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On June 6, the New Jersey attorney general and the New Jersey Division of Consumer Affairs filed an action against a realty company and its principals (collectively, “defendants”) for allegedly violating the state’s Consumer Fraud Act by making deceptive misrepresentations about its “Homeowner Benefit Program” (HBP). Concurrently, the New Jersey Real Estate Commission in the Department of Banking and Insurance filed an order to show cause alleging similar misconduct and taking action against the real estate licenses belonging to the company and certain related individuals.
According to the complaint, the defendants’ HBP was marketed to consumers as a low-risk opportunity to obtain quick, upfront cash between $300 and $5000 in exchange for giving defendants the right to act as their real estate agents if they sold their homes in the future. The HBP was not marketed as a loan and consumers were told they were not obligated to repay the defendants or to ever sell their home in the future. However, the press release alleged that the HBP functions as a high-interest mortgage loan giving the defendants the right to list the property for 40 years, and that the loan survives the homeowner’s death and levies a high early termination fee against the homeowners. The complaint further charged the defendants with failing to disclose the true nature of the HBP and failing to present the terms upfront. Moreover, in order to sell the HBP, the defendants allegedly placed unsolicited telephone calls to consumers despite not being licensed as a telemarketer in New Jersey. The complaint seeks an order requiring defendants to discharge all liens against homeowners, pay restitution and disgorgement, and pay civil penalties and attorneys’ fees and costs.
The order to show cause alleges violations of the state’s Real Estate License Act and requires defendants to show why their real estate licenses should not be suspended or revoked, as well as why fines or other sanctions, such as restitution, should not be imposed. Defendants have agreed to cease any attempt to engage New Jersey consumers in an HBP agreement pending resolution of the order to show cause.
The U.S. District Court for the Western District of Virginia recently entered default judgment against defendants accused of misrepresenting the cost of immigration bond services and deceiving migrants to keep them paying monthly fees by making false threats of deportation for failure to pay. As previously covered by InfoBytes, the defendants—a group of companies providing immigration bond products or services for non-English speaking U.S. Immigration and Customs Enforcement detainees—were sued by the CFPB and state attorneys general from Massachusetts, New York, and Virginia in 2021 for allegedly engaging in deceptive and abusive acts and practices in violation of the Consumer Financial Protection Act (CFPA). The defendants argued that the court lacked subject matter jurisdiction because the Bureau did not have authority to enforce the CFPA since the defendants are regulated by state insurance regulators and are merchants, retailors, or sellers of nonfinancial goods or services. However, the court disagreed, explaining that “limitations on the CFPB’s regulatory authority do not equate to limitations on this court’s jurisdiction.” (Covered by InfoBytes here.)
As explained in the court’s opinion, last year the plaintiffs filed a motion for sanctions and for an order to show cause why the court should not hold the defendants in contempt for actions relating to several ongoing discovery disputes. The court determined that the defendants failed to demonstrate that “factors other than obduracy and willfulness” led to their failure to comply with multiple discovery orders and that the defendants engaged in a “pattern of knowing noncompliance with numerous orders of the court.” These delays, the court said, have significantly harmed the plaintiffs in their ability to prepare their case. Finding each defendant in civil contempt of court, the court also entered a default judgment against the defendants, citing them for discovery violations in other cases. The court set June deadlines for briefs on remedies and damages.
On August 16, a multistate lawsuit led by the Pennsylvania attorney general was filed against a subprime installment lender for allegedly charging consumers for hidden add-on products without their consent. According to the Pennsylvania AG’s press release, consumers believed they had entered into agreements to borrow and repay, over time, a fixed loan amount when allegedly the lender “added hundreds to thousands of dollars to the total amount a consumer owed.” Among other things, the complaint claimed the lender’s alleged “aggressive, high-pressure sales tactics” were “dictated by a profit-driven model,” and that its loans and aggressive sales tactics targeted the most vulnerable borrowers (often subprime and deep subprime borrowers that already carry significant credit card, installment loan, and/or student loan debt) by offering them “small dollar personal loans with high interest costs.” Additionally, the complaint contended that the lender’s corporate policies and practices resulted in employees charging consumers for add-on products they did not know about and did not consent to buy, and that employees were encouraged to perpetrate the unlawful conduct by being rewarded for maximizing add-on charges. The complaint seeks restitution, repayment of unlawfully obtained profits, civil penalties, rescission or reformation of all contracts or loan agreements between the lender and affected consumers, and injunctive relief.
On April 22, the Illinois Department of Financial and Professional Regulation (IDFPR) published in the Illinois Register a notice of adopted rules to implement the Predatory Loan Prevention Act (PLPA or the Act). As previously covered by InfoBytes, the Act was signed into law in March 2021 to prohibit 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. Violations of the Act constitute a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act and carry a potential fine up to $10,000. Additionally, any loan with an APR exceeding 36 percent will be considered null and void.
In general, the adopted rules require lenders to provide a disclosure to consumers about the 36 percent APR rate cap established by the PLPA, incorporate the APR calculation method required by the PLPA, and amend the rules for reporting of payday loans to the state database. The rules specify that words in the definitions are not defined to have the same meaning as in Regulation Z, including any interpretation by the CFPB. For purposes of calculating the PLPA ARP, the rules specify that the calculation excludes only certain specified bona fide fees, but includes finance charges, loan application fees, and fees imposed for participation in any plan or arrangement for a loan, “even if that charge would be excluded from the finance charge under Regulation Z.”
The IDFPR made several amendments related to rate cap disclosure notices. These specify that all loan applications must include a separate rate cap disclosure signed by the consumer (disclosures must be provided in English and in the language in which the loan was negotiated) that clearly and conspicuously states: “A lender shall not contract for or receive charges exceeding a 36% annual percentage rate on the unpaid balance of the amount financed for a loan, as calculated under the Illinois Predatory Loan Prevention Act (PLPA APR). Any loan with a PLPA APR over 36% is null and void, such that 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. The annual percentage rate disclosed in any loan contract may be lower than the PLPA APR.”
The rules take effect August 1.
On February 8, the District of Columbia attorney general announced a nearly $4 million settlement with an online lender to resolve allegations that lender marketed high-costs loans carrying interest rates exceeding D.C.’s interest rate cap. As previously covered by InfoBytes, the AG filed a complaint in 2020, claiming the lender violated the District of Columbia Consumer Protection Procedures Act (CPPA) by offering two loan products to D.C. residents carrying annual percentage rates (APR) ranging between 99-149 percent and 129-251 percent. Interest rates in D.C., however, 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 allegedly never possessed a money lending license in D.C.—violated the CPPA by (i) unlawfully misrepresenting it was 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.
Under the terms of the settlement, the company is required to (i) pay at least $3.3 million in restitution to refund alleged interest overcharges to D.C. borrowers; (ii) provide more than $300,000 in debt forgiveness to D.C. borrowers who would have paid future interest amounts in connection with an outstanding loan balance; and (iii) pay $450,000 to the District. According to the announcement, the company has also agreed that it “will not on its own, or working with third parties such as out of state banks, engage in any act or practice that violates the CPPA in its offer, servicing, advertisement, or provision of loans or lines of credit to District consumers.” The company is also prohibited from charging usurious interest rates, must delete negative credit information associated with its loans and lines of credit, and may not represent that it can offer loans or lines of credit in D.C. without first obtaining a D.C. money lender license.
On June 30, President Biden signed S.J. Res. 15, repealing the OCC’s “true lender” rule pursuant to the Congressional Review Act. Issued last year, the final rule amended 12 CFR Part 7 to state that a bank makes a loan when, as of the date of origination, it either (i) is named as the lender in the loan agreement, or (ii) funds the loan. The final rule also provided that if “one bank is named as the lender in the loan agreement and another bank funds the loan, the bank that is named as the lender in the loan agreement makes the loan.” (Covered by InfoBytes here.)
On June 21, the Maine governor signed S.P. 205/L.D. 522, which enacts and amends provisions prohibiting certain actions in the making of consumer loans to protect consumers from predatory, fraudulent lending practices. Among other things, the act prohibits covered entities from “engag[ing] in any device, subterfuge or pretense to evade the requirements of this Article, including, but not limited to, making a loan 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 of interest, consideration or charge than is permitted by this Article through any method.” Loans that violate these provisions are “void and uncollectible as to any principal, fee, interest or charge.” The act also specifies that a person qualifies as a lender subject to the act’s requirements if, among other things, (i) “[t]he person holds, acquires or maintains, directly or indirectly, the predominant economic interest in the loan”; (ii) “[t]he person markets, brokers, arranges or facilitates the loan and holds the right, requirement or first right of refusal to purchase the loan or a receivable or interest in the loan”; or (iii) “[t]he totality of the circumstances indicate that the person is the lender and the transaction is structured to evade the requirements of this Article.” Additionally, the act provides that a lender who violates the act’s provisions may not furnish information concerning a debt associated with the violation to a consumer reporting agency, nor may it refer the associated debt to a debt collector. The bill takes effect 90 days after legislative session adjourns.
Last month, the Illinois Department of Financial and Professional Regulation (IDFPR) published proposed regulations in the state register to implement the Illinois Predatory Loan Prevention Act (Act). As previously covered by InfoBytes, the Act was signed into law in March and 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. Violations of the Act constitute a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, and carry a potential fine up to $10,000. Additionally, 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.”
The IDFPR’s notice of proposed rules provides definitions and loan terms, including (i) general conditions; (ii) limits on the cost of a loan; (iii) how to calculate and compute the APR for the purposes of the Act; (iv) how to determine bona fide fees charged on credit card accounts, including outlining ineligible items, providing standards for assessing whether a bona fide fee is reasonable, and specifying bona fide fee safe harbors and “[i]ndicia of reasonableness for a participation fee”; and (iii) the effect of charging fees on bona fide fees.
Additionally, the IDFPR proposes several amendments related to rate cap disclosure notices. These specify that (i) all loan applications must include a separate rate cap disclosure signed by the consumer (disclosures must be provided in English and in the language in which the loan was negotiated); (ii) lenders must “prominently display” a rate cap disclosure in both English and Spanish in any physical location and on all websites, mobile device applications, or any other electronic mediums owned or maintained by the lender; and (iii) lenders must disclose the rate cap in any written loan solicitations or advertisements.
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.
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.