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On October 9, the Superior Court of New Jersey Appellate Division reversed a trial court’s decision to revive a proposed class action that challenged, among other things, interest rates of over 30 percent on car title loans. According to the appellate court, the trial court dismissed the case because Delaware, not New Jersey, had a more substantial relationship with the parties’ dispute. While the plaintiff’s contract with the Delaware-based title loan company stipulated that Delaware law applied even though she resided in New Jersey, the appellate court said that under the second exception of the test established by Instructional Systems Inc. v. Computer Curriculum Corp., New Jersey courts will uphold the contractual choice unless the “application of the law of the chosen state would be contrary to the fundamental policy of the state which has a materially greater interest than the chosen state in the determination of the particular issue and which . . . would be the state of the applicable law in the absence of an effective choice of law by the parties.”
“In her certification, plaintiff asserted that she applied for the title loan from her home in New Jersey and that defendant advised her that the loan had been approved by calling and advising her that all she had to do to pick up the money was to come to Delaware and sign the contract.” The appellate court stated that these additional facts may be sufficient to satisfy the second exception’s prerequisites, and that from a procedural standpoint, the trial court should have either converted the title loan company’s motion to dismiss to a motion for summary judgment in order to consider the new information or granted the plaintiff’s motion to file a second amended complaint.
On September 20, the New York Attorney General announced a lawsuit against nine student loan debt relief companies, along with their financing company, and two individuals (collectively, “defendants”), alleging that the defendants fraudulently, deceptively, and illegally marketed, sold, and financed student debt relief services to consumers nationwide. Among other things, the complaint alleges 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) misrepresented that they would apply fees paid by borrowers to student loan balances; (iii) charged consumers over $1,000 for services that were available for free; (iv) requested upfront payments in violation of federal and state credit repair and debt relief laws; (v) charged usurious interest rates; and (vi) provided consumers with “incomplete and harmful advice,” such as counseling borrowers to consolidate federal student loans without explaining that in certain circumstances borrowers could “lose months or years of loan payments they had already made that would qualify toward forgiveness of their loans under the Public Service Loan Forgiveness Program.” The New York Attorney General maintains that these practices 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 as covered by New York Banking Law and New York General Obligations Law, disclosure requirements under the Truth in Lending Act, and the Federal Credit Repair Organization Act.
California Supreme Court says loans not subject to state interest rate caps may still be unconscionable
On August 13, the Supreme Court of California held that interest rates on consumer loans of $2,500 or more could be considered unconscionable under Section 22302 of California’s Financial Code, notwithstanding Section 22303’s maximum interest rate cap for loans under $2,500. The U.S. Court of Appeals for the 9th Circuit asked the Supreme Court of California to address Section 22302’s application to higher cost consumer loans. In the class action that is before the 9th Circuit, consumers alleged that a lender violated the “unlawful” prong of California’s Unfair Competition Law (UCL) with an unsecured $2,600 loan carrying an APR between 96 percent and 136 percent and argued the product is “unconscionable” under Section 22302. To resolve this question, the California Supreme Court held that unconscionability is a “flexible standard” that includes the larger context surrounding the contract. The court held that, although Section 22303 specifies interest rate limitations on loans under $2,500, it does not affect whether a loan in excess of $2,500 is unconscionable, and a court may consider a loan’s interest rate in determining that a loan above this threshold violates Section 22302.
District Court denies service provider’s motion to dismiss on several grounds, rules Bureau’s structure is constitutional
On August 3, the U.S. District Court for the District of Montana denied a Texas-based service provider’s motion to dismiss a suit brought by the CFPB over allegations that the service provider engaged in unfair, deceptive, and abusive acts or practices in violation of the Consumer Financial Protection Act (CFPA) by assisting three tribal lenders in the improper collection of short-term, small-dollar loans that were, in whole or in part, void under state law. (See previous InfoBytes coverage here.) The defendants moved to dismiss the claims on multiple grounds: (i) the Bureau’s structure is unconstitutional; (ii) the claims are not permitted under the CFPA; (iii) the complaint “fails to, and cannot, join indispensable parties;” and (iv) certain claims are time-barred.
In answering the service provider’s challenges to the Bureau’s constitutionality, the court ruled that the CFPB’s structure is legal and cited to orders from nine district courts and an en banc panel of the D.C. Circuit Court, which also rejected similar arguments. (See Buckley Sandler Special Alert.) Addressing whether the Bureau’s claims were permitted under the CFPA, the court ruled that other courts have held that enforcing a prohibition on amounts that consumers do not owe is different from establishing a usury limit, and that moreover, “[t]he fact that state law may underlie the violation . . . does not relieve [d]efendants . . . of their obligation to comply with the CFPA.” Regarding the defendants’ argument that the complaint should be dismissed on the grounds of failure to join an indispensable party because the tribal lenders possess sovereign immunity to the suit, the court wrote that “[u]nder these circumstances, the Court will not create a means for businesses to avoid regulation by hiding behind the sovereign immunity of tribes when the tribes themselves have failed to claim an interest in the litigation.” Furthermore, the court found that the remedies sought by the Bureau would not “impede the [t]ribal [l]enders’ ability to collect on their contracts or enforce their choice of law provisions directly.” Finally, the court stated that, among other things, the service provider failed to show that the Bureau’s suit fell outside the CFPA’s three-year statute of limitations for filing claims after violations have been identified.
On July 11, the New York Department of Financial Services (NYDFS or the Department) released a study of online lending in New York, as required by AB 8938. (Previously covered by InfoBytes here.) In addition to reporting the results of its survey of institutions believed to be engaging in online lending activities in New York, NYDFS makes a series of recommendations that would expand the application of New York usury and other statutes and regulations to online loans made to New York residents, including loans made through partnerships between online lender and banks where, in the Department’s view, the online lender is the “true lender.”
In particular, NYDFS recommends, “[a]ll New York lenders should operate under the same set of rules and be subject to consistent enforcement of those rules to achieve a level playing field for all market participants….” Elsewhere in the report, the Department states that it “disagrees with [the] position” that online lenders are exempt from New York law if they partner with a federally-chartered or FDIC-insured bank that extends credit to New York residents. NYDFS criticizes these arrangements, stating its view that “the online lender is, in many cases, the true lender” because the online lender is “typically … the entity that is engaged in marketing, solicitation, and processing of applications, and dealing with the applicants” and may also purchase, resell, and/or service the loan.
NYDFS also noted that it opposed pending federal legislation that would reverse the Second Circuit’s decision in Madden v. Midland Funding, LLC, which held that federal preemption of New York’s usury laws ceased to apply when a loan was transferred from a national bank to a non-bank. The Department expressed concern that, if passed, the bill “could result in ‘rent-a-bank charter’ arrangements between banks and online lender that are designed to circumvent state licensing and usury laws.”
Noting that many online lenders remain unlicensed in New York, the Department states that “[d]irect supervision and oversight is the only way to ensure that New York’s consumers and small business owners receive the same protections irrespective of the channel of delivery….” To this end, NYDFS recommended lowering the interest rate threshold for licensure from 16 percent to 7 percent.
Although NYDFS stressed that its survey results may be unreliable due to uneven response rates, it reported that, for respondents, the average median APR for online loans to businesses was 25.9%, the average median APR for online loans to individuals for personal use was 14.8%, and the average median APR for the underbanked customers was 19.6% (New York currently caps interest for civil liability at 16% and at 25% for criminal liability).
Overall, the report appears to forecast a more difficult regulatory and enforcement environment in New York for online lenders, as has been the case in West Virginia and Colorado.
On June 27, the Colorado and New York Attorneys General led a coalition of 21 state Attorneys General in a letter to congressional leaders opposing HR 3299 (“Protecting Consumers’ Access to Credit Act of 2017”) and HR 4439 (“Modernizing Credit Opportunities Act”), which would effectively overturn the 2015 decision in Madden v. Midland Funding, LLC. Specifically, H.R. 3299 and H.R. 4439 would codify the “valid-when-made” doctrine and ensure that a bank loan that was valid as to its maximum rate of interest in accordance with federal law at the time the loan was made shall remain valid with respect to that rate, regardless of whether the bank subsequently sells or assigns the loan to a third party.
The letter argues that the legislation “would legitimize the efforts of some non-bank lenders to circumvent state usury law” and it was not Congress’ intention to authorize these arrangements with the creation of the National Bank Act. In support of their position, the Attorneys General cite to a 2002 press release by the OCC and the more recent OCC Bulletin 2018-14 on small dollar lending, which stated the agency “views unfavorably an entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state(s).” (Previously covered by InfoBytes here.) The letter also refers to an 1833 Supreme Court case, Nichols v. Fearson, which held that a “valid loan is not invalidated by a later usurious transaction involving that loan” but was not relevant to the decision in Madden because the borrower’s argument related to preemption. Ultimately, the Attorneys General conclude the legislation would erode an “important sphere of state regulation” as state usury laws have “long served an important consumer protection function in America.”
On May 15, the Maryland governor signed legislation to establish requirements for lenders making covered loans in the state. Among other things, HB1297 increases the threshold for which a loan is subject to small lending requirements within the Maryland Consumer Loan Law (MCLL) from $6,000 to $25,000. The law also prohibits (i) lenders who are not licensed in the state from making loans of $25,000 or less, unless the person is exempt from requirements under MCLL; (ii) a person contracting “for a covered loan that has a rate of interest, charge, discount, or other consideration greater than the amount authorized under state law”; and (iii) covered loans that would be a violation of the Military Lending Act. Loans that violate these provisions are deemed void and unenforceable except in limited circumstances. The law takes effect January 1, 2019.
On April 25, a Florida District Court of Appeal held that a Florida usury law did not apply to the purchase of a used car because the contract for purchase was a retail installment sales contract covered under the Florida Motor Vehicle Retail Sales Finance Act (the Finance Act). According to the opinion, a consumer filed a lawsuit against a used car seller and a lender claiming violations of Florida’s general usury law, which prohibits interest of more than 18 percent per year, because the contract for purchase of a used car had a 27.81 percent interest rate. In affirming the trial court’s decision to grant summary judgment for the car seller and lender, the appeals court found that the contract for purchase met the state’s definition of a retail installment sales contract and, therefore, was governed by the Finance Act (which both the seller and lender were licensed under) rather than the general usury statute. Additionally, because the car was financed over a four-year period, the appeals court found that the finance charge per year was permissible under the Finance Act at $16.48 for every $100. The court also held that the general usury law did not apply to a contract to secure the price of personal property sold, as opposed to a contract for the “loan of money.”
On April 4, the U.S. District Court for the Northern District of California granted a consumer reporting agency’s motion for summary judgment, holding that a “firm offer of credit” under the FCRA does not require that an offer based on furnished information result in an enforceable contract. According to the opinion, a consumer filed a putative class action suit alleging that the consumer reporting agency violated the FCRA by providing California residents’ credit report information to two businesses that were not licensed to make consumer loans in California and that offered interest rates which exceed allowable limits under California law. The court disagreed, holding that the FCRA only requires that a prescreened offer not be retracted if the consumer meets the creditor’s pre-selection criteria. Additionally, the court rejected the consumer’s argument that the FCRA also imposes a duty on consumer reporting agencies to separately credential service providers who are given access to the furnished information from their credentialed principals. The court emphasized that “neither the FCRA, nor any case authority addressing the FCRA” imposes this duty.
On March 23, the Governor of Tennessee signed HB 1944, which amends lending provisions of the Tennessee Code Annotated to change the application of interest rates to the amount financed instead of the total amount of the loan with regard to certain loans made by Tennessee industrial loan and thrift companies. The following interest rate requirements under present Tennessee law now apply to the amount financed: (i) under $100, no interest shall be charged on the principal or on the unpaid balance due after maturity in excess of a maximum effective rate of 18 percent per annum; (ii) between $100 and $5,000, no interest shall be charged on the principal or on the unpaid balance due after maturity in excess of a maximum effective rate of 30 percent per annum; (iii) greater than $5,000, no interest shall be charged on the principal or on the unpaid balance due after maturity in excess of a maximum effective rate of 24 percent per annum; and (iv) for open-end credit plans, a maximum effective rate of 24 percent per annum applies to the principal or on the unpaid balance due after maturity. HB 1944 is effective immediately and applies to loans made on or after March 23.
- Hank Asbill to discuss "The federal fraud sentencing guidelines: It's time to stop the madness" at a New York Criminal Bar Association webinar
- Daniel P Stipano to moderate "Digital identity: The next gen of CIP" at the American Bankers Association/American Bar Association Financial Crimes Enforcement Conference