InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Senate Democrats Lobby CFPB On Forthcoming Payday Lending Proposal
On May 14, six Senate Democrats, including Senate Banking Committee Members Jeff Merkley (D-OR) and Elizabeth Warren (D-MA), sent a letter to CFPB Director Richard Cordray asking that the CFPB consider the proposals included in Senator Merkley’s SAFE Lending Act, S. 172, in developing the forthcoming payday lending proposed regulations. That legislation primarily attempts to address perceived gaps in the regulation of Internet and offshore small dollar lenders—including those lenders affiliated with Native American tribes—and lead generators. The letter also petitions the CFPB to adopt “strong” reforms—such as minimum loan terms, fee and renewal limitations, and a waiting period between loans—that cover all types of small dollar lending. The CFPB highlighted many of these potential reforms in a March 2014 report and field hearing.
New York Targets Online Lenders Through Debit Card Networks
On April 30, the New York State Department of Financial Services (DFS) again expanded the scope of its activities targeting online payday lenders by announcing that two major debit card network operators agreed to halt the processing of payday loan deductions from bank accounts owned by New York consumers who allegedly obtained illegal online payday loans. The DFS asserts that in response to increased regulatory pressure on online lenders’ use of the ACH network—known as Operation Choke Point—those lenders are using debit card transactions to collect on payday loans originated online to New York residents. The DFS believes such loans violate the state’s usury laws. The DFS also sent cease-and-desist letters to 20 companies it believes are “illegally promoting, making, or collecting on payday loans to New York consumers.” The DFS’s assault on online lenders publicly began in February 2013 when it warned third-party debt collectors about collecting on allegedly illegal payday loans, and was first expanded in August 2013 when the 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. At the same time, the DFS asked banks and NACHA to limit such lenders’ access to the payment system. DFS subsequently expanded its effort in December 2013 when it began targeting payday loan lead generation companies.
FTC Settles Suit Against Tribe-Affiliated Lenders; Dispute Over CFPB Investigation Of Tribe-Affiliated Lenders Moves To Federal Court
On April 11, the FTC announced that a tribe-affiliated payday lending operation and its owner agreed to pay nearly $1 million to resolve allegations that they engaged in unfair or deceptive acts or practices and violated the Credit Practices Rule in the collection of payday loans. The FTC alleged that the lenders illegally tried to garnish borrowers’ wages and sought to force borrowers to travel to South Dakota to appear before a tribal court, and that the loan contracts issued by the lenders illegally stated that they are subject solely to the jurisdiction of the Cheyenne River Sioux Tribe. The announced settlement payment includes a $550,000 civil penalty and a court order to disgorge $417,740. The companies and their owner also are prohibited from further unfair and deceptive practices and are barred from suing any consumer in the course of collecting a debt, except for bringing a counter suit to defend against a suit brought by a consumer.
Also on April 11, in a separate matter related to federal authority over tribe-affiliated lending, a group of tribe-affiliated lenders responded in opposition to a recent CFPB petition to enforce civil investigative demands (CIDs) the Bureau issued to the lenders. In September 2013, the CFPB denied the lenders’ joint petition to set aside the CIDs, rejecting the lenders’ primary argument that the CFPB lacks authority over businesses chartered under the sovereign authority of federally recognized Indian Tribes. The lenders subsequently refused to respond to the CIDs, which the CFPB now asks the court to enforce. The CFPB argues that the lenders fall within the CFPB’s investigative authority under the terms of the Consumer Financial Protection Act, which the CFPB argues is a law of general applicability, including with regard to Indian Tribes and their property interests. The lenders continue to assert that they are sovereign entities operating beyond the CFPB’s reach.
More State AGs File Suits Against Online Payday Lender, Loan Servicers
On December 16, the North Carolina attorney general (AG) filed a lawsuit against an online payday lender, two loan servicers, and a related debt collection company, and the Colorado AG filed suit against the same loan servicers and collection company. The Colorado AG previously filed a separate suit against the lender. In addition, the New Hampshire AG promised to enforce a state banking department order against the same entities targeted in the other state actions. All three actions are parallel to, and were taken in coordination with, a CFPB action filed December 16 purportedly signaling broader pursuit of “regulatory-evasion schemes.” In general, the states are alleging that the lender violated state usury or licensing laws in the online origination of short-term, small dollar loans. The lender asserts that it is a Native American sovereign entity not subject to relevant state laws. The states also allege that a servicer, either in its own name or through a related entity, provided the lender with marketing, web hosting and customer services, collected consumer information, and conducted the loans’ initial underwriting review, and then purchased all loans immediately after origination. The states further allege that either the servicers or a related debt collection company engaged in servicing and collections, and that the totality of the activities violated state lending and licensing laws by, among other things, financing and collecting on illegal payday loans. The state AG suits are similar to suits previously filed by other state attorneys general, including in New York, Georgia, Minnesota, and Virginia.
CFPB Announces First Online Lending Lawsuit
On December 16, the CFPB announced a civil lawsuit against a California-based online loan servicer and its owner, subsidiary, and affiliate for allegedly violating the Consumer Financial Protection Act by collecting money consumers did not owe. This is the first CFPB enforcement action to target online lending directly and, according to the CFPB, represents “a significant step in the Bureau’s efforts to address regulatory-evasion schemes that are increasingly becoming a feature of the online small-dollar and payday lending industry.”
The subject loans were acquired from an online payday lender that recently shut down its operations after commencement of investigations and court actions across several states. According to the complaint, the defendants violated licensing requirements and interest-rate caps in several states that rendered certain high-cost loans void or otherwise nullified but nonetheless continued to collect money from borrowers. The complaint states that the defendants’ engaged in unfair and deceptive practices by sending collection notices, debiting accounts, and demanding payments related to such loans without disclosing that the borrowers were not obligated to pay the amounts under state law. The complaint also alleges that the defendants’ actions were abusive because they took unreasonable advantage of consumers’ lack of understanding of applicable state laws.
The CFPB action parallels actions taken by several other state attorneys general on the same day.
New York Targets Lead Generators In Expanded Online Payday Lending Investigation
On December 3, New York Governor Andrew Cuomo announced that the state Department of Financial Services (DFS) sent subpoenas to 16 online “lead generation” companies as part of its expanding investigation into online payday lending. The DFS alleges the target companies are engaged in deceptive or misleading marketing of illegal, online payday loans in New York, and claims lead generation companies offer access to quick cash to encourage consumers to provide sensitive personal information and then sell that information to, among others, payday lenders operating unlawfully in New York. The DFS publicly kicked off an investigation of online payday lending earlier this year when it 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. 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 DFS cites as part of the basis for its expanded investigation consumer complaints about false and misleading advertising (including celebrity endorsements), harassing phone calls, suspicious solicitations, privacy breaches, and other issues.
CFPB Announces First Enforcement Action Against Payday Lender
On November 20, the CFPB announced the resolution of an enforcement action against one of the largest payday lenders in the country. The consent order alleges that the lender and an online lending subsidiary made hundreds of payday loans to active duty military members or dependents in violation of the Military Lending Act, and that call center training deficiencies have allowed additional loans to be originated to spouses of active-duty members. The order also alleges unfair and deceptive debt collection practices, including so-called “robosigning” that allegedly yielded inaccurate affidavits and pleadings likely to cause substantial injury. In July, the CFPB issued a notice that it would hold supervised creditors accountable for engaging in acts or practices the CFPB considers to be unfair, deceptive, and/or abusive when collecting their own debts, in much the same way third-party debt collectors are held accountable for violations of the FDCPA.
Notably, this is the first public action in which the CFPB alleges that the supervised entities engaged in unlawful examination conduct. The Bureau asserts that the lender and subsidiary failed to comply with examination requirements, including by not preserving and producing certain materials and information required by the CFPB. Both the lender and its subsidiary are nonbanks and have not previously been subject to regular federal consumer compliance examinations; the CFPB does not allege that the exam failures were intentional violations potentially subject to criminal charges.
Pursuant to the consent order, the lender must pay $8 million in consumer redress, in addition to the more than $6 million the lender has already distributed to consumers for alleged debt collection and MLA violations. The lender also must pay a $5 million civil money penalty. The CFPB did not reveal how it determined the penalty amount or what portion of the fine is attributable to the alleged consumer-facing violations versus the alleged unlawful exam conduct. Finally, the order requires comprehensive compliance enhancement and imposes ongoing reporting and recordkeeping obligations for a period of three years.
In written remarks released by the CFPB, Director Cordray stated: “This action should send several clear messages to everyone under the jurisdiction of the Consumer Bureau. First, robo-signing practices are illegal wherever they occur, and they need to stop – period. Second, violations of the Military Lending Act harm our servicemembers and will be vigorously policed. Third, the Bureau will detect and punish entities that withhold, destroy, or hide information relevant to our exams.”
CFPB Weighs In On New York Tribal Lending Case
On November 13, the CFPB filed an amicus brief in a Second Circuit case stemming from efforts of the New York Department of Financial Services (DFS) to crack down on lenders offering allegedly illegal payday loans. Certain online lenders affiliated with Native American tribes sought to enjoin the DFS from interfering with their payday lending activities, claiming that the state’s actions violate the tribes’ inherent sovereignty and the Indian Commerce Clause of the U.S. Constitution. The federal district court denied relief last month, holding that the plaintiffs failed to identify an applicable “express federal law” prohibiting the state’s activity and that the tribes are subject to the state’s anti-usury laws, which the plaintiffs’ appealed.
In its amicus brief, the CFPB urges the court to reject the plaintiffs’ contention that the Consumer Financial Protection Act (CFPA) prevents the state from applying its consumer-protection laws to tribally-affiliated lenders, arguing instead that the CFPA “expressly preserves states’ varying consumer-protection laws as applied here, including those that would outlaw loans with certain terms.” According to the CFPB, “[a]lthough the CFPA recognizes that tribes, like states, have a role in regulating consumer financial products and services, and that the CFPB will coordinate with tribes and states in protecting consumers, that has no bearing on whether tribally affiliated lenders must comply with state laws.”
New York Appellate Court Addresses Personal Jurisdiction Based On Online Contacts
Recently, the New York Appellate Division, Second Department, held that out-of-state defendants in a medical malpractice case were not subject to the New York courts personal jurisdiction based on an Internet advertisement viewed in New York and a subsequent series of email and phone contacts between the New York resident patient and the out of state defendants. Paterno v. Laser Spine Inst., No 2011-4654, 2013 WL 5629871 (N.Y. App. Div. Oct. 16, 2013). In this case, the New York trial court had dismissed a medical malpractice suit filed in New York against a Florida-based medical provider over services rendered in Florida, holding that the medical service provider did not transact business in New York. On appeal the Appellate Division agreed, holding that although a defendant need not be physically present in the state to transact any business there in satisfaction of New Yorks statutory requirements for personal jurisdiction, the totality of the circumstances presented did not provide a basis for exercising long-arm jurisdiction over the medical service provider. The appellate court rejected the patients argument that the provider had actively solicited business in New York through an online advertisement, holding that the providers website was passive in nature and that there was no indication it facilitated the purchase of any goods or services. The appellate court also concluded that a series of email and phone contacts between the patient and the provider did not constitute business activity and were not sufficiently purposeful for jurisdictional purposes.
August Beach Read Series: Increasing Scrutiny of Short-Term, Small-Dollar Credit Products
The interest of regulators and enforcement authorities in short-term, small-dollar credit products - including payday loans, advance deposit products, installment loans, and more – has intensified in 2013. State and federal authorities have taken numerous actions to enforce existing law and to develop new rules for these products.
Earlier this year we reported on the DOJ’s prioritization of this area of consumer finance, and we have since reported on many other state and federal developments, including those related to state enforcement of licensing and usury laws against online lenders, federal regulators' scrutiny of advance deposit products and payday loans, congressional interest in small dollar loans (here and here), and the Department of Defense’s potential expansion of the Military Lending Act.
With regard to this last issue, BuckleySandler Partner Valerie Hletko recently examined the DOD’s advance notice of proposed rulemaking related to installment loans used by members of the armed forces and their families. The authors point out that the DOD’s interest in installment loans is emblematic of the scrutiny of short-term, small-dollar credit products, which appear to be increasingly vexing to regulators who recognize widespread demand for them but are concerned that such products may create a high-cost borrowing cycle.
In a 2012 article Partners John Kromer and Valerie Hletko previewed the CFPB’s interest in these products and identified some best practices for short-term, small-dollar lenders.