain any principal, fee, interest, or charges related to the loan.” Additionally, each violation would be subject to a fine up to $10,000.
Nebraska voters approve initiative capping payday loan APRs at 36 percent
On November 3, according to reports, voters passed Nebraska Initiative 428, which proposed an amendment to Nebraska statutes to prohibit delayed deposit services licensees (otherwise known as payday lenders) from offering loans with annual percent rates (APRs) above 36 percent. Under the amendment, loans with APRs that exceed this cap will be deemed void, and lenders who make such loans will not be authorized to collect or retain fees, interest, principal, or any other associated charges. Specifically, Initiative 428 proposed removal of the existing limit that prohibited lenders from charging fees in excess of $15 per $100 loaned and replaced it with the 36 percent APR cap. It would additionally prohibit lenders from offering, arranging, or guaranteeing payday loans with interest rates exceeding 36 percent in Nebraska regardless of whether the lender has a physical location in the state.
FTC settles first consumer protection case against a VoIP service provider
On September 22, the FTC and the Ohio attorney general announced several proposed stipulated final orders against a Voice over Internet Protocol (VoIP) service provider, along with an affiliated company, the VoIP service provider’s former CEO and president, and a number of other subsidiaries and individuals, to settle allegations concerning their facilitation of a credit card interest rate reduction scheme. This marks the FTC’s first consumer protection case against a VoIP service provider. According to the FTC and the AG, the VoIP service provider provided one of the defendants with the ability to place illegal robocalls in order to market “phony credit card interest rate reduction services.” Both of these defendants were controlled by the VoIP service provider’s former CEO who was also named in the lawsuit. In addition, the defendant that placed the illegal calls, along with four additional defendants, are accused of managing the overseas call centers and other components used in the credit card interest rate reduction scheme.
One of the settlements will prohibit the former CEO, along with two corporations under his control, from (i) participating in any telemarketing in the U.S.; (ii) marketing any debt relief products or services; and (iii) making misrepresentations when selling or marketing any products or services. These defendants will collectively be subject to a $7.5 million judgment, which is mostly suspended due to their inability to pay.
The settlement with the VoIP service provider and the affiliated company will require a payment of $1.95 million. The VoIP service provider and its U.S.-based subsidiaries will also be prohibited from hiring the former CEO or any of his immediate family members, as well as from hiring two of the other defendants. These defendants will also be required to follow client screening and monitoring provisions, and are prohibited from providing VoIP and related services to clients who pay with stored value cards or cryptocurrency, or to clients who do not maintain public-facing websites or a social media presence. Additionally, the defendants will be required to block calls that may appear to come from certain suspicious phone numbers, block calls that use spoofing technology, and terminate certain high-risk relationships.
The settlements (see here, here, and here) reached with the defendant that placed the illegal calls and four additional defendants include prohibitions similar to those issued against the former CEO, and will require the payment of a total combined judgment of $10.3 million, which will be largely suspended due to their inability to pay.
All settlements are subject to court approval.
State AGs challenge FDIC’s “valid-when-made” rule
On August 20, eight state attorneys general—from California, Illinois, Massachusetts, Minnesota, New Jersey, New York, North Carolina, and the District of Columbia—filed an action in the U.S. District Court for the Northern District of California challenging 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 (details on the effect of the rule can be found in Buckley’s Special Alert on the issuance of the OCC’s similar rule).
In the complaint—which follows a similar action filed in July by three of the same attorneys general against the OCC for issuing a final rule designed to effectively reverse the Second Circuit’s 2015 Madden v. Midland Funding decision (previously covered here)—the attorneys general argue, among other things, that the FDIC does not have the power to issue the rule, asserting that the FDIC has the power to issue “‘regulations to carry out’ the provisions of the FDIA,” but not regulations that would apply to non-banks. Moreover, the attorneys general assert that the rule’s extension of state law preemption would “facilitate evasion of state law by enabling “rent-a-bank” schemes.” Finally, the complaint states 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, and thus that Madden is likely to have been beneficial rather than harmful.” The complaint requests the court to declare that the FDIC violated the Administrative Procedures Act in issuing the rule and hold the rule unlawful.
OCC approves bank to use host state interest rate for credit cards
Recently, the OCC released Interpretive Letter 1171, which concludes that an interstate national bank may charge interest on credit cards consistent with the law of the state where the non-ministerial function of loan approval for credit cards occurs. According to the letter, after merging with an affiliate bank in another state, the core of the bank’s credit card business is now conducted from a branch in a state different than the state where the bank is headquartered. The credit card business operations include: (i) development of the bank’s credit risk policy; (ii) decision-making about credit approval communication content; and (iii) establishment of individual transaction credit risk rules.
In the letter, the OCC notes that under an adopted framework interpreting 12 U.S.C. § 85 (known as “Section 85”), “an interstate national bank must or may elect to charge [interest] based on where a loan is ‘made.’” The letter states that “a loan is made where the three non-ministerial functions associated with making a loan occur”: (i) approving the loan; (ii) extending the credit; and (iii) disbursing the loan proceeds. Citing to Interpretive Letter 822, which was issued in March 1998, the OCC concluded that the bank may charge interest based on the law of the state where the affiliate bank is located if (i) “all three non-ministerial functions occur” in that state; or (ii) “at least one non-ministerial function occurs in [that state] and the bank’s credit card lending has a clear nexus to [that state].”
Upon review, the OCC determined that the bank’s non-ministerial function of loan approval occurs in the state where its affiliate bank was located, because all of the credit decisions are based on the bank’s credit risk policy which was established in that state. Additionally, the OCC reasoned that there is a “clear nexus” between the bank’s credit card operations and that state because the bank established several credit card lending activities that occur in that state. Thus, the OCC concluded the bank is authorized to charge interest on credit cards consistent with that state’s law.
District Court dismisses usury claim against New York lender
On August 12, the U.S. District Court for the Western District of New York dismissed usury claims against a lender, concluding that lenders licensed in New York can charge interest rates up to 25 percent on loans under $25,000. According to the opinion, a consumer received a check in the mail in the amount of $2,539 from a licensed lender under Article IX of New York Banking Law, with terms requiring repayment at an annual interest rate of 24.99 percent, if the consumer cashed the check. The consumer cashed the check, agreeing to the loan terms. After failing to repay the debt in full, the consumer filed a complaint against the lender asserting various claims, including that the interest rate is unenforceable under New York General Obligations Law (GOL) § 5-511 because it exceeds 16 percent. The lender moved to dismiss the action.
The court agreed with the lender on the usurious claim, concluding that as a licensed lender in New York, the lender is “authorized to extend loans of $25,000 or less with interest rates up to 25[percent]” which is “the limit set by New York’s criminal usury statute, New York Penal Law § 190.40.” The court cited to NYDFS interpretations, stating that unlicensed nonbank lenders may not charge more than a 16 percent annual interest rate, but lenders that “obtain an Article IX license [] may charge interest up to 25[percent] per annum on the small loans.” Because the lender was licensed under Article IX in the state of New York, the lender “was permitted to loan $2,539.00 to [the consumer] at an agreed-upon annual interest rate of 24.99[percent] without violating GOL § 5-511.”