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New York Seeks to Halt Online Payday Loans, Collections; Federal Agencies Issue Subpoenas
On August 6, the New York Department of Financial Services (DFS) sent letters to 35 online lenders, including lenders affiliated with Native American Tribes, demanding that they cease and desist offering allegedly illegal payday loans to New York borrowers. The letters demand that within 14 days the companies confirm that they are no longer soliciting or making payday loans in excess of the state usury caps. Under New York law, it is civil usury for a company to make a loan or forbearance under $250,000 with an interest rate exceeding 16% per year, and a criminal violation to make a loan with an interest rate exceeding 25% per year. The letters also remind recipients that it is illegal to collect on loans that exceed the usury cap; a separate letter to third-party debt collectors included the same notice. The DFS previously warned third-party debt collectors about collecting on illegal payday loans in March. In addition, the Department of Financial Services sent letters to 117 banks and NACHA requesting that they work with the DFS to create a set of model safeguard procedures to deny ACH access to the targeted lenders and provide the DFS with information about steps the institutions are taking to halt the allegedly illegal activity.
The role of banks in processing payday loan payments was identified as an enforcement priority earlier this year by the DOJ’s Financial Fraud Enforcement Task Force. The DOJ, the CFPB, and other federal agencies reportedly have issued subpoenas to banks and other entities as part of a broad investigation of online payday lending.
Georgia Attorney General Latest to Sue Tribe-Affiliated Online Payday Lender
On July 29, Georgia Attorney General (AG) Sam Olens announced a lawsuit against a payday lending operation affiliated with a Native American Tribe for allegedly making illegal loans in that state. The AG asserts that the state’s Pay Day Lending Act specifically prohibits the making of payday loans, including the making of payday loans to Georgia residents through the Internet. The AG alleges, based on an investigation conducted after receiving numerous consumer complaints, that (i) the payday lender makes high interest payday loans to Georgia consumers over the Internet despite not having a license to lend in that state, (ii) the lender has continued to electronically withdraw funds from consumers’ bank accounts even after the consumers have repaid the full amount of the principal on the loan, and (iii) the loan servicer has harassed consumers with repeated telephone calls, obscene and abusive language, threats of wage garnishment or other legal action. In his complaint, the AG rejects claims by the defendants that their lending activities are governed solely by tribal laws, stating that only Georgia law governs loan agreements with Georgia borrowers. According to the AG, efforts to resolve the issue without litigation were undermined by the defendants’ continuing illegal activity. The AG is seeking (i) to enjoin the operation from making or collecting on any loans, (ii) a declaration that any pending loans are null and void, and (iii) civil penalties and attorneys’ fees. Georgia is among several states, in addition to the FTC, to take action against this operation. For example, earlier this month Minnesota Attorney Lori Swanson filed suit a similar suit against the same operation targeted by the Georgia suit.
Senate Committee on Aging Scrutinizes Short-Term, Small Dollar Loans
On July 24, the Senate Special Committee on Aging held a hearing titled “Payday Loans: Short-term Solution or Long-term Problem?” that included discussion of several short-term, small-dollar credit products. Although the Committee’s jurisdiction is intended to cover policy issues related to older Americans, the hearing reviewed small dollar products more generally. Numerous Senators, including committee Chairman Sen. Bill Nelson (D-FL) and Sen. Elizabeth Warren (D-MA) scrutinized bank deposit advance products and, building off the CFPB’s testimony and earlier white paper, characterized them as payday loans that trap consumers in a cycle of debt. Sen. Nelson suggested that banks have an obligation to provide customers with alternatives and a range of options to meet their needs, while Sen. Donnelly (D-IN) and others repeatedly raised the concept of a 36% national usury cap. Committee members, with the help of a representative from Maine’s financial regulator, tried to build a record in support of federal legislation to address alleged practices of online lenders, including charges that such lenders often avoid state licensing requirements to circumvent state usury caps. Committee members and witnesses also discussed the role of banks in assuring debits from customer accounts are compliant with state law.
Virginia AG Sues Online Payday Lender to Enforce State Licensing Law
On July 18, Virginia Attorney General Ken Cuccinelli (AG) announced a lawsuit against an online lender for allegedly making illegal payday loans in the state. The AG explained that the Virginia State Corporation Commission requires every payday loan lender to obtain a license before conducting business in Virginia. The AG asserts that the lender did not obtain the required license. State law limits unlicensed lenders to charging no more 12% in annual interest on a loan. The AG alleges that the rates on the online lender’s loans range from 438% annually for a 25-day loan to 1,369% annually for an eight-day loan. The AG stated that the company instructs customers to apply for loans through its website, and after the loan applications are approved, the company wires funds directly to the consumers' bank accounts in exchange for authorizing the company to directly debit loan payments from the customers’ bank accounts. The suit seeks to enjoin the company from collecting interest over the 12% state limit, and seeks consumer reimbursement of certain interest paid and civil penalties in the amount of $2,500 for each violation.
Magistrate Judge Finds Tribal Payday Lender Subject to FTC Act; Lender Agrees to Settle Some FTC Charges
On July 22, the FTC announced that it obtained a partial settlement of claims it filed last year against a Native American Tribe-affiliated payday lending operation that allegedly charged undisclosed and inflated fees, and collected on loans illegally by threatening borrowers with arrest and lawsuits. FTC v. AMG Servs, Inc. No. 12-536 (D. Nev.). The agreement does not include any monetary resolution of the claims, but (i) prohibits the defendants from certain collection practices, (ii) prohibits the defendants from conditioning the extension of credit on preauthorized electronic fund transfers, and (iii) requires the defendants to implement enhanced compliance policies that are subject to new reporting requirements. The settlement follows a report and recommendation issued last week by the magistrate judge assigned to the case in which he concluded that the FTC has authority under the FTC Act to regulate “Indian Tribes, Arms of Indian Tribes, employees of Arms of Indian Tribes and contractors of Arms of Indian Tribes” with regard to the payday lending activities at issue in the case. Relying on Ninth Circuit precedent, the magistrate judge held that while the FTC Act does not expressly apply to Indian Tribes, it is a statute of general applicability with reach sufficient to cover the Tribal entities. Further, the magistrate judge concluded that “both TILA and EFTA provide the FTC the power to enforce the statutes without regard for any jurisdictional limitations contained in the FTC Act.” The FTC will continue litigating other charges against the defendants, including allegations that they deceived consumers about the cost of their loans by charging undisclosed charges and inflated fees.
Florida District Court Orders Disgorgement of Profits from Unfair, Deceptive Online Payday Loan Referral Practices
On July 18, the U.S. District Court for the Middle District of Florida held that an online payday loan referral business engaged in unfair and deceptive billing practices and failed to provide adequate disclosures to its customers. FTC v. Direct Benefits Group, LLC, No. 11-1186, 2013 WL 3771322 (M.D. Fla. Jul. 18, 2013). The FTC alleged that the defendants violated the FTC Act by obtaining consumers’ bank account information through payday loan referral websites and debiting their accounts without their consent. The FTC also alleged that the defendants failed to adequately disclose that, in addition to using consumers’ financial information for a payday loan application, they would use it to charge them for enrollments in unrelated programs and services. During a bench trial, the parties presented evidence and arguments regarding the content and operation of the websites and whether consumers could enroll in the referral programs without taking affirmative steps to do so. The court agreed with the FTC’s claims that the defendants’ practices were deceptive and held that the “pop-up box” used to enroll consumers in the programs at issue was misleading. The court explained that the defendants’ website and the online payday loan application form created the overall impression that they were intended for applying for payday loans and that the bank account information that applicants were asked to enter would be used for deposit of the payday loan—not so that the account could or would be debited for the purchase of an unrelated product or service. Further, the court held that the defendants’ disclosures were not clear and conspicuous under the principles included in the FTC’s “.com disclosures guidance.” The court also held that the FTC established that the billing practices were unfair, and ordered the defendants to disgorge over $9.5 million and permanently cease the practices at issue.
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