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Special Alert: Federal court says state bank, fintech partner must face Maryland’s allegation of unlicensed lending before state ALJ
A federal court late last month told a state-chartered bank and its fintech partner that they must return to a state administrative law proceeding to fight a Maryland enforcement action alleging that their failure to obtain a license to lend and collect on loans violated state law — potentially rendering the terms of certain loans unenforceable.
The Missouri-chartered bank and its partners attempted to remove an action brought by the Office of the Maryland Commissioner of Financial Regulation to the U.S. District Court for the District of Maryland, but the district court determined that removal was not proper and that Maryland’s Office of Administrative Hearings was the appropriate venue.
OCFR initially filed charges in January 2021 in Maryland’s Office of Administrative Hearings against the bank and its partner asserting the bank made installment and consumer loans and extended open-ended or revolving credit in the state without being licensed or qualifying for an exception to licensure. As a result, OCFR said they “‘may not receive or retain any principal, interest, or other compensation with respect to any loan that is unenforceable under this subsection.’” It said that not only are the bank’s loans to all Maryland consumers possibly unenforceable, but also that the bank, or its agents or assigns, could in the alternative be “prohibited from collecting the principal amount of those loans from any of these consumers or from collecting any other money related to those loans.”
The OCFR’s charge letter also said the fintech company that provided services to the bank violated the Maryland Credit Services Business Act by providing advice and/or assistance to consumers in the state “with regard to obtaining an extension of credit for the consumer when accepting and/or processing credit applications on behalf of the Bank without a credit services business license.” Additionally, the OCFR alleged violations of the Maryland Collection Agency Licensing Act related to whether the fintech company engaged in unlicensed collection activities, thus subjecting it to the imposition of fines, restitutions, and other non-monetary remedial action.
The defendants filed a notice of removal to federal court last year while the enforcement action was still pending before the OAH; OCFR moved to remand the case back to the agency.
In granting the OCFR’s motion to remand, the court concluded that the OCFR persuasively argued that the defendants have not properly removed this case from the OAH for several reasons, including that the OAH does not function as a state court. “Pursuant to 28 U.S.C. § 1441, a defendant may remove to federal court ‘any civil action brought in a State court of which the district courts of the United States have original jurisdiction.’” However, the court determined that, while defendants correctly observed that the OAH possesses certain “court-like” attributes, its limitations clearly showed that it does not function as a state court.
In reaching this conclusion, the court considered several undisputed facts, including that the OCFR is a unit of the Maryland Department of Labor “responsible for, among other things, issuing licenses to entities wishing to issue loans to consumers in Maryland and investigating violations of Maryland’s consumer loan laws.” The court also said that, while OCFR has authority under Maryland law to investigate potential violations of law or regulation and has the ability to issue cease and desist orders, revoke an individual’s license, or issue fines, it cannot enforce its own subpoenas or orders — and that its decisions are not final and may be appealed to a state circuit court.
The defendants had argued that the case involved a federal question as a result of the complete preemption of state usury laws by Section 27 of the FDI Act. The court said licensure, not state usury law claims, was the issue at hand.
During a status conference held last month to discuss OCFR’s motion to remand, defendants requested an opportunity to file a motion certifying the case for appeal. The court will hold in abeyance its remand order pending resolution of that motion. Parties’ briefings are due by the end of May.
If you have any questions regarding the ruling or its ramifications, please contact a Buckley attorney with whom you have worked in the past.
Florida court grants sovereign immunity to lender and company officials
On April 11, a Florida county court concluded that a defendant lender and certain company officials were entitled to sovereign immunity in a case concerning alleged usury claims. The plaintiff claimed the lender used its supposed federally-recognized tribal affiliation to escape state usury regulations. The court dismissed the complaint, however, finding that the lender is an “arm of the tribe” under a six-prong test established by the U.S. Court of Appeals for the Tenth Circuit in Breakthrough Management Group, Inc. v. Chukchansi Gold Casino & Resort. The test determines whether sovereign immunity should apply by examining, among other factors, an entity’s creation, the amount of control a tribe has over the entity, and the financial relationship between the tribe and the entity. According to the court, the defendant’s evidence suggests that the tribe created the defendant as a business entity “to generate and contribute revenues” to the tribe’s general fund. The court found that insufficient detail was presented to support the plaintiff’s assertion that the defendant pays a relatively small percentage of its gross revenues to the tribe. The court added that the plaintiff also failed to present evidence proving that large portions of the defendant’s revenue were distributed to non-tribal entities. In dismissing the case with prejudice, the court also dismissed claims against three individual defendants because they were entitled to sovereign immunity. The court concluded that the plaintiff’s allegations demonstrated that the individuals committed the alleged wrongs in their capacities as employees and officers and therefore the “real party in interest” is the lender.
District Court grants final approval in usury class action settlement
On August 16, the U.S. District Court for the Eastern District of Virginia granted final approval of a class action settlement resolving a purported scheme to unlawfully use tribe-owned firms to make online short-term loans and charge triple-digit interest rates. According to the memorandum of law in support of plaintiffs’ motion for preliminary approval of class action settlement and the stipulation and agreement of settlement, the district court previously approved two class settlements related to the lending enterprise. The first resulted in the purported lender and others: (i) repaying over $53 million dollars in cash; and (ii) forgiving over $380 million dollars of debt owed by consumers who took out loans with three lending companies. However, these settlements did not resolve every claim surrounding the purported scheme, and did not resolve claims with the settling defendant. The plaintiffs claimed that the settling defendant assisted the purported lender’s operations despite a corporate spinoff in May 2014, alleging that “[b]ecause many [of the purported lender’s] employees with institutional knowledge of and involvement in the company’s rent-a-tribe lending business were quickly transferred to [the settling defendant], [the purported lender] required and depended on continued involvement by [the settling defendant] and its employees in operating its rent-a-tribe lending business, which involvement was freely and often provided.” Under the terms of the preliminarily approved settlement, the settling defendant must provide monetary relief to class members totaling approximately $45 million.
2nd Circuit remands case to determine whether loans that violate New York’s criminal usury law are void ab initio
On March 15, the U.S. Court of Appeals for the Second Circuit vacated a district court ruling that had declined to treat an option that permits a lender, in its sole discretion, to convert an outstanding balance to shares of stock, at a fixed discount, as interest for purposes of New York’s criminal usury law. The district court had also observed, though it had no need to reach the issue, that even if the loan was usurious, it would not necessarily be void ab initio. After the case was appealed, the 2nd Circuit certified both issues to the New York Court of Appeals, which concluded, contrary to the district court, that such an option should be treated as interest for purposes of the usury statute and that loans made in violation of the usury statute are void ab initio. In light of the New York Court of Appeals holdings on these issues of state law, the 2nd Circuit vacated the district court’s order, and remanded to the district court to determine, in the first instance, whether the value of the option rendered the loan usurious.
New Mexico caps interest rates on small-dollar loans at 36%
On March 1, the New Mexico governor signed HB 132, which amends certain provisions related to the state’s small dollar lending requirements. Among other things, the bill makes several amendments to the New Mexico Bank Installment Loan Act of 1959 (BILA) and the New Mexico Small Loan Act of 1955 (SLA) by raising the maximum installment loan amount to $10,000 and providing the following: (i) “no lender shall make a loan pursuant to the [BILA] to a borrower who is also indebted to that lender pursuant to the [SLA] unless the loan made pursuant to the [SLA] is paid and released at the time the loan is made”; (ii) only federally insured depository institutions may make a loan under the BILA with an initial stated maturity of less than one hundred twenty days; (iii) a lender that is not a federally insured depository institution may not make a loan under the BILA “unless the loan is repayable in a minimum of four substantially equal installment payments of principal and interest”; and (iv) lenders, aside from federally insured depository institutions, may not make a loan with an annual percentage rate (APR) greater than 36 percent (a specified APR increase is permitted if the prime rate of interest exceeds 10 percent for three consecutive months). When calculating the APR, a lender must include finance charges as defined in Regulation Z “for any ancillary product or service sold or any fee charged in connection or concurrent with the extension of credit, any credit insurance premium or fee and any charge for single premium credit insurance or any fee related to insurance.” Excluded from the calculation are fees paid to public officials in connection with the extension of credit, including fees to record liens, and fees on a loan of $500 or less, provided the fee does not exceed five percent of the loan’s total principal and is not imposed on a borrower more than once in a twelve-month period.
The act also expands the SLA’s scope on existing anti-evasion provisions to specify that a person may not make small dollar loans in amounts of $10,000 or less without first having obtained a license from the director. The amendments also expand the scope of the anti-evasion provisions to include (i) the “making, offering, assisting or arranging a debtor to obtain a loan with a greater rate of interest . . . through any method, including mail, telephone, internet or any electronic means, regardless of whether the person has a physical location in the state”; and (ii) “a person purporting to act as an agent, service provider or in another capacity for another entity that is exempt from the [SLA]” provided the person meets certain specified criteria, such as “the person holds, acquires or maintains, directly or indirectly, the predominate economic interest in the loan” or “the totality of the circumstances indicate that the person and the transaction is structured to evade the requirements of the [SLA].” Under the act, a violation of a provision of the SLA that constitutes either an unfair or deceptive trade practice or an unconscionable trade practice is actionable under the Unfair Practices Act.
The act also makes various amendments to a licensees’ books and records requirements to facilitate the examinations and investigations conducted by the Director of the Financial Institutions Division of the Regulation and Licensing Department. Failure to comply may result in the suspension of a license. Additionally, the act provides numerous amended licensing reporting requirements concerning the loan products offered by a licensee, average repayment times, and “the number of borrowers who extended, renewed, refinanced or rolled over their loans prior to or at the same time as paying their loan balance in full, or took out a new loan within thirty days of repaying that loan,” among other things. The act also outlines credit reporting requirements, advertising restrictions, and requirements for the making and paying of small dollar loans, including specific limitations on charges after judgment and interest.
The act takes effect January 1, 2023.
D.C. reaches nearly $4 million settlement with online lender to resolve usury allegations
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.
3rd Circuit: Applying Pennsylvania usury laws to out-of-state lender does not violate “Commerce Clause”
On January 24, the U.S. Court of Appeals for the Third Circuit held that applying Pennsylvania usury laws to an out-of-state lender is not a violation of the “dormant Commerce Clause” of the Constitution. According to the opinion, the lender provides motor vehicle loans with interest rates allegedly “as high as 180%” to consumers, including residents of Pennsylvania. The opinion noted that the “entire loan process—from the application to the disbursement of funds—takes place . . . at one of [the lender’s] brick-and-mortar locations” outside of Pennsylvania, and that under the lender’s motor vehicle loan terms, the borrower receives the applicable loan proceeds “in the form of ‘a check drawn on a bank outside of Pennsylvania.’” Pursuant to its enforcement authority under Pennsylvania’s Consumer Discount Company Act (CDCA) and the Loan Interest and Protection Law (LIPL), the Pennsylvania Department of Banking and Securities (Department) issued a subpoena asking the lender to provide documents related to its interactions with Pennsylvania residents. The lender stopped making loans to Pennsylvania residents after receiving the subpoena, and later filed a lawsuit in the U.S. District Court for the District of Delaware against the Department claiming it “lost revenue as a result” of the Department’s actions. The suit sought “injunctive and declaratory relief for, among other things, violations of the Commerce Clause.” The Department separately filed a petition in state court to enforce the subpoena.
While the lender did not dispute that before 2017, it engaged in loan servicing activities and vehicle repossessions in Pennsylvania, the lender maintained that it “does not have any offices, employees, agents, or brick-and-mortar stores in Pennsylvania and is not licensed as a lender in the Commonwealth.” Additionally, the lender claimed that while “it has never used employees or agents to solicit Pennsylvania business, and [] does not run television ads within Pennsylvania,” advertisements may still reach Pennsylvania residents. The district court eventually determined that because the lender’s “loans are ‘completely made and executed outside Pennsylvania and inside. . .[brick-and-mortar] locations in Delaware, Ohio, or Virginia,’ the Department’s subpoena’s effect is to apply Pennsylvania’s usury laws extraterritorially in violation of the Commerce Clause.”
On appeal, the 3rd Circuit examined the “territorial scope” of the transactions the Department “has attempted to regulate” and considered whether these transactions occur “wholly outside” of Pennsylvania. The appellate court concluded that the lender’s “conduct does not occur wholly outside of Pennsylvania,” and that the transactions are “more than a simple conveyance of money,” but rather "create a creditor-debtor relationship that imposes obligations on both the borrower and lender until the debt is fully paid.” Moreover, even if the appellate court considered the local benefits with respect to interstate commerce, it “would conclude that they weigh in favor of applying Pennsylvania laws to [the lender].” The CDCA and LIPL “protect Pennsylvania consumers from usurious lending rates,” the 3rd Circuit wrote, adding that applying Pennsylvania’s usury laws to the lender’s loans furthers the state’s local interest in prohibiting usurious lending. “Pennsylvania may therefore investigate and apply its usury laws to [the lender] without violating the Commerce Clause,” the appellate court explained. “[A]ny burden on interstate commerce from doing so is, at most, incidental.”
4th Circuit: Tribal lenders must face usury claims
On November 16, the U.S. Court of Appeals for the Fourth Circuit upheld a district court’s ruling denying defendants’ bid to dismiss or compel arbitration of a class action concerning alleged usury law violations. The plaintiffs—Virginia consumers who defaulted on short-term loans received from online lenders affiliated with a federally-recognized tribe—filed a putative class action against tribal officials as well as two non-members affiliated with the tribal lenders, alleging the lenders violated the Racketeer Influenced and Corrupt Organizations Act (RICO) and Virginia usury laws by charging interest rates between 544 and 920 percent. The defendants moved to compel arbitration under a clause in the loan agreements and moved to dismiss on various grounds, including that they were exempt from Virginia usury laws. The district court denied the motions to compel arbitration and to dismiss, ruling that the arbitration provision was unenforceable as a prospective waiver of the borrowers’ federal rights and that the defendants could not claim tribal sovereign immunity. The district court also “held the loan agreements’ choice of tribal law unenforceable as a violation of Virginia’s strong public policy against unregulated lending of usurious loans.” However, the district court dismissed the RICO claim against the tribal officials, ruling that RICO only authorizes private plaintiffs to sue for money damages and not injunctive or declaratory relief.
On appeal, the 4th Circuit concluded that the arbitration clauses in the loan agreements impermissibly force borrowers to waive their federal substantive rights under federal consumer protection laws, and contained an unenforceable tribal choice-of-law provision because Virginia law caps general interest rates at 12 percent. As such, the appellate court stated that the entire arbitration provision is unenforceable. “The [t]ribal [l]enders drafted an invalid contract that strips borrowers of their substantive federal statutory rights,” the appellate court wrote. “[W]e cannot save that contract by revising it on appeal.” The 4th Circuit also declined to extend tribal sovereign immunity to the tribal officials, determining that while “the tribe itself retains sovereign immunity, it cannot shroud its officials with immunity in federal court when those officials violate applicable state law.” The appellate court further noted that the “Supreme Court has explicitly blessed suits against tribal officials to enjoin violations of federal and state law.” The 4th Circuit ultimately affirmed the district court’s judgment, noting that the loan agreement provisions were unenforceable because “tribal law’s authorization of triple-digit interest rates on low-dollar, short-term loans violates Virginia’s compelling public policy against unregulated usurious lending.”
The appellate court also agreed with the district court that RICO does not permit private plaintiffs to seek an injunction. “Congress’s use of significantly different language” to define the scope of governmental and private claims under RICO “compels us to conclude” that “private plaintiffs may sue only for treble damages and costs,” the appellate court stated. While plaintiffs “urge us to consider by analogy the antitrust statutes,” provisions outlined in the Clayton Act (which explicitly authorize injunction-seeking private suits) have “no analogue in the RICO statute,” the appellate court wrote, adding that “nowhere in the RICO statute has Congress explicitly authorized private actions for injunctive relief.”
District Court allows usury claims to proceed, says class action waivers do not bar certification
On October 14, the U.S. District Court for the Eastern District of Virginia granted class certification in an action alleging a payday lending operation violated RICO and Virginia’s usury law by partnering with federally-recognized tribes to issue loans with allegedly usurious interest rates. The plaintiffs alleged that the defendants (“founders, funders, [or] closely held owners of [a lender] that serviced the high-interest loans made by certain tribal lending entities”) participated in a lending scheme to circumvent state usury laws. The plaintiffs seek declaratory and injunctive relief, damages, and attorney’s fees and costs arising from claims alleging that the defendants, among other things: (i) used income derived from the collection of unlawful debt to further assist the operations of the enterprise; (ii) participated in an enterprise involving the unlawful collection of debt; (iii) collected unlawful debt; (iv) entered into unlawful agreements; (v) issued unlawful loans with interest rates exceeding 12 percent; and (vi) were thus unjustly enriched. The court granted class certification after finding that the existence of a class action waiver in loan agreements between plaintiffs and tribal lenders did not bar class certification. The court explained that “[b]ecause the class action waivers exist to ‘make unavailable to the borrowers the effective vindication of federal statutory protections and remedies,’ the prospective waiver doctrine applies.” The waivers were thus unenforceable.
5th Circuit: Extended overdraft charges are not interest
On September 29, the U.S. Court of Appeals for the Fifth Circuit held that the daily fees imposed on a consumer who failed to timely pay an overdraft were deposit-account service charges, not interest, and thus not subject to usury limits. The plaintiff allegedly overdrew her account and her bank paid the overdraft. The bank began charging a daily fee after the plaintiff did not repay the overdraft within five business days (called an “Extended Overdraft Charge”), which the plaintiff argued constituted interest on an extension of credit and was usurious in violation of the National Bank Act (NBA). In dismissing the plaintiff’s complaint for failure to state a claim, the district court reasoned that the bank does not make a loan to a customer when it covers the customer’s overdraft, and therefore the NBA’s limitations on interest charges do not apply. On appeal, the appellate court sided with the district court and deferred to the interpretation of the OCC that the fees at issue were not “interest” under the law. The court found the OCC’s interpretation to be reasonable and otherwise entitled to Auer deference, and on that basis affirmed.