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Financial Services Law Insights and Observations

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  • Illinois enacts 36 percent rate cap for consumer loans, creates state community reinvestment act

    State Issues

    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.

    State Issues State Legislation Interest Rate CRA Predatory Lending Consumer Finance

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  • 6th Circuit: Delegation clause in arbitration agreement keeps case out of court

    Courts

    On March 4, the U.S. Court of Appeals for the Sixth Circuit determined that a district court “exceeded its authority” when it ruled that an arbitration agreement was unenforceable in a case disputing an allegedly predatory loan. According to the 6th Circuit opinion, the plaintiff claimed she was the victim of an illegal “rent-a-tribe” scheme when she accepted a $1,200 loan with an interest rate exceeding 350 percent from an online lender owned and organized under the laws of a federally recognized Montana tribe. The loan contract the plaintiff signed included a provision stating that “‘any dispute. . .related to this agreement will be resolved through binding arbitration’ under tribal law, subject to review only in tribal court.” The plaintiff filed suit, alleging, among other things, that the arbitration agreement violated Michigan and federal consumer protection laws. The defendant moved to compel arbitration, arguing that because the plaintiff agreed to arbitrate issues regarding “the validity, enforceability, or scope” of the arbitration agreement through a “delegation clause,” the court should stay the case and compel arbitration. The district court denied the defendant’s motion, “maintaining that the enforceability of the arbitration agreement ‘has already been litigated, and decided against [the defendant], in a similar case from the 2nd Circuit.’” The defendant appealed, arguing that the district court disregarded the delegation clause.

    On remand, the 6th Circuit stated that its decision does not bear on the merits of the case but merely addresses who resolves the plaintiff’s challenges to the arbitration agreement. “It’s not even about whether the parties have to arbitrate the merits. Instead, it’s about who should decide whether the parties have to arbitrate the merits,” the appellate court wrote. Focusing on the delegation clause—which states that the parties agreed that an arbitrator, and not the court, would decide “gateway arbitrability issues”—the appellate court held that “[o]nly a specific challenge to a delegation clause brings arbitrability issues back within the court's province,” which was a challenge that the plaintiff failed to make.

    Courts Appellate Sixth Circuit Arbitration Tribal Lending Predatory Lending State Issues Usury

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  • Virginia reaches settlement with open-end credit plan lender

    State Issues

    On March 4, the Virginia attorney general announced a settlement with an open-end credit plan lender, resolving allegations that the company violated Virginia consumer finance laws by (i) imposing a $100 origination fee on loans during a statutorily-mandated finance charge-free grace period; (ii) “[e]ngaging in a pattern of repeat transactions and ‘rollover’ loans with thousands of consumers who were required to close accounts that they paid down to a $0 balance,” but were then allowed to open new accounts for which new fees were charged on a monthly basis; and (iii) charging interest on accounts at an annual rate of 273.75 percent, far exceeding the 36 percent limit that open-end credit lenders are allowed to charge. Under the terms of the settlement, the company is permanently enjoined from further violating Virginia’s consumer finance laws, and is required to pay $850,000 in restitution and $150,00 in attorneys’ fees and settlement costs. The company must also provide more than $10 million in debt forbearance on “accounts that remain unpaid and that were not converted to a separate loan program in October 2018.”

    State Issues State Attorney General Enforcement Consumer Protection Consumer Lending Predatory Lending

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  • CFPB, states sue defendants for predatory immigrant-services scam

    Federal Issues

    On February 22, the CFPB and state attorneys general from Massachusetts, New York, and Virginia filed a complaint against a group of defendants that provide immigration bond products or services for non-English speaking U.S. Immigration and Customs Enforcement (ICE) detainees. The Bureau alleges that the defendants engaged in deceptive and abusive acts and practices in violation of the CFPA, while the states bring related claims that the defendants violated their respective consumer-protection laws, by, among other things, (i) representing that they paid the detainees’ bonds and that monthly payments go towards repaying the defendants for doing so (the Bureau and states allege that the monthly payments are actually “rental fees for a GPS device that do not go to repaying consumers’ bonds”); (ii) making false threats that detainees will be re-arrested, detained, or deported if they do not make the monthly payments or remove the defendants’ GPS devices, many of which, the complaint claims, do not actually work; (iii) threatening to send detainees’ accounts to collection, representing that failing to make payments could harm their credit, or threatening to sue detainees or their families for non-payment; (iv) representing that collateral payments would be refunded once the detainees’ proceedings were resolved but in many cases failing to do so; (v) presenting detainees, most of whom cannot read or understand English, with a series of English-only contracts requiring the payment of large upfront fees plus $420 per month to “lease” GPS-tracking ankle monitors until their cases are resolved; (vi) creating the illusion that defendants are affiliated with ICE, even though they have no affiliation with authorities; and (vii) offering financial rewards to employees who sign up new customers and collect payments. The Bureau is seeking an injunction, as well as damages, redress, disgorgement, and civil money penalties.

    Federal Issues CFPB State Issues State Attorney General Enforcement Predatory Lending CFPA Deceptive Abusive

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  • District of Columbia AG claims online lender violated usury statutes

    State Issues

    On June 5, the District of Columbia attorney general filed a complaint against an online lender for alleged violations of the District of Columbia Consumer Protection Procedures Act (CPPA) by marketing high-costs loans carrying interest rates exceeding D.C.’s interest rate caps. The complaint alleges that the lender offers two loan products to D.C. residents: (i) an installment loan with an annual percentage rate (APR) range of 99-149 percent; and (ii) a second loan product with an undisclosed APR that ranges between 129-251 percent. However, interest rates in D.C. are capped at 24 percent for loans with the rate expressed in the contract (loans that do not state an express interest rate in the contract are capped at six percent), and licensed money lenders that exceed these limits are in violation of the CPPA. According to the AG, the lender—who has allegedly never possessed a money lending license in D.C.—violated the CCPA by (i) unlawfully misrepresenting it is allowed to offer loans in D.C. and failing to disclose or adequately disclose that its loans contain APRs in excess of D.C. usury limits; (ii) engaging in unfair and unconscionable practices through misleading marketing efforts; and (iii) violating D.C. usury laws. In addition, the lender allegedly violated District of Columbia Municipal Regulations Title 16 by lending money in D.C. without being licensed. The complaint seeks a permanent injunction, restitution, and civil penalties. In addition, the complaint asks the court to order the lender’s loans unenforceable and void.

    State Issues State Attorney General Online Lending Usury Interest Rate Courts Predatory Lending

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  • Senators seek protection against predatory lending practices during Covid-19 pandemic

    Federal Issues

    On April 6, Senators Richard Durbin (D-IL) and Sherrod Brown (D-OH) sent a letter to the federal financial regulators (Federal Reserve Board, FDIC, OCC, CFPB, and NCUA), asking them to issue guidance and lending principles to help protect small businesses and consumers affected by Covid-19 from predatory lending practices. As previously covered by InfoBytes, last month, the agencies issued a joint statement recognizing that small-dollar lending can play an important role in meeting credit needs, and recommending that financial institutions offer loans “through a variety of structures including open-end lines of credit, closed-end installment loans, or appropriately structured single payment loans.” The Senators expressed concerns, however, that without clear guidance banning predatory lending practices, consumers “are at risk of being exploited because of a financial hardship created through no fault of their own.” The Senators propose several measures intended to ensure that loan products include strong consumer protections. These include: (i) capping interest rates—preferably at a maximum rate of 36 percent—for small dollar short-term loan products; (ii) ensuring that borrowers are able to meet clear ability-to-repay standards; (iii) “prohibit[ing] loan products with unpaid principal from automatically enrolling the borrower in a new loan product without their knowledge and consent”; and (iv) “eliminat[ing] the potential for one-time lump sum payments or balloon payments.”

    Federal Issues U.S. Senate Predatory Lending Consumer Finance FDIC Federal Reserve OCC CFPB NCUA Covid-19

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  • Massachusetts AG fines auto dealer $1.5 million for predatory lending

    State Issues

    On March 9, the Massachusetts attorney general announced a consent judgment to resolve a 2017 lawsuit brought against an auto dealership and its in-house lender alleging that the dealership misled consumers into purchasing unfavorable sale packages in violation of Massachusetts’ consumer protection law. As previously covered by InfoBytes, the complaint alleged that more than half of the auto dealer’s sales failed or ended in repossession due to misleading sales practices, predatory lending, and faulty underwriting. The consent judgment follows a January court decision awarding summary judgment in favor of the AG’s office. According to the AG’s press release, the auto dealer agreed to provide monetary and injunctive relief to resolve the entirety of the lawsuit’s allegations. The relief includes (i) paying $1.5 million, half of which will go towards reducing ongoing payments on active loans for consumers who purchased cars prior to 2018; (ii) providing eligible consumers who had their vehicles repossessed the option to cancel outstanding debts and repair their credit from the repossession; (iii) improving business practices to ensure provision of fair disclosures and enhanced repair services; and (iv) developing a structured process for handling consumer complaints received by the AG.

    State Issues State Attorney General Enforcement Predatory Lending Auto Finance Consumer Protection Consumer Complaints

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  • Special Alert: Trailer bill would enact California Consumer Financial Protection Law

    State Issues

    A trailer bill accompanying the governor’s proposed 2020-2021 state budget would expand the Department of Business Oversight’s (DBO) authority and enact the California Consumer Financial Protection Law (Law).

    Specifically, the provisions outlined in the proposed Law would revamp and rename the state’s DBO, expand its authority to protect consumers from predatory practices, and foster the responsible development of new financial products. Under California’s Constitution, a trailer bill — which provides for an appropriation related to the budget bill — takes effect immediately after a simple majority vote and the governor’s signature.

    * * *

    Click here to read the full special alert.

    If you have any questions regarding the California Consumer Financial Protection Law or other related issues, please visit our Consumer Finance practice page or contact a Buckley attorney with whom you have worked in the past.

    State Issues State Legislation Consumer Finance Consumer Protection Predatory Lending UDAAP Special Alerts CDBO

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  • Representatives hold hearing on “rent-a-bank” schemes

    Federal Issues

    On February 5, the House Financial Services Committee held a hearing titled “Rent-A-Bank Schemes and New Debt Traps: Assessing Efforts to Evade State Consumer Protections and Interest Rate Caps” to discuss policies relating to state interest rate caps and permissible interest rates on small dollar loans such as payday and car-title loans. As previously covered by a Buckley Special Alert, in November, the OCC and the FDIC proposed rules meant to override the 2015 Madden v. Midland funding decision from the U.S. Court of Appeals for the Second Circuit, and reinforce that when a national bank or savings association, or state chartered bank, transfers a loan, the permissible interest rate after the transfer is the same as it was prior to the transfer. In January, however, a group of attorneys general from 21 states and the District of Columbia submitted a comment letter to the OCC claiming the proposed rule would encourage predatory lending through “rent-a-bank schemes.” (Covered by InfoBytes here.) During the hearing, Committee Chairwoman Maxine Waters (D-CA), expressed concern that the two agency proposals would harm consumers by allowing non-banks to partner with banks and enable non-bank lenders to “peddle harmful short-term, triple-digit interest rate loans.” Representative Rashida Tlaib (D-MI) echoed that concern when she suggested that “rent-a-bank” schemes allow non-banks to dodge state interest rate laws. Many Republicans had views differing from those expressed by Tlaib and Waters. North Carolina Representative Patrick McHenry remarked that the proposals from the OCC and the FDIC merely formalized the “valid when made” rule that had been in use for over a century. At the hearing, HR 5050, which would cap federal interest rates on certain small loans at 36 percent, was also discussed, with several Democrats stressing that the cap may negatively affect credit availability to some consumers.

    Federal Issues FDIC Supervision Nonbank Supervision Bank Supervision Valid When Made OCC Interest Rate Usury House Financial Services Committee Madden Predatory Lending U.S. House

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  • New York says creditors prohibited from obtaining confessions of judgments against out-of-state borrowers

    State Issues

    On August 30, the New York governor signed S 6395, which prohibits creditors from obtaining confessions of judgments through the New York court system against individuals and businesses located outside of the state in order to seize borrower assets. According to a press release issued by Governor Cuomo, prior to the enactment of S 6395, creditors were able to “freeze and seize a borrower’s assets by obtaining a judgment entered in a court far from where the contested agreement was executed, making it difficult for a borrower to legally contest the unfair penalty.” Under S 6395, an entry of judgment may only be filed in “the county where the defendant’s affidavit stated that the defendant resided when it was executed or where the defendant resided at the time of filing.” For non-natural persons, the county of residence is where it has a place of business. Notably, government agencies engaged in enforcing civil or criminal law against a person or a non-natural person, are exempt from the bill’s measures and may file an affidavit in any county within the state. S 6395 is effective immediately.

    State Issues State Legislation Small Business Lending Predatory Lending Merchant Cash Advance

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