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On September 8, the CFPB filed a complaint against a California-based online lender (defendant) for allegedly violating the terms of a 2016 consent order related to false claims about their lending program. As previously covered by InfoBytes, the 2016 consent order alleged the defendant engaged in deceptive practices by misrepresenting, among other things, the fees charged, the loan products that were available to consumers, and whether the loans would be reported to credit reporting companies in violation of the CFPA, TILA, and Regulation Z. According to the September 8 complaint, filed in the U.S. District Court for the Northern District of California, the defendants continued with much of the same illegal and deceptive marketing that was prohibited by the 2016 consent order. Among other things, the complaint alleges that the defendants violated the terms of the consent order and various laws by: (i) deceiving consumers regarding the benefits of repeat borrowing; and (ii) failing to provide timely and accurate adverse-action notices. The Bureau seeks injunctive relief, damages, consumer restitution, disgorgement, and civil money penalties. In addition, the Bureau asks the court to permanently enjoin the defendants from committing future violations of the CFPA, the Bureau’s 2016 Consent Order, ECOA, or any provision of “Federal consumer financial law.”
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.”
On July 9, the U.S. District Court for the Eastern District of Virginia granted final approval of a revised class action settlement, certifying the settlement class, approving the settlement terms, and entering final judgment regarding allegations that an operation used tribal sovereign immunity to evade state usury laws when charging unlawful interest on loans. As previously covered by InfoBytes, in March, the plaintiffs filed a class action complaint against the operation alleging, among other things, violations of the Racketeer Influenced and Corrupt Organizations Act, EFTA, and TILA. The settlement cancels roughly 71,000 loans, requires the operation to pay $86 million in damages, and caps fees at $15 million. According to the final approval, the court finds the revised settlement to be “fair, reasonable, and adequate.”
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.
On April 23, 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 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 before June 2016. The district court held that the proposed class met the requirements for certification, including that the borrowers brought a common, predominant claim, and found that data from a separate settlement, which contained defendant’s consumer-level account information, could be used to establish damages. Although the defendants highlighted an error in the data regarding a plaintiff's residency, the court held that such an error was not substantial enough to undermine the entire data set, because “[d]espite the error … [the] consumer-level data for each transaction provides a fair basis for identifying the scope of the class and aggregate damages for the California class.”
On April 7, the U.S. District Court for the Eastern District of Virginia preliminarily approved a revised class action settlement concerning allegations that an operation used tribal sovereign immunity to evade state usury laws when charging unlawful interest on loans. The plaintiffs filed a class action complaint against the operation alleging, among other things, violations of the Racketeer Influenced and Corrupt Organizations Act, EFTA, and TILA. The preliminarily-approved revised settlement would cancel approximately 71,000 class member loans, including a group of loans sold by the operation to another investor. It would also require the operation to pay $86 million, including an additional $21 million payment from the individual defendant, and cap attorneys’ fees for class counsel at $15 million. The operation would also be required to comply with several non-monetary provisions, including (i) requesting that negative credit reporting information concerning the loans be deleted; and (ii) ensuring that key loan terms, including interest rates and payment schedules to borrowers, are disclosed in loan agreements in compliance with federal law.
On March 9, the CFPB denied a request made by a Delaware online payday lender and its CEO (collectively, “respondents”) to stay a January 2021 final decision and order requiring the payment of approximately $51 million in restitution and civil money penalties, pending appellate review. As previously covered by InfoBytes, in 2015, the Bureau filed a notice of charges alleging the respondents (i) continued to debit borrowers’ accounts using remotely created checks after consumers revoked the lender’s authorization to do so; (ii) required consumers to repay loans via pre-authorized electronic fund transfers; and (iii) deceived consumers about the cost of short-term loans by providing them with contracts that contained disclosures based on repaying the loan in one payment, while the default terms called for multiple rollovers and additional finance charges. Former Director Kathy Kraninger issued the final decision and order in January, affirming an administrative law judge’s recommendation that the respondents’ actions violated TILA, EFTA, and the CFPA’s prohibition on unfair or deceptive acts or practices by, among other things, deceiving consumers about the costs of their online short-term loans.
The Bureau’s March 9 administrative order determined that respondents (i) failed to show they have a substantial case on the merits with respect to their argument regarding ratification as an appropriate remedy for the respondents’ alleged constitutional violation; (ii) failed to show they “suffered irreparable harm” because the Bureau’s final decision does not infringe on the respondents’ constitutional rights and merely requires them to pay money into an escrow account; and (iii) failed to demonstrate that staying the final decision would not harm other parties and the public interest because the respondents might “dissipate assets during the pendency of further proceedings,” potentially impacting future consumer redress. The administrative order, however, granted a 30-day stay to allow respondents to seek a stay from the U.S. Court of Appeals for the Tenth Circuit.
On January 19, the CFPB announced a settlement with a California-based online lender resolving allegations that the company violated the Military Lending Act (MLA) when making installment loans. This settlement is part of “the Bureau’s broader sweep of investigations of multiple lenders that may be violating the MLA,” which provides protections connected to extensions of consumer credit for active-duty servicemembers and their dependents. As previously covered by InfoBytes, last month the Bureau filed a complaint in the U.S. District Court for the Northern District of California alleging that since October 2016 the lender, among other things, made more than 4,000 single-payment or installment loans to over 1,200 covered borrowers in violation of the MLA. These violations included (i) extending loans with Military Annual Percentage Rates (MAPR) exceeding the MLA’s 36 percent cap; (ii) requiring borrowers to submit to arbitration in loan agreements; and (iii) failing to make certain required loan disclosures, including a statement of the applicable MAPR, before or at the time of the transaction.
Under the terms of the settlement, the company is required to pay $300,000 in consumer redress and pay a $950,000 civil money penalty. The company is also be prohibited from committing future MLA violations and from “collecting on, selling, or assigning any debts arising from Void Loans.” Furthermore, the company is required to submit a compliance plan to ensure its extension of consumer credit complies with the MLA. This plan must include, among other things, a process for correcting information furnished to credit reporting agencies about affected consumers.
On December 4, the CFPB announced it filed a complaint in the U.S. District Court for the Northern District of California against a California-based online lender alleging violations of the Military Lending Act (MLA). According to the CFPB, the “action is part of a broader Bureau sweep of investigations of multiple lenders that may be violating the MLA,” which provides protections connected to extensions of consumer credit for active-duty servicemembers and their dependents. The complaint alleges that since October 2016 the lender, among other things, made more than 4,000 single-payment or installment loans to over 1,200 covered borrowers in violation of the MLA. Specifically, the Bureau claims that these violations include (i) extending loans with Military Annual Percentage Rates (MAPR) exceeding the MLA’s 36 percent cap; (ii) requiring borrowers to submit to arbitration in loan agreements; and (iii) failing to make certain required loan disclosures, including a statement of the applicable MAPR, before or at the time of the transaction. The complaint seeks an injunction against the lender that would require the lender to “correct inaccurate information furnished to consumer reporting agencies concerning loans that were void ab initio,” and would prohibit it from collecting on those loans and require it to rescind the credit agreements on those loans. The complaint also seeks damages, redress, disgorgement of ill-gotten gains, and civil money penalties.
On July 21, the U.S. Court of Appeals for the Fourth Circuit affirmed a district court’s denial of defendants’ motion to compel arbitration, holding that the arbitration agreements operated as prospective waivers of federal law and were thus unenforceable. According to the opinion, a group of Virginia borrowers filed suit against two online lenders owned by a sovereign Native American tribe and their investors (collectively, “defendants”). In the action, the plaintiffs contended that they obtained payday loans from the defendants, which included annual interest rates between 219 percent to 373 percent—an alleged violation of Virginia’s usury laws and the Racketeer Influenced and Corrupt Organizations Act (RICO). The defendants moved to compel arbitration, which the district court denied, concluding that choice-of-law provisions—such as “‘[t]his agreement to arbitrate shall be governed by Tribal Law’; ‘[t]he arbitrator shall apply Tribal Law’; and the arbitration award ‘must be consistent with this Agreement and Tribal Law’”—prospectively excluded federal law, making them unenforceable.
On appeal, the 4th Circuit agreed with the district court despite a “strong federal policy in favor of enforcing arbitration agreements.” Most significantly, the appellate court rejected the defendants’ assertion that the choice-of-law provisions did not operate as a prospective waiver. The court noted that while the choice-of-law provisions “do not explicitly disclaim the application of federal law, the practical effect is the same,” as they limit an arbitrator’s award to “remedies available under Tribal Law,” effectively preempting “the application of any contrary law—including contrary federal law.” Moreover, the appellate court concluded that under the arbitration agreement, borrowers would be unable to effectively pursue RICO claims against the defendants, and more specifically, would be unable to “effectively vindicate a federal statutory claim for treble damages” under RICO. Thus, because federal statutory protections and remedies are unavailable to borrowers under the agreement, the appellate court concluded the entire agreement is unenforceable.
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