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Online payday lender settles usury suit for $141 million
On June 26, the U.S. District Court for the Eastern District of Virginia approved a preliminary settlement to resolve putative class allegations against an online payday lending company and related entities (defendants) accused of issuing high interest loans through a “rent-a-tribe” lending operation. According to the class’s second amended complaint, the defendants’ “rent-a-tribe” operation was an “attempt to circumvent state and federal law by issuing high interest loans in the name of a Native American tribal business entity that purports to be shielded by the principle of tribal sovereign immunity.” The class—which consists of borrowers from throughout the U.S.—alleged that the defendants provided “financing and various lending functions” carrying “extortionately high interest rates for short-term loans” that were “far beyond legal limits,” and that the unlawful interest rates were not disclosed to borrowers during the application process. Additionally, the class alleged that the defendants failed to provide key loan terms or misrepresented the loan terms, including repayment schedules, finance charges, and the total amount of payments due. Under the terms of the settlement, the defendants will pay a $65 million cash payment, cancel $76 million in high-interest loans, and provide other non-monetary relief.
New York AG settles with student debt relief defendants
On June 25, the U.S. District Court for the Southern District of New York entered a stipulated final judgment and order to resolve allegations concerning an allegedly fraudulent and deceptive student loan debt relief scheme. According to the New York attorney general, the defendants allegedly sold debt-relief services to student loan borrowers that violated several New York laws, including the state’s usury, banking, credit repair, and telemarketing laws, as well as the Credit Repair Organizations Act, the Telemarketing Sales Rule, and TILA. The order imposes a $5.5 million judgment against the majority of the defendants, which will be partially suspended after certain defendants pay $250,000. The AG’s case against one of the defendants, however, will continue. The order also prohibits the defendants from engaging in unlawful acts or deceptive practices such as false advertising, and, among other things, imposes compliance and reporting requirements and permanently bans the defendants from offering, providing, or selling any debt relief products and services or collecting payments from consumers related to these products and services.
District of Columbia AG claims online lender violated usury statutes
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 CPPA 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.
Special Alert: OCC adopts final rule addressing Madden
On Acting Comptroller of the Currency Brian Brooks’ first day in that role, the OCC issued a final rule designed to effectively reverse the Second Circuit’s 2015 Madden v. Midland Funding decision.[1] As published in yesterday’s Federal Register, the rule, titled “Permissible Interest on Loans that are Sold, Assigned, or Otherwise Transferred,” provides that “[i]nterest on a loan that is permissible under [12 U.S.C. 85 for national bank or 12 U.S.C 1463(g)(1) for federal thrifts] shall not be affected by the sale, assignment, or other transfer of the loan.” This rule contrasts with the Madden decision’s conclusion that a purchaser of a loan originated by a national bank could not charge interest at the rate permissible for the bank if that rate would be impermissible under the lower usury cap applicable to the purchaser. More specifically, the Madden court found that subjecting assignees to state usury law under these circumstances does not “significantly interfere” with the exercise of national bank powers -- the general preemption standard set forth in the Dodd Frank Act.[2]
New York AG announced proposed settlement with student debt relief companies
On May 22, the New York attorney general (NYAG) announced a proposed settlement with three student loan debt relief companies and two of the companies’ executive officers (collectively, “defendants”), resolving allegations that the defendants participated in a broader scheme that fraudulently, deceptively, and illegally marketed, sold, and financed student debt relief services to consumers nationwide. As previously covered by InfoBytes, the September 2018 complaint alleged that a total of nine student loan debt relief companies, along with their financing company, and the two individuals violated several federal and state consumer protection statutes, including the Telemarketing Sales Rule, New York General Business Law, the state’s usury cap on interest rates, disclosure requirements under TILA, and the Federal Credit Repair Organization Act. Specifically, the NYAG asserted, among other things, that the defendants (i) sent direct mail solicitations to consumers that deceptively appeared to be from a governmental agency or an entity affiliated with a government agency; (ii) charged consumers over $1,000 for services that were available for free; (iii) requested upfront payments in violation of federal and state credit repair and debt relief laws; and (iv) charged usurious interest rates.
If approved by the court, the proposed consent judgment would require the five defendants to pay $250,000 of a $5.5 million total judgment, due to their inability to pay. Additionally, the defendants are also permanently banned from advertising, marketing, promoting, offering for sale, or selling any type of debt relief product or service—or from assisting others in doing the same. Additionally, the defendants must request that any credit reporting agency to which the defendants reported consumer information in connection with the student loan debt relief services remove the information from those consumers’ credit files. The defendants also agreed not to sell, transfer, or benefit from the personal information collected from borrowers.
The NYAG previously settled with two other defendants in February, covered by InfoBytes here.
2nd Circuit: New York usury law does not apply to interest rate applied after default
On March 30, the U.S. Court of Appeals for the Second Circuit affirmed multiple orders issued by a district court in favor of an assignee mortgage holder (plaintiff), concluding that a borrower (defendant) was liable for interest at a default rate of 24 percent per year. After the defendant fell behind on his mortgage payments, the debt ultimately was assigned to the plaintiff, who initiated a foreclosure action. The plaintiff alleged a default date of February 1, 2008, and contended that the defendant was liable for interest at the 24 percent per year default rate. The district court granted the plaintiff’s motion for summary judgment, holding that the motion was supported by record evidence and that defendant’s affirmative defenses were meritless. The defendant’s motion for reconsideration was denied. A court-appointed Referee issued a report calculating the amount due on the note and mortgage, which the defendant appealed on several grounds, arguing, among other things, that (i) the plaintiff is a “debt collection agency” under New York City Administrative Code, and is precluded from taking action without being licensed; (ii) the 24 percent default interest rate applied by the Referee violates New York’s civil usury stature (which caps interest rates at 16 percent); and (iii) “the Referee erred by applying the default interest rate from the date of default rather than from the date of acceleration.”
On appeal, the 2nd Circuit concluded that, regardless of whether the plaintiff allegedly failed to obtain a debt collection agency license, the plaintiff was not necessarily barred from foreclosing on the mortgage and collecting the debt at issue. The appellate court also determined that New York’s civil usury statute “‘do[es] not apply to defaulted obligations . . . where the terms of the mortgage and note impose a rate of interest in excess of the statutory maximum only after default or maturity.” The appellate court further held that the mortgage note and agreement clearly stated that a lender is “entitled to interest at the [d]efault [r]ate . . . from the time of said default. . . .”
District court approves $18.5 million “rent-a-tribe” payday loan settlement
On February 25, the U.S. District Court for the Eastern District of Virginia granted preliminary approval of an $18.5 million class action settlement to resolve allegations including violations of the Racketeer Influenced and Corrupt Organizations Act, state usury and lending laws, and unjust enrichment against a financial technology company and a tribal corporation (defendants). According to the complaint, the company evaded state law usury limits by attempting to use the sovereignty of an Indian tribe (“rent-a-tribe”) in order to issue payday loans carrying annual percentage interest rates as high as 460 percent. While the defendants have denied any wrongdoing, they have agreed to, among other things, (i) cancel loans originated during the class period “on the basis that the debt is disputed”; (ii) no longer sell any outstanding loans and cease all collection activity; (iii) contact all consumer reporting agencies to request the permanent removal of any missed payment marks on loans originated during the class period; (iv) no longer sell class members’ personal identifying information to third parties; and (v) establish an $18.5 million fund to go towards costs, service awards, attorneys’ fees, and cash awards to class members.
Maryland orders vehicle title lender to pay $2.2 million
On February 21, the Maryland attorney general announced the issuance of a final order against a vehicle title lender, its owner, and related businesses (defendants) for making unlicensed and usurious consumer loans in violation of the Maryland Consumer Protection Act. According to the AG’s Consumer Protection Division (Division), the defendants offered consumers short-term, high-interest loans secured by a consumer’s motor vehicle title. The defendants allegedly kept the vehicle’s title, and, if the consumer failed to make a payment on the loan, would repossess or sell the vehicle. The Division claimed that these transactions, which the defendants claimed were pawn transactions, were actually consumer loans under Maryland law and carried interest rates of 360 percent. Under the terms of the final order, all loans the defendants made to Maryland consumers are void and unenforceable. The defendants are also ordered to, among other things, permanently cease engaging in unlicensed lending activities in the state and may not make loans that exceed the maximum allowed rate of interest, charge fees that are not permitted under state law, repossess secured vehicles or other personal property, or operate without requisite surety bonds. In addition, the defendants may not repossess consumers’ vehicles and must return any repossessed vehicles still in their possession. Finally, the defendants must pay at least $2.2 million in restitution to affected consumers, a $1.2 million civil penalty, a $50,000 claims procedure fee, and $73,000 in costs.
New York AG settles with student debt relief companies
On February 18, the U.S. District Court for the Southern District of New York approved a settlement between the State of New York and a student loan debt relief operation including five debt relief companies and one individual (defendants) in order to resolve allegations that the defendants violated the Telemarketing Sales Rule, the Federal Credit Repair Organizations Act, TILA, state usury laws, and various other state laws. As previously covered by InfoBytes, the New York attorney general brought the lawsuit in 2018 alleging that the defendants “engag[ed] in deceptive, fraudulent and illegal conduct…through their marketing, offering for sale, selling and financing” of debt relief services to student loan borrowers. The AG claimed that, among other things, the defendants allegedly (i) charged consumers who purchased the debt relief services illegal upfront fees; (ii) misrepresented that they were part of or working with the federal government; (iii) falsely claimed that fees paid by borrowers would be applied to borrowers’ student loan balances; and (iv) induced borrowers to enter into usurious financing contracts to pay for the debt relief services.
Under the terms of the agreement, the defendants—without admitting or denying the allegations—agreed to a judgment of $2.2 million, which will be suspended if the defendants promptly pay $50,000 to the State of New York and comply with all other provisions of the agreement. The defendants are also permanently banned from advertising, marketing, promoting, offering for sale, or selling any type of debt relief product or service—or from assisting others in doing the same. Additionally, the defendants must request that any credit reporting agency to which the defendants reported consumer information in connection with the student loan debt relief services remove the information from those consumers’ credit files. The defendants also agreed not to sell, transfer, or benefit from the personal information collected from borrowers. According to the settlement, six additional defendants were not included in the agreement and the AG’s case against them continues.
Representatives hold hearing on “rent-a-bank” schemes
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.