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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.
On July 14, the U.S. Court of Appeals for the Third Circuit affirmed a district court’s denial of defendants’ motion to compel arbitration, holding that an arbitration clause contained within an online tribal lender’s payday loan agreement impermissibly strips borrowers of their right to assert statutory claims and is therefore unenforceable. Specifically, because this “limitation constitutes a prospective waiver of statutory rights,” the lender’s arbitration agreement “violates public policy and is therefore unenforceable.” The plaintiffs filed a putative class action contending that they obtained payday loans from the lender, which included annual interest rates between 496.55 percent to 714.88 percent—an alleged violation of the Racketeer Influenced and Corrupt Organizations Act (RICO) and various Pennsylvania consumer protection laws. The defendants moved to compel arbitration. The district court denied the defendants’ arbitration request, ruling that “the arbitration agreement was unenforceable because the arbitrator is permitted only to consider tribal law,” and, therefore, the arbitrator could not consider any of plaintiffs’ federal or state law claims. The 3rd Circuit agreed, rejecting, among other things, the defendants’ argument that the plaintiffs could bring RICO-like claims under tribal law and possibly receive “similar relief.” The appellate court noted: “The question is whether a party can bring and effectively pursue the federal claim—not whether some other law is a sufficient substitute.”
- APPROVED Webcast: Remote examinations and complaints — The “new normal”
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- Sherry-Maria Safchuk and Lauren Frank to discuss "New CFPB interpretation on UDAAP" at a California Mortgage Bankers Association Mortgage Quality and Compliance Committee webinar
- Daniel P. Stipano to discuss "High standards: Best practices for banking marijuana-related businesses" at the ACAMS AML & Anti-Financial Crime Conference
- Daniel P. Stipano to discuss "Wait wait ... do tell me! Where the panelists answer to you" at the ACAMS AML & Anti-Financial Crime Conference
- Jonice Gray Tucker to discuss "The future of fair lending" at the Mortgage Bankers Association Regulatory Compliance Conference
- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute